14

Honest Money

Cobbold’s final eighteen months, at the start of a legendary decade, were not entirely easy. From spring 1960 the post-election brakes on the economy began all too predictably to be applied, with the Bank reluctantly implementing the special deposits scheme in relation to the clearing banks – a move towards the quantitative controls that Cobbold had always dreaded, seeing them as likely to erode the Bank’s authority. Then in June, with the balance of payments position deteriorating, not only was a second tranche of special deposits removed from the clearers but Bank rate went up from 5 to 6 per cent. ‘There is no crisis,’ noted one of the discount market’s representatives after their regular weekly meeting with the governor. ‘Asked whether he [Cobbold] had not fired two barrels at once, he said that it was no bad idea to discharge an extra round at the retiring enemy.’ The relief lasted only until March 1961, when a surprise revaluation of the deutschmark precipitated a sudden surge of pressure on Britain’s gold and foreign exchange reserves, in turn leading to Cobbold and Roy Bridge negotiating at the Bank for International Settlements the so-called ‘Basle credits’, running through to July and totalling some $910 million. ‘Parsons felt that the tide had turned, at least temporarily, against the speculators,’ recorded the Fed’s Charles Coombs soon afterwards about the Bank’s reaction; and in the event ‘temporarily’ proved correct, as another sterling crisis gathered in June, amid what Cobbold called ‘the recurrent market rumour about early sterling devaluation’, a rumour that, writing to his counterpart at the Fed, Bill Martin, he wholly repudiated: ‘We are determined to hold the present position and are most anxious not to give public opinion the slightest excuse for detecting any weakness in that determination.’ Cobbold had become governor in 1949 under the threatening cloud of devaluation; now he was leaving under the same cloud, perhaps slightly less threatening but undeniably present. ‘It has all been great fun,’ he told a leading City figure, and it was to his credit that at least some of it had been.¹ Over the twelve years he had grown into his office and, through strength of personality as much as anything else, would come to be seen as perhaps the ultimate ‘Mr Governor’ of the nationalised Bank.

The selection of the new governor – ultimately the government’s decision, but intimately involving Cobbold and other senior figures at the Bank – had been far from uncomplicated. The front-runner at the start of 1960, following the Court’s recommendation, was Morgan Grenfell’s Lord Harcourt, who in the mid-1950s had spent three years in Washington as the UK’s economic minister; but Sir Frank Lee, permanent secretary at the Treasury, was soon persuading Heathcoat Amory that Harcourt was not up to it and that instead they should look to Sir Oliver Franks, a brilliant administrator and former ambassador in Washington who was now chairman of Lloyds Bank. Eventually, in September 1960, the new chancellor, Selwyn Lloyd, formally offered the position to Franks. ‘The Governor won’t like it and the Deputy perhaps will be a bit prickly,’ predicted Hall at the Treasury, ‘but in nine months’ time everyone will be saying what a good thing it is.’ The diarist was mistaken, as there took place during October what was in effect a Cobbold-led rebellion at the Bank, with the governor deploying three senior members of Court to make it clear to both Macmillan and Lloyd that Franks was unacceptable. The reasons they gave are apparently unrecorded, but it is a fair guess that they and Cobbold had at least a triple motivation: Franks was someone whom they regarded as essentially a civil servant, not a City man; who was probably too fastidious for the increasingly important public-relations aspect of the office; and who, with his formidable, ultra-analytical intelligence, was ominously likely to turn the Bank into a study group, not a bank. Nor did it help Franks’s cause that, if Labour had won the 1959 election, he would have been the unambiguous choice of the new government. Almost certainly Franks got wind of the Old Lady’s hostile sentiments, and on 25 October he informed Lloyd that he no longer wanted the position. ‘Kim Cobbold,’ noted Macmillan somewhat bitterly after trying and failing to persuade Franks to change his mind, ‘is, of course, triumphant.’²

Within days, Macmillan and Lloyd made their final decision: Lord Cromer, intimately connected with Barings and currently the UK’s economic minister in Washington. Tellingly, as Hall now noted, Cobbold and the Court had been ‘plugging’ him ‘ever since they knew they could not have Harcourt’. Cromer was forty-two (making him the youngest governor for over 200 years); and the Financial Times reckoned that ‘with membership of the right clubs (Brooks’s and the Beefsteak), descended from a family which has combined business acumen and great wealth with pro-consular tradition, and married into one of the great 20th century newspaper dynasties [the Harmsworths], his qualifications must have appeared irresistible to the Prime Minister’. Or as Macmillan himself reflected after Cromer became governor: ‘Lord C. has a nose. He is not a Baring for nothing – a long business and financial tradition.’ During his governorship, though, he would provoke mixed emotions in Threadneedle Street. To some he was an accessible figure who brought a welcome, indeed novel, degree of verve and imagination to the job; to others he seemed self-important and, in an unwelcome patrician way, lacking in sympathy for life’s toilers in the ranks. ‘He was an aristocrat,’ recalled one colleague. ‘He didn’t always bother to defend his arguments, I mean he was rather good at stating things …’ Or according to another: ‘For me Cobbold is still the great Governor. Cromer was written up enormously because he was very good with the press. But to those of us in the Bank he was an outsider …’ And, even worse, he was ‘much more inclined’ than his predecessor ‘to like to see his name in the papers’.³ Transcending those judgements is a larger question. At a time when Britain was poised to undergo a social revolution, was this really the right moment for George Rowland (‘Rowley’) Stanley Baring, third Earl of Cromer, to become the Bank’s new public face? In retrospect it is perhaps surprising that Cobbold, largely responsible for engineering the appointment, failed to see the danger.

In July 1961 the new governor – who right from the start, noted the visiting Per Jacobsson, ‘seemed as natural as any man could be’ – was confronted by a serious sterling crisis. ‘Sterling is under extreme pressure and the threat of imminent devaluation is only being held in abeyance by massive short-term support enlisted from other Central Banks,’ he bluntly informed Selwyn Lloyd on the 7th, adding that the underlying circumstances were ‘more serious in many ways than the previous all too frequent post-war sterling contretemps’. Demanding a comprehensive statement by the end of the month, Cromer then set out his stall. ‘Wage and salary increases unrelated to increased productivity’ amounted to ‘a fraud on other sections of the people’; organised labour was guilty of ‘restrictive practices’, management of a ‘high degree of complacency’; public expenditure comprised far too much ‘non-productive investment’; and it was high time to start fashioning a defence policy that was no longer ‘a heritage from the great days of our Imperial past’. Over the next two and a half weeks he continued to keep up the pressure, above all insisting – as for so many years Cobbold had done – on the necessity of strong fiscal measures to accompany monetary ones if there was to be, he reiterated to Lloyd on the 19th, ‘a reasonable prospect of achieving the object of defending the existing parity of sterling’.

Eventually, on the 25th, the chancellor announced his package: various personal credit and government expenditure restrictions; Bank rate up from 5 to 7 per cent; and a call for a ‘pay pause’. As almost invariably was the case in these situations, the Bank would have preferred a still tougher package, even though the Financial Times reckoned the measures ‘the toughest economic restraints since the austerity period of Sir Stafford Cripps’; and in early September, by when sterling was no longer under pressure but funds were failing to flow to London despite the Bank rate hike, Cromer explained to Lloyd that there still ‘unquestionably’ persisted ‘lack of confidence in our taking measures to increase our competitiveness’. Significantly, one area where Cromer would come to look for sharper elbows was among the cartelised and mainly sluggish clearing banks, publicly raising the question in 1963 (at a Martins Bank anniversary banquet) ‘whether the considerable rigidity in interest rates which has grown up in the banking world in the last twenty years or so is an encouragement to the growth of bank deposits’ – subsequently described by one commentator as ‘a moment of high drama in an industry not unduly given to histrionics’, and a pointer to that industry’s more dynamic if less stable future.⁴

