17

Serious Misgivings

‘Proper control of the money supply is unlikely to become a simple matter,’ the Bank at the end of April 1979, shortly before the general election, warned the next chancellor. ‘With a combination of correct judgement and good fortune, the authorities are able to steer a course that allows the money supply to grow within its permitted range without this being accompanied by unforeseen, unwelcome, or unacceptable behaviour of either the rate of exchange or the rate of interest.’ Unfortunately for harmonious relations, the problem was that the new Tory government under Margaret Thatcher had a zealous and unbending streak of monetarism, quite different from the Bank’s far more cautious approach.

On Thatcher’s part, this streak involved attaching huge importance not only to the meeting of tight monetary targets (especially £M3 targets) but also to the ultimately will-o’-the-wisp doctrine of monetary base control (MBC) – a doctrine based on the theory that (in the retrospective words of her first chancellor, Sir Geoffrey Howe) ‘the Bank of England could control the money supply directly by manipulating and targeting the small deposits held by the clearing banks at the Bank’. The Bank was not keen from the start, with a paper by Charles Goodhart and others in the June issue of the Quarterly Bulletin arguing that MBC would ‘threaten frequent and potentially massive movements in interest rates, if not complete instability’, quite apart from serious ‘disturbances and dislocations to well-established arrangements’. Undeterred, Thatcher soon afterwards commissioned a joint Treasury/Bank study of MBC, a study that over the next half-year or so moved at fairly glacial speed. Thatcher herself, understandably perturbed by the sharp hike in MLR (14 to 17 per cent) in November after a rapid rise in the money supply had led to a funding crisis, became increasingly impatient. ‘Wass noted that the Prime Minister and the Chancellor were continually pressing for progress and made it clear, in answer to a question, that it was the Bank that was seen to be responsible for the absence of faster progress, this being our particular area of responsibility,’ ran the Bank’s record of a Richardson visit to the Treasury shortly before Christmas.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More immediately, on holiday in Switzerland, she happened to meet the monetarist economist Karl Brunner and the Swiss central banker Fritz Leutwiler. To both she unburdened herself; from both came the message that the drastic overshoot must be the result of Bank of England mismanagement. Early September saw the denouement, with August’s fast-growing, seemingly out-of-control figures due to be announced on the 9th. Wednesday the 3rd was Richardson’s longest day. At a 9.30 meeting at No. 11, accompanied by John Fforde and Charles Goodhart, he was told by Howe that Thatcher was ‘clearly unhappy that the monetary situation seemed to have gone wrong, and would be looking for reassurance that the Treasury and the Bank had a grip on the situation’; to which he responded by asserting that ‘the markets were clearly inhibited by the fact that they no longer knew where they were on the map’ and noting that ‘the monetary statistics were undoubtedly in disarray’; while Goodhart commented that ‘changes in £M3 were not reliably related to movements in the real economy’ and that ‘£M3 in recent years had been much influenced by structural shifts in the financial sector’. At 6 o’clock the governor was back in Downing Street, this time at No. 10 and on his own. ‘Her strategy was right … it was not being properly operated … the Bank of England was functioning as a lender of first resort, not last resort … the clearing banks were shovelling money out …’ Richardson listened to it all and more, before eventually the meeting was adjourned. Two days later, on Friday, the chancellor’s office rang the governor’s office to say that the prime minister wished to resume ‘the other day’s meeting’ on the 8th at 3 pm, only to be told that Richardson would be in Basel for a BIS meeting. So in the event that Monday afternoon, with McMahon also away, it was Fforde and George who arrived at No. 10 to see Thatcher and Howe. ‘Who are these people?’ she reputedly said on coming into the meeting room, and then gave (according to the record by her office) what Cobbold would have called both barrels:

The Prime Minister said that she understood that the underlying rate of monetary growth was now reckoned to be 15 per cent or higher. This was extremely disturbing – given that the 7–11 per cent target was the centre-piece of the Government’s economic strategy. It seemed to her that the Bank had been pursuing an interest rate policy rather than a policy to control the money supply … As long as the clearers could rely on the Bank to relieve any pressure on their liquidity, they would surely be all too willing to maintain a high level of lending … On monetary control, she was disappointed that it had taken so long to reach a conclusion on the proposals to change over to a monetary base system. Finally she wondered whether more could not have been done to put pressure on the clearing bank chairmen to get them to reduce their lending.

