That evening, Davies had a ‘lengthy discussion’ with Burns, resulting in a note ‘about debt management, and all that’, that was for the governor’s eyes only:
The position remains rather unclear and in many ways unsatisfactory, though some of the worst possibilities do not seem to be on the agenda …
Terry has attempted to engage Gordon Brown in discussion on the details, but so far without success. He [Brown] has continued, however, to repeat his view that he wants strategy, tactics and operations to move from the Bank to the Treasury. That is what he said in his letter (as he interprets it) and that is what he thinks is going to happen. Terry has attempted to get him to focus on the implications of this and particularly the possible movement of CGO [Central Gilts Office] and Registrar’s which it would imply, but so far without much success.
Burns hoped, went on the deputy, that ministers would agree ‘to take out the “thinking” bits of the operation, but leaving at least CGO and Registration with the Bank, and possibly the management of primary auctions (roughly on the French model)’; as for cash management, the latest from Burns was that ministers ‘wished to separate the management of government cash from monetary policy operations’; and finally, ministers were showing ‘no desire to move the government’s account away from the Bank of England’.59
What about supervision? ‘The fact that the Government is consulting on the future of banking supervision will soon become known,’ Davies wrote to George on 6 May, as part of his list of issues to resolve. ‘We need to decide how strongly we need to argue for retention of a function in the Bank, whether there are halfway houses which would appeal to us and how far we should properly seek to mobilise opinion elsewhere in support of our cause.’ Quite apart from the question of what Brown had or had not said on the 5th, unbeknown to the governor there would soon be a development at the other end of town. The lord chancellor, drawing up the Queen’s Speech with its list of bills through to autumn 1999, had left space for only one Bank of England bill; and unless the Treasury moved swiftly – it now realised rather late in the day – it would be in danger of missing the legislative bus for changing the overall regulatory and supervisory structure.
Brown accordingly asked George to come to see him on Monday the 19th, with the latter again expecting to be discussing the MPC’s composition. Instead, he learned that the Bank would be losing its role as banking supervisor, which would be given instead to a much expanded version of the Securities and Investments Board (SIB), to be headed – if he agreed – by Howard Davies. The governor said little in response, and was quiet in the car; but back in the Bank his mood was sulphurous, with only the occasional moment of black humour – ‘not even Leigh-Pemberton lost this lot,’ he said at one point. Several times he threatened to resign there and then, and it took a considerable effort by the Bank’s senior non-executive director, David Scholey, to persuade him not to. George’s anger was not because of the loss of supervision as such, but because he believed he had been misled by Brown into promising the staff that there would be full consultation ahead of a final decision. As for Davies, he was in Buenos Aires, addressing a banking conference; later that day, he received the offer by phone, responding to an initially mysterious message, ‘PLEASE CALL MR BRAUN’; and, after protracted discussion with George (the deputy running up a $2,000 phone bill), he accepted it. Next day, Tuesday the 20th, prior to Brown making his Commons statement about the proposed new structure, George wrote to the chancellor about how the Bank would be reacting to it:
I have discussed this with the members of Court who have asked me to express to you their dismay that the Bank was not consulted on the substance of your decision to remove responsibility for banking supervision from the Bank. Both they, and I, had clearly understood, both from our conversation on 5 May and the terms of your side letter to me on 6 May, that the Bank would be consulted.