1961, with the orderly Bretton Woods world of stable currencies palpably starting to come under attack from speculators and hot money in the foreign exchange markets, signified the start of the modern era of central bank co-operation. This took the form first of the swap arrangements involved in the Basle credits and then the inauguration that autumn of the so-called ‘gold pool’. The old-style gold standard might no longer exist, but gold was still (in Forrest Capie’s phrase) ‘the anchor for the US dollar’. Indeed, ‘the Bretton Woods system depended on the United States standing ready to buy and sell gold at $35 an ounce.’ Even before the pool was formally established in November, essentially as a US initiative to share the cost of intervening on the London gold market in order to stabilise the dollar’s gold value, the Bank was working closely with the Fed. ‘With respect to the Bank of England activity in the gold market, he said that he saw no reason for anyone getting hysterical if the price goes above $35.20,’ noted the Fed’s Thomas Roche in September after a phone conversation with the Bank’s foreign exchange virtuoso. ‘Bridge said that he expects lots of trouble between now and the end of the year and that the Bank of England would use all the artistry possible. Bridge feels that the Bank of England being on the scene must handle the market as they see fit since, in his opinion, it is difficult for us to be of any substantial help at the fixing time, for example, since it would be 5.30 a.m. in New York and we would not be able to get the feel of the market.’ February 1962 saw the gold pool’s role expanding, with the key central banks agreeing to form a buying syndicate for the coordinated purchase of gold on the London market. External reaction was generally favourable, with one of the Bank’s executive directors, John Stevens, observing to the Fed that he had been ‘gratified’ that the London press ‘had not tried to delve deeply into some of the figures, especially the matter of the ¼% buying or selling charge’.

All this was consistent with Cromer’s strong, Norman-like internationalism, if not necessarily with his perhaps equally strong belief in free markets. ‘He had a particularly strong relationship with the Federal Reserve System, both in Washington and through the Federal Reserve Bank of New York, where he counted respectively Bill Martin and Al Hayes amongst his close friends,’ recalled an obituarist. ‘He built equally good relationships with the Governors of the Group of Ten countries [G10, established in 1962 to boost the IMF’s lending capacity] whom he met regularly in Basle.’ A typical moment occurred in July 1963, just before the governor headed off for a three-week holiday in Majorca. The context was the Fed’s recent discount-rate action; and, recorded Hayes after his transatlantic phone call, ‘I thanked Governor Cromer for the helpful way in which his bank had cooperated in holding things steady during the last hectic day or two – including the gold market.’⁵

Befitting his merchant banking background, Cromer also had a powerful sense of the need to restore London’s position as an international financial centre – and, crucially, he stimulated and encouraged his colleagues to think likewise. Emblematic, as well as hugely important in its own right, was the unfolding Euromarkets story. There, as far as the infant but fast-growing eurodollar market was concerned, the Bank’s policy remained broadly one of benign neglect. ‘However much we dislike hot money we cannot be international bankers and refuse to accept money,’ a report to the Treasury stated in October 1961. ‘We cannot have an international currency and deny its use internationally.’ Undeniably there were qualms, not least during the winter of 1962–3 after Sir Charles Hambro (still on the Court almost thirty years after stepping down as a pioneer executive director) had told Humphrey Mynors that he was getting ‘quite alarmed’ at the way the market was expanding, a market in which Hambros had a significant stake, and had asked for guidance. After a two-month internal debate at the Bank, the eventual steer was unequivocal. ‘It is par excellence an example of the kind of business which London ought to be able to do both well and profitably,’ the deputy governor wrote to Hambro in January 1963. ‘That is why we, at the Bank, have never seen any reason to place any obstacles in the way of London taking its full and increasing share. If we were to stop the business here, it would move to other centres with a consequent loss of earnings for London.’ Similarly, when during the second half of 1963 bank runs on the Continent prompted widespread anxiety about the stability of eurodollar deposits, the Bank held the line, with Bridge (by now an adviser to the governors) asserting that ‘the international framework of monetary co-operation which we now have’ was capable of dealing with any ‘misplaced lack of confidence’. Or as he candidly explained his thinking the following spring to the chief economist of Bankers Trust in New York:

The so-called Euro-dollar market is nothing other than a natural international money market. My point of analysis is that while domestic money markets are subject to the supervision of the monetary authorities and indeed to the banking laws of the countries concerned, there is not in existence any comparable international monetary authority to supervise and, where necessary, regulate the international money market nor, if there were, is it immediately evident by what means it could or would exercise its control.

The key word was ‘natural’; as for the lack of supervision, itself a strong attraction at this stage to many of the market’s participants, Bridge was not unduly worried: ‘There may indeed be some unsound banking here and there. Too much lending long against short borrowings. But this is where the experience and the judgement of the international banker should come in …’⁶

By this time, moreover, the eurodollar market – essentially an inter-bank, wholesale money market – was complemented by the newly created eurobond market, essentially a long-term capital market that was likewise based in London and was predominantly dollar-denominated. Its two main architects were George Bolton and Siegmund Warburg, but it was undoubtedly indispensable to their cause that Cromer happened to be in the governor’s chair. ‘We are sympathetic to this proposal,’ he replied to Bolton in July 1962 after the latter (still on the Court, as a non-executive director) had set out the various initiatives in play that would help to restore London’s position as a capital market, ‘and will give it what practical support we can.’ The following summer saw not only the pioneer eurobond issues, but the US administration’s fateful Interest Equalisation Tax, doing major damage to New York as an international financial centre; and within weeks, in August 1963 after Morgan Grenfell’s Harcourt had inquired about the Bank’s attitude to a possible City of Oslo dollar issue in London, Maurice Parsons was stating explicitly that ‘we do not put any obstacle in the way of such issues on the basis that London is thereby conducting a brokerage business, which on the whole we are inclined to favour’. ‘Admittedly,’ continued that executive director, ‘we in the Bank would much prefer to see this kind of business done in sterling but unfortunately that is only possible in the case of a limited number of countries …’⁷

Taken together, the eurodollar and eurobond markets were central to London’s re-emergence from the 1960s as a top international player, starting to recover some of the ground it had lost since 1914. What Cromer was unable to engineer, however, was the abolition of exchange controls. ‘The restraint on the foreign exchange earning power of the City by the continuation through all these years of the Exchange control mechanism has been insidious and by no means insignificant and that has played its part in diminishing the contribution which the City makes to the “invisibles” element in the balance of payments,’ he declared in July 1961 to Selwyn Lloyd in his lengthy remonstrance shortly after becoming governor; in October 1962, in his Mansion House speech, he called for a revival of London’s ‘entrepot business in capital’; and the following spring, writing to the permanent secretary at the Treasury, Sir William Armstrong, he was adamant not only that exchange control represented ‘an infringement on the rights of the citizen, either individually or collectively, to dispose of his own property as he sees fit’, but that its continued existence (almost a quarter of a century after the start of the war) ‘proclaims to the world at large a sense of our weakness while providing the British Government of the day with a wholly unjustified feeling that in it they have a defence against the consequences of misfortune or mismanagement’. Fortunately or unfortunately, the governor did not get very far. ‘Those who think that we are not expanding as fast as we might,’ wrote Armstrong in July 1963 reflecting on why he was unable to recommend abolition or near-abolition, ‘would say that if we have sufficient resources to be able to devote them to overseas investment, we ought rather to use them for a further reduction to unemployment at home.’⁸ In short, the politics did not yet stack up – and would not for another decade and a half.

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 want 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 between 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.

After being accused of ‘an attack on democracy’, Cromer asked if he should resign rather than go against his conscience – to which Wilson adroitly replied that ‘if the Governor resigned, the pound would be a casualty’. Shortly before the meeting broke up, with Cromer asserting that the Bank had ‘a clear statutory responsibility to act independently as well as to advise’, the knowledgeable prime minister riposted that if it tried to do so in the present situation ‘the history of the Bank of England which had begun with Governor Houblon would end with Governor Cromer’. Next day, a Thursday, Bank rate remained unchanged; and Cairncross the following week reflected that Cromer had ‘overplayed his hand’, not least ‘by suggesting adverse market reactions where none had shown themselves’.¹³

Cromer was by now approaching the end of his five-year term. Late the previous year, following a conversation at Basle about his intentions, he was recorded as ‘waiting to see whether an election will be held this spring and, if so, what the results of the election will be, as this could have quite a bearing on his decision’. By March 1966, with Labour on course for re-election, Cromer had probably made up his mind to go, and in April he informed Callaghan to that effect. Would he have been reappointed anyway? At best it is doubtful, and it is also doubtful whether grief was unconfined among many of his colleagues. ‘I think various of us felt he was playing the hand wrong,’ recalled one of them, John Fforde. ‘He was playing it almost as a Tory politician and not as it should be played, with a Labour Government by the Governor of the Bank of England.’ Jasper Hollom, who had joined the Bank thirty years before Cromer’s departure and was chief cashier during most of his governorship, agreed, reckoning that he had ‘become increasingly incapable of a dialogue with Whitehall’ as he ‘fired off immense amounts of ammunition at them, often actually without cleaning the barrel before he put another round in’.¹⁴ The truism about someone being his own worst enemy does perhaps apply in this case.