Howe characteristically tried to calm things down. ‘It was easy to be wise after the event,’ he observed. ‘Not only the Treasury and the Bank, but also most outside commentators, had under-estimated the underlying rate of monetary growth.’ And the two Bank men, with George doing most of the talking, apparently did attempt in trying circumstances to mount a defence, noting that the issue of methods of monetary control was ‘extremely complex’, which presumably went down well. The meeting ended with Thatcher stating that ‘it was crucial to get the money supply back under control’. Clearly it was a memorable encounter, naturally mentioned by Dow: ‘I got no coherent account of how it went. There was evidently much ill temper and interruption, before which the chancellor apparently bowed his head; and, in effect, so likewise (if one can imagine his silent fury) must John Fforde have done. Terry Burns [chief economic adviser at the Treasury] said afterwards it was a pity no one spoke up against the tirade since the PM had nothing to do but repeat herself, and was left frustrated.’ As for Fforde, added Dow, he was so shaken that apparently he returned to the Bank saying that he refused to meet Thatcher again; and it was not long before the word was out about the prime minister’s extremely dim view. ‘Now we have Mrs Thatcher buttonholing all and sundry to proclaim that “it’s all the Bank’s fault,”’ wrote Ferdinand Mount in the Evening Standard. ‘Any passing Swiss banker or Cabinet sub-committee is treated to a lecture on the incompetence of the present Governor, Mr Gordon Richardson. He has, she claims, totally messed up the money supply; he never tells her a thing; how can you run a country with a central bank which does not understand the simplest things, and so on, and so on.’7

The closing months of 1980, and early months of 1981, were an extremely difficult time for all concerned, as manufacturing output rapidly declined and mass unemployment became a reality – a grim state of affairs owing much to what the financial historian Duncan Needham has called ‘a misconceived monetary policy’. Indeed, on the final page of his authoritative survey of British monetary policy between the late 1960s and early 1980s, he has this striking passage about Thatcher herself:

If, instead of simply berating Bank officials, she had listened to their advice, she might have learned that it is not possible to control the broad money supply in the UK and, even if it were, that there is no robust relationship between £M3 and real economic objectives such as price stability and growth. If she and her Treasury team had listened to the Bank in 1979, the British economy might not have shrunk by nearly 6 per cent.

Given that judgement, blessed of course with the benefit of hindsight, it is particularly instructive to look at the memo that McMahon sent to Richardson on 18 September – ten days after the great blow-up, and immediately following another difficult meeting at No. 10 – on ‘The Bank’s Position on Monetary Policy’. He began by considering the suggestion from Goodhart and Dow that the Bank ‘should make some form of apologia to the Prime Minister on monetary policy’:

There is a case for exculpating ourselves from unfair accusations that have been made. Thus we could refer to our record of scepticism and concern about the effects of the corset; the fact that the rollovers and the so-called ‘interest rate policy’ were a firm Government decision; the difficulties the banks have in reducing rates quickly; the difference between experience here and in the US, etc. My feeling in the light of this morning’s meeting, however, is that it might be better not to spend time defending ourselves. The danger is that, to hostile or sceptical eyes, such arguments will indeed look defensive.

Instead, argued McMahon, it was better for the Bank to look ahead constructively to the future and to try to help Thatcher: ‘I read her as seeing quite correctly what a real (quite apart from presentational) jam we are all in and very much wanting to be shown a possible way towards the shore.’ But how? McMahon noted that, at the meeting, she had said, in response to Richardson’s explicit question, ‘that she would like to have the exchange rate lower than it is so long as (a) it was consonant with the continuance of the existing monetary policy and (b) it did not involve a plunge’; and, added McMahon (no doubt entirely accurately), ‘she did not join Lawson’s strong rebuttal of the idea of joining the EMS’. That, however, would not be enough in itself: there was also an urgent need for lower interest rates. And here McMahon contended that the Bank’s policy should be one of encouraging a reduction in the PSBR in order to achieve those lower interest rates – in other words, through public expenditure cuts rather than monetary policy. There may or may not have been a causal link, but in effect that was what would happen. During the autumn the MTFS turned in practice increasingly into something more like a fiscal than a financial strategy; monetarist dogma from the West End started to be toned down, as policy became looser; and Howe’s famous/infamous March 1981 budget savaged the PSBR. McMahon himself was enough of a Keynesian to be having by that time serious misgivings – ‘I believe that history will view fiscal tightening now as very misguided indeed,’ he predicted in February – but the essence of the government’s approach was very much in line with his solution the previous autumn.8