But, after referring to ‘what will inevitably be seen as a precipitate decision’, the governor went on: ‘What is important now, however, is that we work together to make a success of the new arrangements.’ Brown duly made his statement that afternoon, noting that he intended to involve the Bank fully in drawing up the detailed proposals, as well as generally relying upon the expertise of the Bank’s staff. The following day, George’s tone to the chancellor was warmer: ‘I spoke to all the staff in the supervisory area yesterday [in a hastily convened meeting at the Guildhall soon after Brown’s statement], and I am confident that we will all do everything that we can to make the new arrangements work.’60
Everyone of course was more or less in the dark as to precisely what those ‘new arrangements’ would be, not least what part the Bank would play. The central bank still needed, noted the Bank’s press notice on the 20th after Brown’s statement, to ‘be able to monitor, through the new regulatory body, the financial condition of individual institutions, as well as that of the system as a whole’. In the statement itself, Brown asserted that ‘the Bank will remain responsible for the overall stability of the financial system as a whole’, while at the same time ‘the enhanced Securities and Investments Board will be responsible for prudential supervision and, in due course, for conduct of business rules’. Relatively few tears were shed for the loser. ‘The Bank of England deserves to be shorn of responsibility for the prudential supervision of banks,’ declared the City editor of The Times. ‘The roll call of UK bank failures, although spectacular, is short. But the public lost faith in the central bank’s supervisory skills, because they were clearly the poor relation in the Old Lady’s family of priorities.’ And he added that ‘top Bank people’ had ‘long gravitated to the more glamorous world of macroeconomic policy and international currency affairs’. Naturally, views differed within the Bank itself. George had reached a point where he was relatively agnostic; King was frankly relieved, having consistently argued that a continuing supervisory role would represent a serious impediment if and when the Bank received statutory responsibility for monetary policy; and among the 425 supervisory staff, the mood was reported by the Sunday Times as ‘black’. As for the City at large, it was difficult to disagree with the view of an investment banker quoted by the same paper: ‘It will certainly diminish the role of the Bank as a spokesman for the whole of the London financial community. Its leadership role will be undermined …’ From the fourth estate, a last word at this stage went to the Economist: ‘Achieving the right balance of separation and co-operation between the Bank and the SIB will be difficult.’61
The next few months were spent establishing the new settlement, not helped by a distinctly mistrustful Bank/Treasury relationship. As early as 27 May, the governor was expressing to Brown his ‘concern about the preparation of the Bank of England Bill’ and identifying ‘radical differences of approach’ between Bank and Treasury officials about ‘the extent of the Bank’s role outside the monetary policy area’. His letter tried to get the new chancellor to see the big picture from the Bank’s perspective:
In essence the Bank’s credibility and authority as a central bank depends upon its ability to act, with a degree of independence – accountable to and through Court – across a range of functions which give it the necessary overall critical mass. It is possible in relation to any individual issue to take a minimalist view, but the cumulative effect of doing so would then be to diminish the standing and reputation of the Bank, in the eyes of our counterpart central banks overseas, of the world’s financial markets, and of the British public, to the point where it would find it difficult to carry out its remaining functions effectively. I am sure this is not your intention because it would substantially undermine what is, and has the capacity to continue to be, an important national asset.
In the sphere of debt management and such, the Bank largely lost: soon after George’s missive, Brown made it clear that the Treasury was not going to relinquish its desire to have a considerably more hands-on role. Even so, the Bank still managed to keep a reasonable presence in the markets. ‘Our money
market operations continued as before,’ a senior official told Keegan not long after the new settlement was in place, ‘and, although we have less of a role in gilts, we have quite a portfolio of gilts for our own customers, and we continue operating (for the Exchange Equalisation Account) in the foreign exchange market.’ Over the Bank’s day-to-day financial independence from the Treasury a keen, hard-fought tussle took place, eventually won by the Bank, while much time was spent on the issue of lender of last resort and the Bank’s general operational freedom as overall guardian of financial stability.