It is possible that at least six people were, at one point or another, in the frame as likely successor. One, H. C. (‘Nugget’) Coombs, was a Keynesian-minded Australian central banker, well regarded by Wilson and backed by the Economist; another, the Court’s favoured candidate, was John Stevens, a former executive director now in Washington; a third, backed by George Brown, was the highly regarded Sir Eric Roll, currently at Brown’s Department of Economic Affairs; a fourth, at least according to himself, was the press magnate Cecil King, a non-executive director since 1965; a fifth was Cromer’s deputy, O’Brien; and finally, as sounded out by Callaghan, there was Reginald Maudling, recently defeated (with some covert assistance from Cromer) for the Tory leadership. In the end it went to O’Brien. He had, in Callaghan’s admiring retrospective words, ‘entered the Bank of England on the bottom rung without the advantage of family or school’ and was ‘modest, quiet, considerate of the views of others but firm in his own beliefs’, as well as ‘technically proficient’; O’Brien himself was surely correct in judging that his meritocratic background appealed to Callaghan and Wilson, as did the fact that he was not part of the City establishment in the same way as Cromer. The appointment was announced later in April. ‘Good plain cook: won’t argue about the menu’ was reputedly the reaction of Lord Harcourt (that possible alternative to Cromer), while the Economist offered a cautious welcome: ‘He becomes Governor because he has fewer enemies than his rivals. The same negative virtues produced surprising results for the Labour party in 1935 … If Mr O’Brien can be an Attlee of Threadneedle Street, he could find no better model.’ Or more succinctly, as the Fed’s William McChesney Martin would call him: ‘a tough little scrapper’.¹⁵

O’Brien took his seat in the governor’s room in the parlours at the start of July 1966 – a month of English footballing glory offset by a major sterling crisis. ‘Sterling has been under speculative pressure in the exchange market, reflecting such diverse factors as the seamen’s strike and its high settlement cost, the heavy loss of exchange reserves reported for June, the rather large trade deficit in June, and a renewed discussion in the press about the possibility of devaluation’: the sober report by the Fed on the 14th summed up the situation well enough. The new governor had already sent Callaghan a six-page memo, calling for deflationary measures but adopting a notably less hectoring and censorious tone than his predecessor; and on the evening of Friday the 15th, after a rise in Bank rate from 6 to 7 per cent had failed to stop the attacks on sterling (the Bank active all day in the foreign exchange market and losing $140 million), he put his case in person to Wilson and Callaghan:

If the British Government were to devalue [recorded the official minute], it would be regarded by overseas countries as a device by the Socialist Government to avoid having to face the real decisions which were essential if our payments were to be brought into balance. This view he restated on three occasions, and he used a graphic phrase, namely that devaluation would be regarded as the Socialist Government’s ‘recipe’ for dealing with a situation which in fact demanded unpleasant internal measures. On the other hand, if a Socialist Government could maintain the parity of the £ in spite of the present pressures by introducing tough measures, it would once and for all demonstrate worldwide its determination to solve the problems without recourse to devaluation. From this he believed the Government would gain enormous benefit.

On Tuesday the 19th, following the prime minister’s return from Moscow, the Cabinet voted by seventeen to six against devaluation. Next day, Wilson announced a heavily deflationary package – ‘perhaps the biggest deflationary package that any advanced industrial nation has imposed on itself since Keynesian economics began’, reckoned the Economist – and the pressure on sterling began to ease. Wilson would subsequently pay tribute to how, during the crisis, O’Brien’s ‘calm and reasoned advice’ had ‘made a deep impression on my colleagues and myself’; and at this critical moment in Labour’s history, three and a half months after it had won a commanding majority for the first time since 1945, the governor’s apparently not unsympathetic stance – so different in feel if not necessarily substance from his predecessor – may well have been decisive in stiffening ministerial resolve to place the needs of sterling above those of economic expansion.¹⁶

Through the winter of 1966–7, although O’Brien intermittently succumbed to bouts of governor’s gloom (‘he harped on the rising tide of Government expenditure,’ noted Cecil King in December in his tell-all diary), the balance of payments improved, interest rates fell, and there was less talk of devaluation. Then in the early summer of 1967, not a summer of love in Threadneedle Street, the mood music changed decisively, against a backdrop of sharply deteriorating trade figures, the justified expectation that Britain’s application to join the European Economic Community (EEC) would fail, and the Six-Day War, accompanied by the closure of the Suez Canal. ‘The press openly discusses devaluation and some of the papers are strongly pressing for it,’ observed Cairncross in May, while not long afterwards in Paris, safely away from the Bank for an OECD meeting, Kit McMahon confided in Jeremy Morse (an executive director), ‘You know, I think we ought to be devaluing now.’

More generally at the Bank, as the summer wore on and doubts steadily increased about the government’s political determination to defend the pound, there existed perhaps three schools of thought: those (exemplified by Parsons, now deputy governor, and Bridge) who, on moral grounds as much as anything, remained implacably opposed to devaluation; those who thought that the time had come to devalue before being forced to do so; and the middle group, which preferred to hold to the parity as long as possible. The governor himself oscillated between the ditchers and the hedgers. ‘O’Brien drew me aside after Court to talk about the political situation,’ recorded King on 3 August. ‘He is acutely unhappy, living from day to day … He is afraid that the idea of devaluation has gathered so much momentum that it may prove irresistible.’ O’Brien was no less pessimistic, even fatalistic, by the end of the month, not least following the government’s decision to relax hire-purchase restrictions. ‘I think he has given up hope of maintaining the exchange value of the pound,’ recorded King after ‘a long talk’ with him. ‘He thinks under pressure ministers are thinking more of full employment and less of our financial position.’ The autumn brought little relief. Bad trade figures, a dock strike in London and elsewhere, an EEC report questioning sterling’s long-term future as a reserve currency – it was all too apparent that sterling was now on an irreversible one-way ride towards devaluation. Even so, when O’Brien saw Wilson on 1 November, with sterling being sold heavily, he was still unwilling to recommend that fateful step.¹⁷ Given his perspective on the politicians and what he saw as their lack of will-power, he wanted them to make the call.

Over the next few weeks, events moved swiftly – more swiftly, and unpredictably, than anticipated by the Bank/Treasury group (code-name FU, short for ‘follow up’ but accurately reflecting official feelings) that since spring 1965 had been preparing the detailed mechanics in the event of devaluation. ‘After three years of incessant borrowing and ever-rising debt Jim Callaghan felt he had come to the end of the road and I agreed with him,’ was how O’Brien would recall his key meeting with Callaghan on Saturday, 4 November. At Basle over the following weekend, the governor managed to persuade his fellow central bankers to accept the principle of a 15 per cent devaluation without any retaliatory devaluation by themselves. On Thursday the 16th, after the final political decision had been taken to devalue on Saturday the 18th, and after O’Brien had told the Court that (in King’s words) ‘money had been pouring out since May’ and ‘we had got to the end of our present resources’, a question in the Commons from a Labour backbencher called Robert Sheldon about a possible $1 billion loan from abroad made it obvious to the rest of the world, from Callaghan’s evasive reply, that devaluation was about to happen, giving speculators an easy killing next day. The Fed’s memo recorded graphic telephone conversations with those in the thick of the action at the Bank:

6.55 a.m. (New York time). Robson said that they were holding the rate at 2.7824 with heavy selling going on all day. He said they had been supporting the forwards to a small extent but had been backing away as the pressure built up. He said that so far they had lost something close to $300 million.

8.45 a.m. Sangster said the money was still going out with the spot total now $600 million and forwards $100 million.