Over the next year and a half, there remained in Threadneedle Street only patchy sympathy with the general thrust of the government’s economic approach. In May 1981, at the first meeting of the deliberately policy-oriented Deputy Governor’s Committee (DGC), McMahon speculated rather wistfully that ‘if there was still no sign of recovery by the autumn, the Government might be more susceptible to suggestions for stimulating action provided they could be presented in a way which did not seem too grossly in conflict with the broad strategy’; later that summer, he and Dow were in favour of pursuing what Dow termed ‘An alternative policy’, essentially reflation through reducing indirect taxes rather than expanding public investment, though with McMahon going somewhat further in wanting to introduce ‘a 12-months freeze’ (or what he wryly called ‘the final heresy’); and in mid-September, Dow was stating frankly that ‘the Government’s central economic strategy is in some disarray’, adding that ‘by mid-October Government policy will probably be seen to be in a critical state’. The chances are that Richardson distanced himself somewhat from these viewpoints, and it is perhaps telling that the chancellor would specifically pay tribute to the governor for his contribution during that autumn’s ‘heavy weather’ as sterling continued to plummet from its dizzying 1979–80 heights. ‘Gordon Richardson’s advice was always measured,’ recalled Howe, ‘tempered by long, front-line experience of the need to act more rather than less decisively, above all sooner rather than later in face of unmistakable signals from the exchange markets.’ By the following summer, most dispassionate observers reckoned that the economy was at last starting to recover, but McMahon at a DGC in July 1982 declared that it was ‘increasingly clear that the UK was on a bad track’, before asking: ‘What sort of forecast would we want before we would advocate remedial action?’ At which point, neither of the Bank’s two rising men were willing to back him. It was, thought Eddie George, ‘difficult to say’, but he ‘certainly did not think that the present forecast was sufficient’; while David Walker ‘cautioned the meeting against premature urgings for fiscal reflation’. Nor was there much joy for grumbling industrialists when they came later that month to see Richardson. The CBI’s Sir Campbell Fraser and Sir Terence Beckett arrived ‘in sombre mood’, a mood that must have darkened after they had listed their complaints about what was still historically a high MLR: ‘The Governor remarked that industry’s focus on interest rates was in reality a reflection of the weakness of profits. The truth of the matter, he said, was that the profitability of industry was lamentable and that improvement must come from within companies. Reductions in interest rates were not the way to sustained gains in profitability.’9

Over this same year and a half or so, monetary policy continued to become less rigid. Thatcher’s favoured monetary base control was by the start already in effect off the table, though August 1981 saw a change to the Bank’s operating techniques in the money market – changes scathingly described by Goodhart retrospectively as ‘a kind of consolation prize for MBC monetarists (for not getting MBC)’, in which ‘the authorities agreed that operations could become somewhat more market-oriented with less reliance on discount-window lending’. Or as he explained further:

The authorities would still set interest rates (with a view to hitting their monetary target), but would, it was suggested, disguise what their interest-rate objective was (the unpublished band), and pretend that it was all the market’s doing. Frankly this was confused and silly. In practice it had little effect, apart from being a pretext for the Bank to introduce some reform and widening of British bill markets, which it wanted to do anyhow for its own purposes. The unpublished bands, etc., never transpired; the authorities went on announcing administered changes in minimum lending rate, and the monetarist overtones in the supposed ‘new methods’ rapidly became a dead letter and forgotten.

MLR was soon abandoned and replaced by the Bank of England repurchase rate. As for the MTFS itself, it was by spring 1982 palpably losing coherence, diluted by an array of rival monetary aggregates: narrow (M1), broad (£M3), broader (PSL2). Indeed, even before then, in December 1981, a piquant conversation took place between Richardson and Wass. ‘He was good enough to say,’ recorded the governor for his deputy’s eyes only, ‘that it was now clear that the reservations that I had expressed two years ago about the MTFS were being shown to have been right.’ And increasingly, by that time, the Bank was pushing hard – and even optimistically – for entry to the EMS. ‘I believe the tide is now beginning to run in favour,’ observed McMahon as early as August 1981, citing the ‘growing disenchantment’ on the part of Lawson (by now very pro-EMS) and ‘to some extent’ Howe with ‘the existing framework of monetary targets’. Nor in this case was McMahon an outlier within the Bank. ‘An exchange rate standard has once again come to seem attractive as a possible alternative anchor for domestic policy,’ noted Dow at about the same time. ‘This is felt as strongly and explicitly by those on the monetary side – John Fforde and Charles Goodhart – as by those more detached like myself.’ The crunch came in January 1982, amid some sudden nervousness. ‘There is still very great resistance to joining EMS, especially from the Prime Minister,’ conceded McMahon on the 18th. Moreover, ‘we should I think have to agree that the present is not a particularly opportune time to join: at around 4.30 the £/DM rate looks too strong’, though he was still hopeful of ‘finally (?some time in the spring) taking the plunge’. Four days later, on the 22nd, Thatcher chaired a meeting with ministers. Howe was opposed, not least because of a concern that the whole European idea might be soured in British eyes if the EMS appeared to cause high British interest rates; and Thatcher agreed, though for a very different reason, with her dominant anxiety instead being loss of ‘freedom to manoeuvre’. Accordingly, to the disappointment of the Bank (including Richardson), the non-decision was taken to continue to wait until the time was ‘ripe’.10 Rather like Thatcher’s premiership itself, this one would run and run.