By the end of July – as the parties concerned moved somewhat acrimoniously towards agreeing a Memorandum of Understanding (MoU) that would embody the new supervisory tripartism (Treasury plus SIB, soon to be called the Financial Services Authority, plus Bank) – the governor was taking his case in person to No. 10, having initiated the meeting ‘to ensure that the Prime Minister was personally aware of the issues at stake and the seriousness with which he [George] viewed them’. The governor accordingly outlined to Blair how he had ‘envisaged a system where the SIB, as supervisor of individual institutions, would probably first pick up signs of a problem that might raise systemic issues, would bring it to the Bank so that the systemic aspects could be discussed, with the Bank having the primary responsibility for deciding how to act and on what terms’; and he added that ‘as he understood it the SIB had no problem with the Bank’s proposed model’. However, he went on, ‘the arrangements proposed by the Treasury … would split responsibility in an artificial way between the Bank and SIB’, so that ‘he feared that they would blur accountability dangerously, and by diminishing the Bank’s capacity to act as a central bank, could reduce its ability to respond effectively to a crisis’. Moreover, George further complained, the ceiling proposal (‘some £70 million’) by the Treasury on how much risk the Bank ‘could accept’ was ‘so low as to be almost useless in a crisis’, compounded by the fact that ‘the mandatory tripartite consultation requirement above this low ceiling could introduce dangerous delay’. In short: ‘It seemed perverse to choose now to put new limitations on the Bank’s ability to provide rapid and discreet support in future.’ Blair’s emollient response was to assure the governor that he would ‘make sure’ that the chancellor ‘was aware of the strength of the governor’s concerns’; and indeed, when the MoU was eventually published it contained nothing specific about limiting the Bank’s freedom of action to mount an operation ‘in exceptional circumstances’.62
On the ground, meanwhile, the Bank’s supervisors either moved to the FSA in Canary Wharf or remained in Threadneedle Street as part of the Financial Stability Wing, with none made redundant. And of course the MPC, ultimately the rationale for all the upheaval, took shape – remarkably quickly – and got down to work. A crucial prior question was the exact definition of the inflation target it would be set. George’s concern, he told Brown in late May, was that ‘the surrounding language … accurately reflected the way in which we took account of the balance of risks’; and he noted that ‘the previous Chancellor had muddied the waters with his reference to inflation normally being in a zone of 1–4%’. In the event, Brown in his Mansion House speech in June announced that he was setting the Bank an inflation target of 2.5 per cent, with the requirement that the governor write an open letter to the chancellor if inflation strayed by more than 1 per cent either side of that target. As for the MPC’s preparations, orchestrated by King, there seems to have been relatively little blood spilled over the Treasury’s appointment of externals, but the harder task was getting George to agree to the principle of voting, which he eventually did. His deputy was now leaving the Bank, to head the FSA; and in late July it was announced that the two new deputy governors would in due course be King (heading monetary stability) and David Clementi (heading financial stability), the latter having made his name at Kleinwort Benson masterminding much of the government’s privatisation programme, though not personally known to an initially suspicious George.
Tuesday, 28 October saw simultaneously the Bank of England Bill – formally giving operational responsibility for interest rates to the new MPC – having its first reading in the Commons; the MoU being published; and the new super-regulator, the Financial Services Authority, being launched – and indeed christened – by the chancellor. ‘These reforms,’ declared Brown, ‘provide the platform for long-term monetary and financial stability’; while in Threadneedle Street, a couple of miles upstream from Canary Wharf, the 303-year-old Bank stood poised to play its part in this brave new world.63
POSTSCRIPT
You Just Don’t Know When
Taking as a whole the years 1997 to 2013 – the last six years of Eddie George’s governorship and all ten years of Mervyn King’s – one event dominates that historical landscape: the banking crisis that began in the summer of 2007 and peaked in the autumn of 2008. Its economic consequences were profound. Some six years later, King’s successor noted that if that crisis had not happened, UK output by 2014 would probably have been 15 per cent higher than it actually was; or put more intimately, each person would have been on average £3,750 a year richer. This postscript is different in kind to the preceding chapters. They are largely based on the Bank’s archives; this is not (with the exception of certain records released online in 2015 covering 2007–9). Instead, it is based on material already in the public domain and some two dozen conversations. ‘The important thing,’ observed King himself to The Times in 2012, ‘is that all the papers and documents will be available to the historians in 20 or 30 years’ time and they will be the people who will form the judgement. You have to have someone who wasn’t involved, who is dispassionate.’1 The present author trusts he is dispassionate; but, absent the key archives, any judgements can only be strictly provisional. The authoritative account of the Bank during this period remains to be written.