8.55 a.m. Bridge said that gold was now up another $7 million, bringing a total for the day to $43 million. He said that a great deal of sterling was being sold that he was sure people did not have.

10.25 a.m. Sangster said the total was now $800 million spot and $47 million on gold.

Altogether, according to Forrest Capie’s account, the Bank spent some $1,450 million defending the rate, for the last time, on this long bad Friday – a day on which Bridge’s market report was just one word: ‘Crucifixion’. ‘The pound was under siege in the world’s foreign exchange markets yesterday,’ began The Times’s patriotic front-page report next day. ‘In London, the Bank of England battled courageously, non-stop, in an attempt to beat off the biggest selling wave ever seen.’

On Saturday evening, the Treasury announced the pound’s devaluation to $2.40; on Sunday evening, Wilson made his ill-fated broadcast declaring that devaluation did not mean that ‘the pound here in Britain, in your pocket or purse or in the bank, has been devalued’; on Monday afternoon, Callaghan announced the accompanying package of measures, involving expenditure cuts significantly smaller than O’Brien had wanted. It was just over eighteen years since the previous devaluation – and, writing to an American correspondent a week or so later, the deputy governor Maurice Parsons, who had been in a state of virtual denial almost up to the announcement, expressed himself ‘acutely embarrassed’ and ‘deeply regretful’. Could the Bank have played its hand better? Quite apart from the larger question of whether it would have been more sensible to have recommended devaluation in July 1966 or even in October/November 1964, which it probably would, ‘the immediate timing’, reflects Capie in his authoritative account of the devaluation saga, ‘was poor even apart from the mess of the Chancellor’s response to the parliamentary question’ and ‘the end of October would have allowed a more orderly process’, whereas ‘by mid-November it was increasingly costly and difficult to stick to the planned timetable’. His overall verdict, moreover, is damning:

One of the principal failings in the operation as far as the Bank was concerned was their obsession with psychological warfare. Their pride in market skills and the lack, for so long, of serious economic input contributed to a concentration on manipulating the market. There was no economic model employed in the discussion of devaluation in the Bank. There was no mention of the monetary approach to the balance of payments. The analysis used was the elasticities and absorption approach that had been used in the analysis for the 1949 devaluation.¹⁸

Or put another way, if the Bank of 1949 had still been recognisably Norman’s Bank, the Bank of 1967 was still recognisably Cobbold’s Bank.

There was no shortage of alarums and excursions during the year after devaluation – starting with the tumultuous gold crisis of March 1968, as the gold pool (which the Bank had been operating since 1961 on behalf of most Western governments) came under intolerable strain from speculators convinced that the dollar was no longer strong enough to hold gold’s price at $35 an ounce.¹⁹ During the week beginning the 11th, so much gold had to be flown from Fort Knox to London that eventually the floor of the Bank’s weighing room collapsed; and that Friday, following a request from the Fed supported by O’Brien (but not by Bridge), the new post-devaluation chancellor, Roy Jenkins, agreed to the temporary closure of the London gold market – eventually reopened at the start of April after a meeting of central bankers in Washington, attended by O’Brien, had agreed to a two-tier system for gold, in effect creating an artificial distinction between official and private transactions.²⁰

Then, for light relief, came Cecil King’s attempted coup d’état in May. A manifestly political appointee to the Court, resented from the start by Cromer and then O’Brien, that non-executive director had become convinced by the spring that there was a conspiracy afoot to conceal the gravity of the financial situation facing the country, specifically in relation to the state of the Bank’s reserves. On 9 May, the day before he tried to overthrow the Wilson government via revelations in the Daily Mirror about what he claimed was the true position, he tendered his unmourned resignation as a Bank director. ‘His scorn for everyone was lofty and unending,’ recalled O’Brien. ‘Not by a long chalk one of Winchester’s most attractive products.’ Even so, and despite the almost capital crime of disclosing what had been reported in confidence to Court, King was correct in his allegation that the reserves figures were fixed, especially by the non-reporting of forward transactions which could be huge. Indeed, it was said during this period that at any one time there were at least five versions in play: the position in the dealing room; the position as reported to the chief cashier; the position as reported to the governor; the position as reported to the chancellor; and the position as published.²¹

O’Brien himself, as the summer unfolded, was increasingly preoccupied by the problem of how to run down in as orderly and honourable a fashion as possible the sterling area, whose belated demise had been made inevitable by devaluation. Australia was identified as the key country; and, fortified by the recent Basle Agreement (in effect involving the world’s central banks giving the UK a $2 billion credit to enable her in turn to give exchange rate guarantees to all the official sterling holders), the governor set out in late August for secret negotiations, travelling under a false name and smuggled on board a Qantas flight via the freight-loading room at London Airport. The negotiations did the job, with the Australian authorities agreeing not to dump sterling wholesale, and other countries in the sterling area soon followed their example – in effect pledging to keep an agreed proportion of their reserves in sterling and thus allowing the Basle Agreement to come into operation. As for the British economy, in some sense the cause of all these difficulties, it did during 1968 – under the notably harsher regime of Jenkins, much encouraged and applauded by O’Brien – very gradually start to give the appearance of improving. Eventually, by the autumn of 1969, it was reasonably clear that the balance of payments situation had, in Jenkins’s retrospective words, ‘fairly firmly turned’. And he also remembered an exchange at around that time with O’Brien: ‘I said, “Leslie, I think there might be some balance of payments honours. Would you like to be a peer or a privy councillor?” I always treasured the reply. He said, “I’d rather be a privy councillor, I’ll get a peerage anyway when I retire.”’²²

Honours aside, O’Brien was not just concerned in these years with the travails of sterling. A growing preoccupation was the increasingly vexed area of contested takeovers, which since 1959 had been conducted, in theory anyway, in accordance with the City Code on Takeovers and Mergers, itself the fruit of a working party set up by Cobbold after the Aluminium War. By 1967 it was looking a distinctly threadbare set of guidelines, prompting Wilson that July publicly to demand that the City promulgate ‘formal and clear ground rules’ about takeover battles and ensure that those rules were carried out. O’Brien responded by rapidly getting the merchant bankers into line, telling one that ‘if the City were not capable of putting their own house in order it would be open to me to advise HMG that there was no alternative but to introduce a securities and exchange commission on the American model’. The outcome was a somewhat tougher City Code and the start in March 1968 of what was generally known as the Takeover Panel, both funded and staffed (as well as Mynors being its first chairman) by the Bank.

‘It was the blind leading the blind for a while,’ conceded long afterwards its first secretary (the Bank’s Peter Cooke), and that summer the panel proved itself largely ineffective during the so-called Gallaher Affair – a fierce takeover battle for the Ulster-based tobacco company that saw Morgan Grenfell and its brokers, Cazenove, successfully riding roughshod over the central tenet of the Code that all shareholders in a company being bid for should receive equal treatment. ‘Ultimately,’ declared the Daily Telegraph’s Kenneth Fleet in assessing where the episode left the Takeover Panel, ‘it must be replaced with statutory rules interpreted and administered with statutory authority.’ That, however, was something that O’Brien, and indeed the City at large with its deep, almost atavistic attachment to being left alone to run its affairs, refused to accept; and by early 1969 he was ready to put in place a beefed-up panel with rather more powers. Not everyone was happy, including the top man at Schroders who was also since 1967 a non-executive director at the Bank:

Mr Gordon Richardson telephoned the Governor to say that he was alarmed at the rumours which were flying round the City about sanctions in support of the Panel on Take-overs. He personally viewed these developments with apprehension, and felt that there would be several people in the City who, while supporting the operations of the Panel, would object in principle to the quasi-legal status of the sanctions proposed. The Governor replied that he understood this feeling, but that the only people he had been able to find to run the Panel were insistent that the Panel be given teeth. The alternative was an SEC.