The early 1980s were an exceptionally troubled time for British industry, which for the Bank meant not just intense debates about high policy but also a notably active role for its Industrial Finance Division under the restlessly energetic David Walker.11 ‘In the past four years,’ he recorded in early 1984, ‘the Bank has been concerned with more than 150 mainly listed companies, some 50 very closely, where lending bankers were reluctant to increase facilities and, in some cases, disposed to withdraw those already in place.’ A flavour comes through in a catch-up note that McMahon sent to the returning Richardson in November 1981. ‘We have leapt from crisis to crisis on this,’ he wrote about the drama surrounding Sir Freddie Laker and his airline. ‘As I have always half expected, the Prime Minister, after taking a ruthless line in the abstract, did a volte face when it suddenly looked as if he was going to have to go. However heroic work by D.A.W. has probably managed to see him through the immediate crisis without any significant Government contribution. The underlying situation of course remains grave.’ So it did, with the company conclusively collapsing in early 1982, and inevitably there were mixed fortunes overall. ‘Good progress had been made over the last two months towards establishing satisfactory financing arrangements in three important cases,’ Richardson told the clearers that summer, ‘although others were in worse shape’; and he added that ‘the Bank was now continuously involved in an array of smaller cases, the problems of many of which were likely to persist for a long time’. Successes in these years included Turner & Newall, John Brown and Weir Group, while failures included the textile machinery group Stone-Platt Industries as well as Laker. Throughout, the Bank’s principles of action remained largely consistent: banging together the heads of the troubled company’s creditor banks and sometimes institutional shareholders; if necessary, bringing in new management to the company; and making it clear there would be no government or Bank bail-out. Looking further ahead, the Bank had become increasingly convinced that industry would be on a much sounder footing if it had an improved corporate governance model, resulting in the launch in early 1982 under Bank auspices of Pro Ned (Promotion of Non-Executive Directors). Its brief was to promote the wider use of non-executive directors, and under the leadership of Jonathan Charkham, a skilled networker recruited from the Civil Service, it made significant progress. ‘What matters in business is the strength of direction and management,’ Walker crisply informed an audience of West Midlands industrialists two years after Pro Ned began. ‘This transcends every other consideration …’ But as he was also at pains to emphasise, the non-executive director was in himself (very occasionally herself) ‘neither magician nor panacea’.12

One episode in the early 1980s was well out of the normal run of Bank activities. This involved a key role in the US/Iran hostage deal of January 1981, by which the release of fifty-two captured US personnel in Iran was secured against some $8 billion in cash, gold and securities. The Foreign Office naturally welcomed the Bank’s participation in helping to execute the complex plan, unlike the financial secretary. ‘How much profit,’ Lawson aggressively asked McMahon, ‘are you going to make on this deal?’ Shortly afterwards, McMahon himself, accompanied by the chief cashier David Somerset, flew to Algiers, where the Algerian government was acting as an intermediary between the two countries; and over a very long weekend of difficult negotiations, they waited to release the Americans’ money when the moment was judged safe. ‘There were in practice,’ recalled McMahon, ‘many problems to solve’:

The size of the operation was daunting, involving as it did (even if only for a short time) a trebling of our balance sheet. Our main aim was to minimise the various risks to which the Bank would be exposed. One important aim was to see that the period during which the funds were with us was as short as possible. Another was to reduce as far as possible our own discretion. To the extent that any scope existed for us to exercise judgement as to whether or when or how any particular payment was made, we could be vulnerable to criticism or legal action if anything went wrong. In addition, even if we had fully secured ourselves legally there were the commercial risks inevitably involved with such large sums and what one might call the political risks: e.g., if something had happened to the hostages while in flight at about the time we were making the payment to Iran that we were legally required to do, we could suffer great criticism …

Back in London, meanwhile, the linchpin figure was Derrick Byatt, chief manager of the Foreign Exchange Division and providing the technical expertise to enable the Bank to be escrow agent for the transaction. ‘During the final crucial days of the operation,’ his obituary would record, ‘he was in the office day and night, sleeping when he could on a camp bed in the conference room adjacent to his office.’ Undeniably the whole episode was a feather in the Bank’s cap – and perhaps much needed, at a time when it was feeling distinctly unloved.13

The real international challenge during Richardson’s governorship still awaited. ‘Almost certainly the most dangerous financial occasion of the second half of the twentieth century,’ would be Charles Goodhart’s verdict on the LDC (less developed countries) debt crisis that broke out in the second half of 1982, as first Mexico and then Argentina and Brazil were unable to refinance their borrowing. ‘If the loans to these countries had been marked to market, some, perhaps a majority, of the major money-centre international banks in the world, and especially those in New York, would have been (technically) insolvent, and the world’s financial system would have faced a major crisis.’ Not least because he was able to mediate between two powerful but personally incompatible central bankers – Paul Volcker of the Fed and Karl Otto Pöhl of the Bundesbank – it was a situation that brought out the best from Richardson’s formidable armoury.