From 1997 the public centrepiece of the newly independent Bank was of course the Monetary Policy Committee. Initially, it proved a distinctly uncomfortable ride, especially during 1998 as the inflation-busting MPC stubbornly kept interest rates high despite the palpable damage being inflicted on some sectors of the British economy by a strong pound. The consequence was the Bank being uncomfortably exposed to forceful, at times even vicious, attacks – from both sides of industry, from columnists and cartoonists, even from trade union demonstrators gathered by the Duke of Wellington’s statue outside the Royal Exchange. By the new century, though, the tide had almost wholly turned. Polling by NOP in February 2001 revealed not only that 55 per cent of people were satisfied with the way the Bank was doing its job and just 10 per cent dissatisfied, but that four times as many people would prefer to see interest rates rather than prices go up – from the Bank’s perspective, a gratifying indication that inflationary expectations had at last been anchored. Later that year, an MPC member, Sushil Wadhwani, publicly noted that whereas inflation had averaged around 7 per cent during the 1980s, and around 4.25 per cent over the 1990–7 period, the average between May 1997 and March 2001 had been 2.4 per cent; soon afterwards, the shadow chancellor, Michael Howard, announced that the Conservative Party no longer opposed Bank independence; during 2002 the UK, unlike the US and Germany, avoided recession, prompting the chancellor, Gordon Brown, to assure fellow-MPs that ‘the Bank of England has the capacity to make the right decisions at the right time for the long-term interests of the British economy’; while in 2003, shortly before stepping down as governor, George reflected on how, since the start of inflation targeting in the wake of 1992’s Black Wednesday, ‘we’ve now had over 40 successive quarters of positive growth … you can’t ask for anything more really’.2
King’s first speech as governor was in October that year, at a dinner in Leicester co-hosted by the Bank and the East Midlands Development Agency. Looking back over the ten years since late 1992, following the adoption of an inflation target, he declared that the UK had ‘experienced a non-inflationary, consistently expansionary – or “nice” –
decade’. And he went on to describe it as ‘a decade in which growth was a little above trend, unemployment fell steadily, and, supported by the improved terms of trade, real take-home pay rose without adding to employers’ costs, thus allowing consumption to grow at above trend rates without putting upward pressure on inflation’. A benign picture indeed. ‘Will the next ten years be as nice?’ King then asked, to which he answered, ‘That is unlikely,’ for reasons that included the probability of less favourable terms of trade and already a reduced margin of spare capacity. Even so, he emphasised that ‘the macroeconomic framework of this country is sound and proven’; while what most listeners and commentators took away from the speech was that seductive four-letter acronym.
Inevitably there was a temptation to believe that the magic formula had been found. Although fully conceding that ‘we cannot prevent boom and bust in particular sectors’, the Bank’s Paul Tucker, an MPC member since 2002, told the Treasury Committee in October 2005 that ‘we should be able to prevent boom and bust across the economy as a whole in the way that we experienced all too many times in the past’. The MPC’s tenth anniversary fell in 2007. In February the deputy governor for monetary policy, Rachel Lomax (who had moved from Whitehall), reflected in a speech at Leicester on how ‘the so-called Great Stability of the past decade has bestowed on the MPC the great gift of credibility – a golden halo which eluded monetary policy makers in the United Kingdom for most of the 20th century’; in May the governor, King, gave an address to the Society of Business Economists that similarly pointed to ‘our new-found stability’ (average growth over the ten years of 2.8 per cent, above the post-war average; ‘not a single quarter of negative growth’; average deviation of inflation from target of ‘just minus 0.08 percentage points’); and in September, in its formal assessment of the MPC’s first ten years, the Treasury Committee pronounced that ‘the monetary policy framework of the last decade has been broadly successful’ and that ‘while it is difficult to quantify the contribution made by the Monetary Policy Committee to maintaining a low inflation rate over the last decade as distinct from the effects of wider changes in the global economy, the Monetary Policy Committee deserves a significant amount of credit for ensuring that inflation over the last decade has been both lower, and less volatile, than in preceding decades’.3
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