O’Brien carried the day, and by spring 1969 the Takeover Panel Mark II was under way, including tough-minded, non-Bank people now running it. Even so, The Times’s headline was still apt: ‘Teeth at last – but how will they bite?’²³

All this coincided with significant takeover or would-be takeover activity on the part of the clearing banks, half a century after it had seemingly been settled for all time that there would be a Big Five of Barclays, Midland, Lloyds, Westminster and National Provincial. In early 1968, with O’Brien and government both supportive, it was announced that the similar-sized last two would be coming together to form National Westminster; soon afterwards, in February, a startled City learned of the intention of Barclays and Lloyds to form a combine, likely to have control of some 48 per cent of joint-stock banking. Again the governor was on board, explaining in due course to the Monopolies Commission (to which reference had been made by government) the key arguments of economies of scale, greater potential for modernisation, less over-banking, and an enhanced size and therefore presence in international banking – at a time, he hardly needed to add, of American banks flexing their muscles, especially in the context of the Euromarkets. What O’Brien was unable to deny was either that the creation of three large banks might well lead in time to a duopoly (that is, if NatWest took over Midland in order to combat the Barclays/Lloyds giant) or, still more damagingly, that (in the words of the eventual report) ‘a duopoly situation would make nationalisation of the banking system easier to achieve and would bring that possibility nearer’. In July, the Commission came out against a merger; and with Jenkins having been told by the governor that although he ‘remained on balance in favour’ he ‘would not feel it necessary to go to the stake about it’, the government accepted that verdict.

By contrast, where O’Brien did not feel at all relaxed was about major tie-ups between clearing banks and merchant banks, especially after he had been almost entirely by-passed in 1967 when Midland took a 33 per cent stake in Samuel Montagu – to his ‘extreme displeasure’, as he informed Midland’s chiefs. Two years later, in September 1969, he spoke frankly to Hill Samuel’s expansion-minded Sir Kenneth Keith about why he ‘continued to feel that too close an association between individual merchant banks and particular clearing banks was not in the best interests of the City’: partly because such association would make it hard for clearers to access across the merchant banking spectrum ‘the lion’s share of the banking brain power in the City’; and partly because there would be no gain in ‘merchant banking personnel being turned into organisation men of the clearing bank type’.²⁴ In short, the Bank was determined that the City’s barriers – in effect an old-style guild system – would remain intact for the foreseeable future.

During the turbulent late 1960s – the Vietnam War intensifying pressure on the Bretton Woods system as well as provoking huge protest demonstrations, before one of which Tariq Ali told students, ‘Don’t be surprised if the Bank of England is occupied’ – the most discontented citizens of the square mile were, irrespective of mergers or non-mergers, the clearing bankers. Liquidity ratios, special deposit schemes, ‘ceilings’ for lending: one way and another, they had spent most of the decade with one hand tied behind their backs, seldom free from some sort of quantitative lending restraint, and inevitably they came increasingly to feel that the Bank was not doing enough to protect them against politicians too cowardly to make the cuts in public expenditure that were the real alternative to always turning off the monetary tap. ‘The co-operation of the banks on which we have relied so heavily for so long is sorely strained,’ O’Brien himself warned the Treasury in November 1968, ‘and might break if we try to impose a further restraint on their lending,’ but in vain as yet another round of credit tightening went ahead; and soon afterwards, the chief cashier, Jasper Hollom, recorded a meeting with Sir Archibald Forbes at which Midland’s chairman had ‘made some rather wild remarks, e.g. that we still maintain a pretence in this country of having a private banking system but that it might be all for the best if this façade was torn down without more ado’. Was there a better way of organising things? By the end of the decade, recalls Charles Goodhart (who as a youngish economist had come to the Bank in 1968), ‘the desire to get rid of direct quantitative credit ceilings, generally seen as distortionary and partially ineffective, was widely shared, not only by the banks and the Bank, but also in the Treasury and amongst politicians of all the main parties’. The task then for the early 1970s, he also recalls, would be finding a satisfactory ‘half-way house’ between ‘direct credit controls’ on the one hand and ‘pure reliance on flexible interest rates and open-market mechanisms’ on the other.

Moreover, complementing this new emphasis on how to implement monetary policy, and perhaps causally related to it, was a new emphasis on that policy itself. ‘Monetary policy suddenly became fashionable last autumn,’ noted the Financial Times’s Samuel Brittan in February 1969; while that same month John Fforde in an internal memo scornfully referred to monetarism (as it was starting to be called by followers of the Chicago economist Milton Friedman) as ‘wishful primitivism, born of exasperation with certain intractable economic problems of modern society’. Still, primitive or not, such views, with their stress on watching monetary aggregates and setting monetary targets, could not be ignored. ‘The Governor said that, despite some dissenting views in the Bank, he was minded to publish Goodhart’s paper in the June Bulletin, with a personal attribution,’ noted Hollom in April 1970 after O’Brien’s meeting with Jenkins and the Treasury’s permanent secretary, Sir Douglas Allen. ‘He thought it a subject on which it would be helpful to put out a study which was of an academic nature rather than a set position taken up by the Bank.’ Allen gave the go-ahead, and Goodhart’s article, ‘The importance of money’, duly appeared in the June issue of the Bank’s Quarterly Bulletin. Forrest Capie has called it ‘a watershed in the Bank’, marking ‘the beginning of some monetary economists’ influence in the Bank’, and so it was. Yet to read it almost half a century later is to be struck by the circumspect tone. ‘Monetary policy is not an easy policy to use,’ conceded Goodhart towards the end. ‘The possibility of exaggerated reactions and discontinuities in application must condition its use.’ His final passage lacked nothing in balance:

Professor Friedman has argued that the rate of change of the money supply would be a better indicator of the thrust of monetary policy than variations in the level of nominal rates. To the extent that price stability ceases to be an accepted norm, and expectations of inflation, or even accelerating inflation, become widespread, this claim that the rate of growth of the money stock may be a better indicator of the direction of policy than the level of interest rates takes on a certain merit. As, however, there will always be multiple objectives – for example the balance of payments, the level of employment, the distribution of expenditure, etc – no single statistic can possibly provide an adequate and comprehensive indicator of policy.

Accordingly, he concluded, ‘basing policy, quasi-automatically, upon the variations in one simple indicator would lead to a hardening of the arteries of judgment’.²⁵

Large and challenging questions of policy and judgement were sadly outside the remit of the Select Committee on Nationalised Industries at a time when select committees were not yet independent of government. Under the vigorous promptings of the left-wing Labour MP Ian Mikardo, that body had long been itching to scrutinise the Bank, and by 1969 they got their wish from Jenkins – though not without a doughty and successful rearguard action from O’Brien, who, threatening not to co-operate, managed to persuade a reluctant chancellor that it should in essence be a narrowly functional inquiry into how the Bank operated as an institution. Chaired by a Tory MP, Colonel C. G. Lancaster, the Committee began questioning witnesses in April 1969; and between then and March 1970, the governor made nine appearances, stressing throughout the paramount need to retain the Bank’s operational independence, especially if it was to be able to continue to give worthwhile advice to the government of the day. The end-result was an eminently sober report, published in late May 1970 and recommending that the Bank should behave more like other nationalised industries, with the publication each year of a full set of accounts. ‘The Old Lady of Threadneedle Street has been told to strip her bonnet and shawl and put on a see-through dress,’ optimistically declared the Daily Mirror, but O’Brien soon afterwards told the Treasury that he was ‘not too unhappy’ with the report and its reception. Or as he would later recall, his only significant disappointment concerned Mikardo, who had used the report’s publication to displace Colonel Lancaster and chair a press conference. ‘He proceeded to say some pretty rough things about the Bank, not at all in keeping with his courteous behaviour during our long examination. Once again the vulgar political animal had won the day.’

As it happened, the report coincided with a torrent of vulgar politics: the 1970 general election. The Bank of course stayed studiously above the fray, but it was still a resonant moment when on 1 June, just over a fortnight before polling day, Cromer appeared on Panorama in order to dispute Jenkins’s claim that Britain now had one of the world’s strongest balance of payments positions. ‘There’s no question,’ he insisted, ‘that any government that comes into power is going to find a much more difficult financial situation than the new Government found in 1964.’ Next day, publicly responding to Cromer’s comments, Wilson understandably compared the current surplus with the £800 million deficit he had inherited in October 1964. ‘I do not see’, he declared, ‘how the most committed politician could describe that as a worsening of the situation.’²⁶ Did the former governor’s intervention make a significant difference to the outcome? Probably not; but, all things considered, he was presumably less than dismayed as it became clear on the night of 18 June that his old foe would be packing his bags and leaving Downing Street.