A handful of gubernatorial moments stand out from an immensely complicated narrative. In early September, at the IMF’s annual meeting held that year in Toronto a few days after the leading central banks had arranged through the BIS a $1.85 billion bridging loan for Mexico, Richardson was very much one of the ‘Big Four’ – along with Volcker, the Swiss National Bank’s Leutwiler and the IMF’s Jacques de Larosière – in not only keeping Mexico (and thus the New York clearing system) going, but starting to apply moral pressure on the commercial banks to limit repayment demands; a day or two later, back in London, Richardson told Volcker on the phone that he was ‘haunted with the fear that nothing would happen unless someone was prepared to take a very positive lead’ and that ‘the time might come when they would both have to take the initiative with the banks’; later in September, as the Argentine situation rapidly deteriorated but the British government felt it impossible so soon after the Falklands War to adopt a constructive position, it was Richardson who paved the way to the UK and Argentina unfreezing each other’s assets, thereby making it possible to start dealing with the Argentine debt problem; by October, a dialogue was in train between the governor and the British clearing banks – some of which (above all Lloyds) were horribly over-extended in Latin America – to discuss their provisioning; late that month, a dinner at Richardson’s St Anselm’s Place home saw Volcker, Leutwiler and the host working out how to co-ordinate Volcker’s debt plan, including the vital question of how to bring onside the commercial banks without the central banks themselves providing long-term (as opposed to bridging) loans to the debtors; and on 22 November, this time in the governor’s flat at New Change, Richardson gave another dinner, where he, de Larosière, Leutwiler and the Bank’s overseas director, Anthony Loehnis, sat down with six leading commercial bankers from around the world, including Morse of Lloyds, and successfully explained that there was no alternative to a cohesive approach from what was in effect the creditors’ cartel. Much else still lay ahead – including the formation of co-ordination groups of the principal lenders and eventually the invention of ‘the Matrix’, an indispensable device in getting the banks not to pull the plug unnecessarily through believing they were going to be at a competitive disadvantage if they did not – but it was starting to become clear that there would be no total meltdown. ‘I would just marvel over Richardson’s patience and the deliberate care in getting the Europeans on board,’ recalled Volcker a decade later. ‘My style is to walk into a room and say, “Here’s the problem and here are some solutions,” and expect everyone to get on board in two minutes. He understood it took two hours of explanation over dinner to get them on board.’14

By this time, towards the end of 1982, the international debt crisis so preoccupied Richardson that, although sixty-seven, he hoped to continue to serve as governor for a year or two beyond the end of his second term in June 1983. Given, however, that the final decision rested with Thatcher, that was never a realistic possibility. Nor was it realistic, in terms of the succession, that his deputy, McMahon, would get the job, with Thatcher telling a confidant (according to her biographer, Charles Moore) that ‘he’ll never be Governor of the Bank of England while I’m Prime Minister’. Or as Dow put it on behalf of the other end of the mutual dislike, ‘Kit was too transparently a good and honest liberal, not disposed to like her, nor her ways.’ What, for the second time round, about Morse? Howe pushed hard for his school contemporary, calling him ‘my brilliant fellow Wykehamist’, but to no avail. ‘He is clever, anxious to appear so, and never surely a lady’s man,’ was how Dow interpreted the prime minister’s veto, while for all Morse’s intellect and international experience it did not help that he had a temperament seldom hot for certainties. The obvious merchant banker candidate was David Scholey – on the Court, one of the City’s stars, and by now running Warburgs; but there seems to have been a feeling in the Treasury that he was perhaps a little young and might instead be just the man after the next governor had served a single term.

Who would that be? The announcement, taking almost everyone by surprise, came two days before Christmas: the NatWest’s Robin Leigh-Pemberton. In his mid-fifties, ‘he seemed too much a gentleman, too little a professional’, as Dow reflected, before going on:

His record would be unlikely even as a caricature of a well-off, traditional conservative: Eton, then Classics at Trinity College, Oxford, after which the Grenadier Guards and the bar; a gentleman farmer with a couple of thousand acres of family land near Sittingbourne in Kent, member of the County Council in the Conservative interest (‘but that was a long time ago’), now Lord Lieutenant of the county; Brooks and the Cavalry Guards Club; chairman of a lawnmower firm called Birmid Qualcast, and on sundry government committees; and successively regional, then national, director; then (since 1977 – also a surprise appointment) chairman of the National Westminster.

External reaction was largely negative. ‘A cause for concern,’ observed the Financial Times, while the Economist did not try to deny either that he was ‘ill-equipped for the job’ or that the appointment was ‘provocatively political’. Why had Thatcher chosen him? The obvious explanation was that, after the largely unhappy government/Bank relationship of the previous few years, he was someone whom she felt could be relied upon to do her bidding; Christopher Fildes would later surmise that she wanted someone at the Bank who would ‘stand up for the right’ even if the next general election ‘went wrong’; while Dow nearer to the time offered a double theory:

In the first place, he got on with her. In her feminine way, this seems a sine qua non. The qualities that enabled him to get on with her were that he was a conservative, in an entirely natural, robust, and unenlightened way; that he was masculine; and that he charmed her. In the second place, he came from the world of the ordinary banks. The appointment was unconventional in this: he was the first clearer ever to get the post … She thinks not in niceties, but of the end result – whether the clearers’ base rates go up or down. She hankers after a direct lien on them. Why not have someone from that world, who might have some authority over it – and listen to you?

Whatever her motivation, Leigh-Pemberton hardly helped himself with his early public pronouncements after the news had broken. Inflation was ‘vastly more dangerous to democracy than Communism’; in relation to the international debt situation, ‘If ever there was a crisis it is now over’; and ‘Are they ever necessary, these 2 a.m. crisis meetings?’ Unsurprisingly, the mood in the Bank was at best cautious, and within months McMahon had revamped the Deputy Governor’s Committee, describing the change as ‘an initiative by top management of the Bank to take decisions or make recommendations without involving him [the next governor] in a lot of detailed discussion’.15

Yet while Richardson was still governor there remained one important area of unfinished business: the square mile itself, where during the early 1980s, as in the 1970s, the signs were mixed about the reality of the Bank’s once taken-for-granted authority. Specifically, there occurred in 1981 two episodes throwing serious doubt on that authority. The first was Richardson’s failure, despite his best efforts, to dissuade Howe from including in his March budget a one-off levy on the clearing banks, amounting to some £400 million. The very next day, meeting the clearers, he ‘expressed regret that his efforts had not been more successful’, at which point Morse ‘intervened to say that the Chairmen were indeed conscious of the Governor’s efforts in this regard, and were grateful for them’ – a gracious exchange, but twelve years later it would be a revealing moment when, at a Bank/Treasury meeting, the latter’s Rachel Lomax ‘recalled that when the wind-fall profits tax was imposed on the banks, Nigel Lawson had been concerned that it would diminish the effectiveness of the Governor’s eyebrows’.

The other 1981 episode also involved the question of suasion. This was the question of the ownership of the Royal Bank of Scotland (RBS), with Richardson happy by the spring to see it being taken over by Standard Chartered but deeply disturbed by the arrival on the scene of an unwelcome counter-bidder, the Hongkong and Shanghai Banking Corporation (HSBC). Crucially, meetings between Richardson and HSBC’s Michael Sandberg, at which the governor’s eyebrows were raised to their fullest height, only entrenched the counter-bidder’s determination. The Bank’s negative attitude had a rational basis – including concerns that if HSBC (still based in Hong Kong) took over RBS, then the Bank might find itself in a position of ‘responsibility without power’ in terms of supervision-cum-lender-of-last-resort – but poor personal chemistry between two strong-minded men accustomed to getting their own way also played a part. In the event, both bids for RBS were referred to the Monopolies and Mergers Commission (MMC); and during the summer, Richardson was disconcerted to discover not only that the British clearers intended to stay neutral in the matter (Morse explaining to him that ‘the fundamental reason common to all four banks was that they would have to live with HSBC in the future’), but that neither the Treasury nor the City gave encouragement when he tried to push the idea of legislative powers to strengthen the Bank’s control over the ownership of British financial institutions. Towards the end of the year, with the MMC’s decision imminent, the Bank was coming under significant press criticism, including what McMahon called ‘a lot of obviously deliberately leaked stuff that we were being protectionist and stuffy’, as well as the Sunday Telegraph ‘raising the whole question of a potential resignation issue [for Richardson] and also suggesting that the Prime Minister would not be displeased to see us discomfited’. In the Spectator, Fildes saw the stakes as undeniably high: ‘If the Bank of England loses this battle, its authority will never be the same again. On that authority, much hangs. It is felt throughout the City of London – in the banks and beyond them. It lies behind the whole of the City’s system of self-regulation.’ Finally, in January 1982, the MMC pronounced that neither bid should proceed, and the government agreed. RBS lived to fight another day, while for Richardson it was perhaps a score-draw: neither the outcome he had originally wanted nor the one he had argued so strongly against. It remained for Sandberg to pay a final visit before flying back to Hong Kong. ‘He straight away declared his purpose to be “to doff his hat”,’ recorded McMahon; and at the end of a ‘relatively easy conversation’, during which the visitor explained that his bank still hoped to get into UK deposit banking, ‘the Governor said that if at any time he had any proposals or ideas he, the Governor, would be glad to hear them and talk them over …’16