‘I have never been to the Bank of England before,’ recorded one of Wilson’s colleagues in his diary earlier that year, ‘and one really did have to go through about five great iron gates as if one were entering a prison.’ Tony Benn was there for lunch with O’Brien:

We then went up to the most beautiful dining room. He is a nice man, very agreeable but totally out of touch because he has worked for the Bank all his life and doesn’t understand the attacks on him from outside … He said the usual stupid things about trade unions and wished the shareholders would play a larger part in companies. He lives in a dream world. It occurred to me with a great sort of flash of lightning that this is what is wrong with the City: the people in it don’t make any effort to broaden their interests.

Almost a decade earlier, in the early 1960s, another diarist-outsider, in his case on secondment to the Bank, might have broadly agreed. This was Roger Alford, who was particularly struck by the deputy governor, Humphrey Mynors: ‘His interest in genealogy and cosy trivia (the holding of Bank of England stock by the professors of divinity in the University of Utrecht) all point to a very limited outlook; but to great capability within those limits. The limits seem to exclude any willingness to really search for the truth or for sound opinions; if it is familiar and satisfies appearances, this is enough.’ There was also the question of imaginative sympathy. In November 1966, the financial journalist William Davis wrote in Punch an open letter to O’Brien. Noting that the recently appointed governor had had, unlike his two Etonian predecessors, an unassuming suburban school education, Davis then singled out for criticism a passage in O’Brien’s first speech as governor, at the lord mayor’s dinner, in which he had declared the necessity of having ‘to maintain continuously some margin of spare resources until we find out how to keep the economy on an even keel without it’ – Bankspeak, observed Davis, for half a million out of work, at which point ‘you didn’t sound a bit like a suburban school product who understands what happens to men in their fifties (your age group) during high unemployment’. And more generally, added Davis, although ‘the Bank has already become a good deal less stuffy’ and ‘you are less secretive than in the past’, nevertheless ‘on several major issues your approach seems to be far from progressive’, not least the Bank’s deeply ‘emotional’ attachment ‘to the word “sterling”, and to its role on the world stage’. Empathy was not the concern of Thomas (now Lord) Balogh, the economist closest to Wilson, when he submitted to the Lancaster/Mikardo inquiry a memorandum entitled ‘The Bank of England – Some Defects in Organisation and Functioning’. One passage perhaps gave particular offence in Threadneedle Street:

Until the present incumbent [O’Brien], the decisive (almost dictatorial) Governorship was filled from the outside, without any recognisable training either in what has become a recognised economic administratorship. In the U.S., Germany, France, Italy, Australia, Canada and the Netherlands, to name but a few countries, it would be difficult to imagine a non-expert’s appointment to this particular function. The present Governor rose from the ranks of the Bank without any general training so much needed by a Central Banker. While perhaps less obviously politically partisan than some of his predecessors he has strongly biased views on the management of the economy.

In short, Balogh’s overall impression, looking at the Bank, was one of ‘inadequate intellectual ability and political bias’.²⁷

Benn, Alford, Davis, Balogh – how fair or accurate was the largely unflattering picture that they drew? Indeed, how ripe for fundamental change was, by the start of the 1970s, the Bank in its higher echelons, both in themselves and in relation to the outside world?

The classical exposition of the Bank’s world-view was set out in 1962 by Mynors and the economic adviser Maurice Allen. In the context of an internal course being devised on central banking, they assembled a list of propositions called, with deliberate modesty, ‘Opinions Attributed to Central Bankers’, propositions that undoubtedly they endorsed:

A central banker needs a sense of smell. Analysis is only theorising but may be encouraged when it confuses critics.

No civil servant understands markets.

Politicians do not sufficiently explain the facts of life to the electorate.

Central bankers should always do what they say and never say what they do.

Taxes are too high.

Bankers are people who do, in the main, what you wish. The rest are fringe institutions. They do not exist.

Wave the big stick if you like, but never use it; it may break in your hand. Better still, try wagging your finger.

In banking, the essence of solidity is liquidity.

Never spit into the wind.

Always lean against the wind.

As for economic policy specifically, a handful of maxims revealed how little, in a supposedly Keynesian age, the Bank’s verities had shifted since Norman’s time:

All expenditure is inflationary, but government expenditure most of all.

A foreign exchange rate is sacred, to be touched only when all other corrective measures are seen to have failed.

Stability in the value of money helps economic growth.

Confidence in a currency is the first requisite for its stability; weakened confidence can be restored only by policies of a Gladstonian kind.

Other countries do not owe us a living.

None of this would have surprised Anthony Sampson, who had recently spent some time anatomising the Bank and being struck by the rarity of graduates, the profusion of ‘inarticulate but confident’ market operators, and the way in which the institution embodied ‘the unquestioning regimental spirit of the public school proletariat’. Not long afterwards, in the mid-1960s, when an aspiring financial journalist, Christopher Fildes, wrote a piece about how London would soon have a market in dollar-denominated bills of exchange, the rebuke came on high from Hilton Clarke: ‘Young man, I would trouble you to remember that this institution has a branded product of its own.’²⁸

Nothing, of course, stood entirely still – and, looking at the top personnel, as the Bank passed from the uncertainties of the 1960s into the turbulence of the 1970s, it is tempting to divide them into old school and rather less old school. Undeniably in the former camp were O’Brien, the authoritative but increasingly afflicted Maurice Parsons (deputy governor, 1966–70), and the extraordinarily industrious Jasper Hollom (executive director, 1966–70, then deputy governor). Among the younger generation they were joined by John Page, who rose to become chief cashier in 1970, which in effect made him the Bank’s chief executive, with extensive managerial and operational responsibilities. ‘He took a very old-style clearing bank Chief Executive approach, very tough, aggressive, down to earth, no nonsense, bugger it kind of line,’ recalled a colleague not altogether fondly. Arguably somewhere between old and new schools was the economist John Fforde, an executive director from 1970 (having been Page’s predecessor as chief cashier) and possessed of a formidable intellectual grasp, though also susceptible to strong tugs of emotion. Finally, there were the two youngish manifest high-flyers, Jeremy Morse and Kit McMahon, both in their different ways impatient with the Bank’s apparent lack of sophistication. Already celebrated as the first winner of the maximum prize of £1,000 on the TV crossword programme Take a Letter, and the quintessential cerebral Wykehamist, Morse had become an executive director in 1965, working mainly on the overseas side and winning his spurs above all through his leading role in settling the post-devaluation claims of fifty-six sterling area countries. McMahon (like Fforde an executive director from 1970) was also cerebral, but with a bit more edge, befitting an Australian who, shortly before coming to the Bank in 1964, had written a challenging book called Sterling in the Sixties. ‘His approach is critical without getting over-doctrinal,’ reckoned the Economist on his original appointment as an adviser, and that would be a just assessment of his Bank career as a whole.²⁹

As had been the case for many years, the executive directors on the Court continued to be heavily outnumbered by the non-executives, as usual by this time coming from a reasonably broad range of backgrounds – including, in 1970, industry (Pilkingtons, English Electric), food (Cadbury Schweppes), mining (Rio Tinto) and of course trade unionism. Three notable recent appointments were Sir Richard Thornton of Barclays (the first time one of the Big Five was represented on the Court), the economist Sir Eric Roll (two years after he failed to become governor) and one of the big beasts of post-war Britain, the National Coal Board’s chairman Lord Robens. The last made his mark more than most non-executives, provoking in December 1968 ‘a rather lively meeting of the Court’ (according to Cecil King’s inside source) by ‘saying that he didn’t see why directors of the Bank should be kept in the dark while all those gathered at Basle were given the true figures of our reserves’. Robens generally pushed hard for more information to be given to the Court, as well as for a streamlining of procedures; and by 1977 he would be able to tell the Old Lady that in his view the Court had at last become more akin to the board of an industrial company.³⁰