Other aspects of the Bank/City relationship in the early 1980s revealed a stronger Bank, not least when in 1981 it determined that it would no longer be solely the prerogative of members of the Accepting Houses Committee – which is to say the leading merchant banks – to have their bills rediscounted by the Bank at its ‘finest rate’. ‘Here, as in some other areas,’ Richardson explained to the clearers, ‘the Bank felt a tension between its desire to support the interests of British banks and the need to maintain London as an attractive international centre.’ The complaints were predictable, including from Barings, but apart from high-street deposit banking it was starting to become increasingly clear in which direction that tension would be resolved. The importance of London’s standing as an international financial centre also played its part in the Bank’s initially cautious but ultimately firm support for the start of a financial futures exchange, with Richardson doing the formal honours when LIFFE (London International Financial Futures And Options Exchange) opened for business in the Royal Exchange (moribund for most of the century) in September 1982. There was also the thorny matter of Lloyd’s insurance market – traditionally not an area of Bank surveillance let alone interference, but by this time deeply scandal-ridden. Increasingly the feeling at the Bank was that Lloyd’s was badly under-managed, needing more independent input; and shortly before Christmas 1982, Richardson asked an outsider, the management consultant Ian Hay Davison, to go there as its first chief executive, having influenced Lloyd’s in offering him the job in the first place. With some reluctance, Davison eventually agreed – ‘Above all I admired Gordon Richardson and he asked me: I would not have accepted for anyone else’ – and that marked the start of the clean-up of one of the City’s defining historic institutions.17

By this time, however, the Bank’s central City preoccupation was on more familiar terrain: the Stock Exchange. This was a story going back to the late 1970s and the decision by the Labour government to refer the Exchange’s rule book to the Restrictive Practices Court. The hope was that the change of government in May 1979 would make a difference; but when Richardson two months later emphasised to Wass ‘the disadvantages of the Restrictive Practices Court and in particular the time it would take to reach a conclusion and the high costs involved for the Stock Exchange’, the deflating response was that the new trade secretary, John Nott, was being ‘very rigid on this’. So it proved, and over the next few years the Stock Exchange found itself almost completely hobbled by having the well-intentioned but inappropriate Office of Fair Trading (OFT) on its back, with the eventual court case not expected to be heard before 1983 at the earliest – and with the Stock Exchange expected to lose. By 1981 the Bank was starting to think hard about that institution’s future, with McMahon canvassing internally in May the abolition of not just single capacity (that is, member firms having to be brokers or jobbers) but also minimum commission, on the grounds that ‘the services provided by the broking community – research, analysis, etc – might be improved by the concentration that would undoubtedly occur’. Then during 1982 it stepped up a gear, particularly under the influence of David Walker, newly made an executive director. That summer he sent a key paper to the Treasury, arguing for abandonment of the reference and an urgent inquiry (independent of the OFT) into the single-capacity question and if possible the fixed-commission structure also:

World securities trading is changing very fast, with a particularly strong push into new areas by American houses such as Merrill Lynch and Salomon Brothers, and if the London market is to avoid relegation to the second or third division in the world league, with eroded invisibles earnings, the Stock Exchange in London needs to be flexible and responsive to the new challenge. The pace is brisk and time is short: very large change is likely on the world securities scene over the three years now in prospect before the Restrictive Practices Court rules. The risk is that, by then, the Stock Exchange will have lost ground to some extent irretrievably.

Additionally, in the context of the Stock Exchange Council having reluctantly raised to 29.9 per cent the maximum external stake in a member firm, Walker highlighted the weak capitalisation of many of those firms. ‘It is unlikely that many outsiders, including potentially merchant banks and life assurance companies as well as other foreign houses,’ he wrote, ‘are likely to commit sizeable amounts to invest in the securities market while the present planning blight persists.’ In short, and crucial to London’s future as an international financial centre in the new era of borderless capital flows, the Stock Exchange somehow had to be rescued from its insular, debilitating imbroglio.

No independent, non-OFT inquiry took place, but during the winter of 1982–3 the Bank worked hard on the issue. In particular, a clutch of papers by Andrew Threadgold (of the Economics Division) and John Footman (of the Industrial Finance Division) examined the Exchange in fine-grained detail. Their work culminated in February 1983 in the Bank’s green paper on ‘The Future of the Stock Exchange’, produced under the auspices of Walker and Douglas Dawkins. It contained serious warnings about the possible consequences of ‘wholesale deregulation’, defined as ‘the removal of all of the restrictions governing market entry, minimum commission and single capacity’. Such consequences might include the market becoming ‘less liquid and prices more volatile’ as the result of a diminished role for market-making; ‘less unified trading’ following the abolition of single capacity (because going off the market floor meant trading was less centralised); and, if market entry was loosened, ‘failures and defaults would be likely to increase’. Even so, the green paper still advocated the desirability of an alternative structure to the status quo, one that involved significant deregulation; and commending the paper to Eddie George (another recently appointed executive director), Walker made optimistic noises: ‘Getting the Stock Exchange into what I think the Americans call a more dynamic mode will be of great importance. I am confident that it can be done.’ Nevertheless, huge uncertainty still existed, not least in relation to what was generally after the abolition of exchange controls a rapidly changing business environment. ‘I am trying to find more published material on what outside firms would like to do given a relaxation of the Stock Exchange rules,’ Footman informed Walker later that month. ‘So far I have seen none. One way of getting a better feel of this is to talk privately to senior officials in the major merchant banks, and possibly to the major US securities firms in London through whom we have, through Gold and Foreign Exchange, fairly close contact. But even so, we will have to rely an awful lot on guesswork.’ Moreover, of course, there was still the whole hanging question of the court case. Helpfully, Richardson himself was by now fully engaged and starting a series of constructive conversations with the trade secretary (Lord Cockfield) and to a lesser extent Howe; so that by the time of the general election on 9 June 1983, he and Walker had (according to Dow) ‘just about persuaded’ them that ‘the case should be withdrawn from the Court in return for an undertaking by the Stock Exchange to reform’.18