In the bigger day-to-day picture, though, more significant was the vexed issue of the role of the executive directors, of whom under the terms of the 1946 legislation there were only four at any one time. Despite the fact they had been in existence for almost forty years, these executives still remained somewhat to the side and not fully integrated into the Bank’s workings, certainly in terms of responsibilities. The direct contrast was with the time-honoured chief cashier, who initialled every memorandum to the governor and from whom permission was required, in theory at least, before a member of staff was permitted to talk to someone outside the Bank. The decisive moment – albeit a turning-point that failed to turn – came in September 1969 when the management consultants McKinsey & Co initially wanted to recommend a much expanded role for the executive directors, before O’Brien persuaded them to tone down that advice. Summarising their meeting, McKinseys’ Alcon Copisarow noted that the governor had been worried such a recommendation ‘might adversely affect the morale of department heads since it could appear to carry with it a downgrading of their position’. And: ‘You felt it might overburden Executive Directors by involving them in detailed departmental activities. We agree that these would be undesirable consequences, and fully recognise the vital contribution that department heads – and the Chief Cashier in particular – make to the policies and operations of the Bank … We have therefore modified our organisational recommendations in this area.’ Accordingly, the report formally presented to the Bank that autumn, while indeed recommending that executive directors ‘should exercise effective supervision over major policy decisions, departmental budgets, the initiation of new programmes, and selected senior staff appointments’, at the same time made it clear that ‘we do not suggest that Executive Directors should become involved in the detailed administration of departments’. Nor did the report insist on any great urgency:

Clarifying the role of Executive Directors should be an important medium-term objective for restructuring the organization of the Bank. We recognise that a change of this kind is difficult to implement immediately. Furthermore, the appropriate degree of authority that Executive Directors need to exercise differs between departments. The aim, therefore, should be to move towards this objective of direct executive responsibilities gradually and flexibly.

O’Brien had been bold to commission McKinseys in the first place, not least because of the tricky politics of their being an American firm, but this reassuring sight of the long grass was what he wanted to see. Or as on one occasion he observed to Morse, with some force, ‘Never forget that the Chief Cashier is the third man in the Bank.’³¹

There was only limited progress too when it came to the quality and depth of the Bank’s economic analysis. ‘This is the sort of analysis which any uninformed person could make from reading the newspapers,’ scornfully commented a Whitehall mandarin in early 1961 on the latest diagnosis that Cobbold had sent to Macmillan and his chancellor about the darkening economic situation. Several factors contributed to this general shortfall: an aversion to modern economic thought on the part of Maurice Allen, economic adviser before becoming an executive director (1964–70); an even deeper aversion to economics generally (in terms of that discipline’s place in the Bank) on the part of Mynors, so that it was not until after the end of his deputy governorship that the Bank felt able in 1965 to create a bespoke Economic Intelligence Department (EID); an almost atavistic loyalty to practice over theory, to market touch over everything, with Allen proud to describe monetary policy as ‘psychological warfare’; the fact anyway that monetary policy as such was wholly secondary to the paramount, even obsessive priority of defending sterling, so that by 1968 the Bank did not yet publish a single monetary statistic; and a slowness to realise that, with the rise of high-class financial journalism, the Bank could no longer claim sole in-the-know authority and needed to put in some hard mental graft. Of course, the odd individual recruitment of economists did make a significant positive difference, notably those of McMahon in 1964 (‘one felt like a fish out of water,’ he recalled), Andrew Crockett two years later, Leslie Dicks-Mireaux in 1967 and Goodhart soon afterwards. Even so, as late as 1975 it was clear from the review of the EID conducted by Eddie George (who had joined the Bank in 1962) that a certain shortfall persisted. Putting aside the department’s already increasingly specialist Economic Section, he observed that although a growing number of staff ‘are recruited with specialist qualifications, notably in economics, they are recruited basically for their all-round acceptability to the Bank as a whole, and they do not typically specialise in any particular area or type of work when they arrive’. Accordingly, he went on, ‘some sense that the balance has been too much in favour of generalism is shared by many of those interviewed, both within the Department and outside’. And altogether, he concluded, ‘the dominant impression to come out of the Review is of E.I.D. at an uneasy stage in a process of transition from a narrow statistical-informational role to a wider role embracing also financial and economic assessment and policy advice’.³²

Was there also a transition taking place in the Bank/City relationship? The answer, by 1970 anyway, was yes, but only up to a point. ‘If I want to talk to the representatives of the British Banks, or indeed of the whole financial community, we can usually get together in one room in about half-an-hour,’ Cobbold had famously told the Radcliffe Committee in 1957; and to a large extent the City still remained a village in which the Bank was the acknowledged head. In 2012 a former acting deputy governor, Brian Quinn, would somewhat wistfully evoke that ‘stable, clubby environment’:

All recognised banks reported to the Bank and came into the Discount Office once a year for a discussion of their returns. There was no unambiguous legal definition of what constituted a bank. It was what the Bank said it was and any prospective new entrant had to be judged fit, usually after having operated with only its own capital for a period of a year or more.

The Discount Office received and monitored banks’ financial accounts and, more importantly, kept its fingers on the pulse of what was going on in the City generally. Informal information – including gossip – played an important part in this process. Talk of any unusual activity or questionable behaviour was passed on to the Bank, which, if the rumours had some foundation, would have a word with the relevant management, usually sufficiently early to anticipate problems. Much depended on confidence and trust, on pursuing real and not imagined problems, on not disclosing sources, and on how the action taken by the Bank, though not publicised, could adversely affect reputation. That mattered a great deal.

It was a world, added Quinn, of a banking oligopoly, of tightly controlled credit, of generally stable interest and exchange rates, of little risk-taking, of limited movement of staff around the City (‘switching from Barclays to Lloyds, for example, was unheard of, if not treasonable’) and of standards of behaviour being ‘monitored and enforced by unwritten consent, with the Bank unquestionably the final arbiter’. ‘Of course,’ he concedes, ‘there were occasional transgressions, and the Bank’s views were not always accepted without protest, but challenging its role as headmaster of the City carried its own risks.’ In the Discount Office itself, Hilton Clarke’s successor was James (Jim) Keogh; and the story is told of his decisive intervention on learning that the discount house Gerrard & National were buying a firm of undertakers (apparently on the grounds of synergy – ‘something else we can do with our hats’). ‘You are not going to do this,’ he curtly informed its buccaneering Kenneth Whitaker, ‘you are not going to do anything like it, get rid of it now!’

Nevertheless, the traditionally rather feudal relationship was changing. Partly this reflected the fact that the City itself was starting to change, especially with the rapid emergence of the Euromarkets and the accompanying arrival of American banks, mainly unsupervised by the Bank. But the bigger cause was growing scepticism on the City’s part as to whether the Bank – as ultimately, especially since 1946, an arm of the Treasury – could effectively represent and further its interests. ‘One instance of a conflict between a set of City institutions and the Bank of England recently was the conflict between the clearing banks and the Bank of England specifically in regard to their ability to meet the ceilings set on their lending,’ the Financial Times’s M. H. (‘Fredy’) Fisher told the Select Committee in February 1970. ‘There everyone knew – the Bank knew, the clearing banks knew – that what they were up against was not the Bank of England but the Chancellor. This was apparent all the way through and became immediately apparent once the thing came out into the open.’ Another journalist, Anthony Harris of the Guardian, elaborated:

The present ambiguous situation is obviously unsatisfactory in some ways. The Bank tries to act in both capacities. The most clashing one is not an argument with the Government, but technically over its management of the gilt-edged market, since it became less concerned simply to stabilise the market of any time, and more concerned to maximise the amount of public lending taking place. In such a case the ambiguity comes out very acutely. One is not very clear whether the Bank is acting as the guardian of marketability of gilts or as sales agent of the Government. The two worlds to some extent clash. I do not see an escape from this, but it is causing a lot of uneasiness at the moment.

Later that month, also giving evidence, O’Brien insisted that his ‘prime responsibility’ was to act ‘as agent of Government, to carry out a variety of functions as efficiently as possible in line with Government policy’; and accordingly, ‘I am not the representative of the City but I do represent City interests where I think it is right and proper to do so.’ He was, in short, the City’s ‘discriminating advocate’.³³ Given the Bank’s continuing insistence that it mediated the square mile’s representations to government, as opposed to allowing it direct access, it was not hard to predict further tensions ahead.

What about the Bank/government (aka Bank/Treasury) relationship? ‘It would be very helpful to us,’ was the message in June 1969 from O’Brien to Al Hayes at the Fed ahead of the Select Committee’s fact-finding visit to New York, ‘if you could emphasise the difference between your position and ours. We have none of your independent authority and therefore no independent right of action.’ In his own evidence, naturally, O’Brien emphasised the necessity of the governor of the day retaining his ‘superiority’, in comparison to civil servants, ‘in the degree of independence’. So too for the Bank as a whole, which according to him (in effect following the Cobbold line to Radcliffe) required operational autonomy if it was properly to fulfil its ‘independent advice function’ to government. Certainly there was a degree of self-respect involved. ‘Central bankers are persons in their own right,’ declared O’Brien when asked about how much he consulted ministers before going to meetings at Basle. ‘They have views about the future of the universe, particularly in so far as monetary and economic affairs are concerned, and no central bank governor would be prepared to go to such a meeting in such a forum merely as the puppet of someone else; he goes in his own right. After all, he is a central bank governor.’ Certainly also, the Bank did continue to enjoy a quite significant degree of day-to-day independence, an independence founded largely on its necessarily highly technical management of the money market (including through its relations with the discount houses), the gilt-edged market and the foreign exchange market – quite apart of course from its key supervisory-cum-macro-economic role in relation to the banking system. In practice, moreover, it tended to be – notwithstanding the snub to Cromer during the March 1966 election – the dominant party when it came to interest rate decisions. ‘I said that the Chancellor had been near to overruling the Governor on a cut in Bank rate,’ recorded Cairncross in April 1968 after a conversation with the Bank’s Jeremy Morse. ‘J. pointed out that it was the Bank’s rate and therefore could not be changed without their agreement. I said that this was going too far. He then said that both sides had a veto on moving and that it was usually the Bank that wanted to move. I had to agree that I couldn’t recall a specific case where the Bank had been pushed into cutting the rate against its will (or even into increasing it when it didn’t accept the need to do so).’

Yet in a larger sense it is hard to avoid the impression of the Bank as somewhat marginalised during the increasingly Keynesian and corporatist 1960s, as demand management flourished and new centres of policy-making influence came to the fore, including the trade unions, the CBI and the National Economic Development Council (‘Neddy’). ‘It has reached my ears that you are shortly having a cocktail party for employers and the TUC,’ Cromer wrote almost forlornly in 1963 to John Hare, the minister of labour. ‘With considerable temerity I am writing to ask you whether it might be possible for me to receive an invitation. The reason for this rather odd request is that, in the normal course of events, I have virtually no opportunity of meeting the TUC members and on this occasion I have a particular reason for wanting to contrive a meeting with one or two individuals …’ It was also arguably a problem that O’Brien had spent his career working his way up at the Bank, which perhaps inevitably meant that he tended to view the permanent secretary at the Treasury as his opposite number whereas say Cobbold and Cromer (but not Catto) had instinctively cultivated a more direct relationship with ministers. In any case, by the turn of the decade the feeling at the Bank seems to have been one of some frustration – a frustration that McMahon eventually gave vent to in July 1971, writing a note for O’Brien that apparently applied to recent years as well as 1971 itself:

A number of us have been concerned for some time about the relationship between fiscal policy and monetary policy. For example, in the run-up to the Budget, the following is hardly a caricature of what happens. The broad magnitude of fiscal action is agreed in the Budget Committee, while the economic forecasts are still being made. Reference to the possible role of monetary policy at this stage can be made by the Bank representative, but only in the most general terms and in any case they are not taken very seriously. Then, when the national income and balance of payments forecasts are complete, detailed work goes on in the Treasury, to which we are not privy, settling particular tax changes agreed upon. At a late stage, when the Budget speech is already into its third or fourth draft, the financial forecasts are completed, throwing up certain implications for money supply, the appropriate net sales or purchases of gilt-edged to the public for the year ahead, etc. It is then decided at a Treasury/Bank meeting that since it would be absurd for the authorities to try to operate a monetary policy which was inconsistent with the aims the Chancellor was trying to achieve by his fiscal policy, monetary policy should be broadly accommodating.

In short, ‘the present situation, whereby monetary policy is effectively a residual in total policy, is very unsatisfactory’; and near the end McMahon referred with some bitterness to the way the Treasury ‘keep us at arm’s length in devising their packages’.³⁴

Perhaps the area of greatest concern to the Select Committee was that of accountability. ‘It helps you to do good by stealth, in other words?’ asked Mikardo, after O’Brien had sought to justify the Bank’s non-publication of accounts on the grounds that this at times enabled it discreetly to ensure the stability of the banking system. ‘Yes, indeed,’ replied the governor, but the MP for Poplar persisted:

But does that not also have the corollary that it helps you to drop clangers by stealth, to make mistakes by stealth, or, to put it another way, this facility of doing good by stealth creates as a corollary a situation in which whatever mistakes and however large they may be the Bank makes, there is no way in which they are ever publicly revealed? – Yes, that is so, but dropping clangers is not a thing which the Bank goes in for.

The Committee’s report in 1970 was predictably critical on this aspect. After noting that ‘the Bank could go on operating inefficiently for years without anyone outside knowing about it’, that indeed ‘for all anybody knows with certainty to the contrary, it may have gone on operating inefficiently for years’, it went on:

Your Committee have no reason to think that this has been the case. But the fact is that any institution which is protected by secrecy and shielded from scrutiny is in danger of becoming unselfcritical and complacent. This danger is greatly increased in the case of the Bank by the fact that, in many areas of its work, it has been reluctant to apply to its performance and methods the types of objective criteria which are used by other large businesses, public and private. The Bank seems ready to fall back on the broad view that an institution that is nearly 300 years old does not need to use other people’s instruments of measurement and control because its longevity indicates that there cannot be much wrong with it: this is a view which Your Committee finds unacceptable. It must be said that there was almost an assumption of institutional infallibility that flavoured much of the Evidence which Your Committee received and the Governor himself was not immune from it.

Various recommendations followed – including not just that the Bank should publish its accounts, but also that in terms of capital expenditure it should be held to the same criteria as other public corporations – but what mattered more was the broad critique. It was a critique in line with Anthony Sampson’s charge eight years earlier in his Anatomy of Britain: ‘The Bank has never accepted the notion of public accountability, and over the past hundred years its activities have become more, not less, clandestine.’ And he quoted an anonymous banker as to why the Bank’s Quarterly Bulletin was so (in Sampson’s phrase) ‘ingeniously obscure’: ‘It isn’t so much that they don’t want to tell you what’s going on; it’s more that they don’t know how to explain it: they’re like a Northumbrian farmer.’ Perhaps in truth it was a bit of both, but either way this absence of transparency was not a helpful contribution to the quality of debate – whether outside or inside the Bank.

Ultimately, like so much else, it came down to culture, and the traditional rather introverted culture of the Bank was very deeply entrenched. Notably revealing testimony, suggestive of a whole mentality, comes from Pen Kent, who joined the Bank in 1961 as a graduate recruit and later that decade was enduring the ‘fairly nerve-wracking exposure’, as he recalled over forty years later, of preparing the figures for the daily morning meeting in the governor’s room. That meeting, attended by the governor and a handful of senior colleagues including the chief cashier, was called ‘Books’; and significantly, the all-important leather-bound book had ‘precisely the right number of pages to cover the weekly returns for our financial year’:

It was this book which you had to complete in manuscript, in special ink made by the printing works, guaranteed not to fade for 200 years. An expensive recipe. And you were not allowed to show or reveal any errors of any kind. Now it’s very difficult to imagine that you can fill this in, (a) that the figures are always right, and (b) that you always transcribe them correctly. So techniques had been developed for scratching this rather high glossy parchment-like paper with a scratcher which was supplied as part of your toolkit, it even had an ivory handle. And then you had to polish the paper because if you tried to write with this kind of ink on paper that’s been roughed up … you can imagine. Now that was a completely artificial constraint on your facility and ability to do this efficiently and quickly. And for a long time it was kept deliberately archaic as I think a sort of testing ground for your nerve and your endurance. And it became a kind of joke. But it also developed this mystique because there was a book kept in which there was a photograph of everyone who had managed the Bank of England’s books, single-handed on their own, having qualified. And this book had photographs going back to the 19th Century …

‘All the Bank’s greats,’ added Kent about this ritual which anyone who aspired to high office had to master, ‘it was like the Hall of Fame …’³⁵