Exactly three weeks after Thatcher’s landslide triumph was Richardson’s final day in office. It concluded with a dinner in the Court Room for directors and wives, at the end of which there entered ‘beneath an enormous busby a vast piper’ who, recorded Dow, ‘marched slowly round the table, solemnly piping, and slowly back, and slowly round again, finally saluting before the Governor, whom he dwarfed’. That was a relaxed occasion, unlike some other formal meals during his governorship. In 1981, a week after becoming a Treasury minister, Jock Bruce-Gardyne had been ‘bidden to luncheon’:

On arrival I was ushered up to Kit McMahon who, after a brief exchange about the weather, took me on to the Governor’s sanctum. Once again, a brief word of welcome, and then in we passed to a substantial dining-room. Gathered there were about 16 assorted Bank top brass awaiting our arrival. In silence. A glass of sherry was proffered, and then the Governor took me round the circle of introductions. No one else spoke. We sat down, myself on the Governor’s right hand, Lord Croham on his left, Kit McMahon opposite. Apart from these three, and a rare intervention from the head of the Bank’s market operations, Eddie George, no one round the table used his mouth for any other purpose than to swallow food throughout the entire meal. One and all stared, as if mesmerised, at my host. I emerged to my waiting car sweating.

In the tradition of Norman, Cobbold and Cromer, if not perhaps Catto or O’Brien, Richardson was the last of the governors to be treated – and, in his case, sometimes to demand to be treated – as akin to an Eastern potentate. But during ten of the most challenging years in the Bank’s history, he had in many ways proved himself as one of the great governors. Perhaps he was vain, perhaps he was arrogant; undeniably he could take an eternity deciding what to do, resulting in what one aide called ‘paralysis by analysis’; but he had a fine mind, a deep devotion to duty and an infinite capacity for taking trouble. Neither the secondary banking crisis of the mid-1970s nor the international debt crisis of the early 1980s would have been resolved nearly so successfully without those qualities. A final word – to return to matters of the table – goes to the member of the governor’s office who wrote in March 1981 to Mr Mounce, BE Services Limited, about ‘Menus for Court Room Functions’:

1 The Governor does not approve of Smoked Salmon for a large number of people because of its terrible price nowadays.

2 He feels strongly that the foods which are actually in season at the time should be served – e.g. Pheasant is certainly not in season at the end of April. You cannot go wrong with Asparagus, Strawberries and especially Raspberries when they are in season over here – but only then.

3 This applies strongly to New Potatoes – but the Governor insists that these should be the very small ones. In fact he likes vegetables to be light and simple. He particularly dislikes Broccoli and also Courgettes.19

‘The present Governor is commendably prompt in the despatch of business,’ McMahon in March 1984 told fellow-members of the Deputy Governor’s Committee. So he was, in marked contrast to his predecessor, but the statement begged the question of precisely what business passed across Robin Leigh-Pemberton’s desk, especially given the rationale of the remodelled DGC itself. In this potentially invidious situation, as he gradually grew into a position that had come to him so unexpectedly, it helped greatly that the new governor brought to bear some impressive human qualities. ‘He was a man of great charm and decency,’ Forrest Capie has written. ‘He had complete integrity and was generally relaxed and at ease in what he did. He proved to be much shrewder than many would have thought on his appointment. He could also be strong when required. He knew his limitations but also would not only listen to advice but happily delegate where needed. He did not try to substitute his judgement for others on technical monetary matters. He inspired people to give of their best …’ A trio of brief snapshots from senior Bank people who worked for him help to flesh out the picture:

A lovely man … the ultimate non-executive chairman. (Michael Foot)

Gave people their head, he trusted them and he backed them, and if they asked him to do something to help achieve a goal he would do it very patiently. (Pen Kent)

He always stood with his troops. He never cut himself loose … (Roger Barnes)

‘I have enjoyed pretty well everything I’ve done – life is interesting if you take enough trouble to find out the details, the problems, the purposes of whatever it is you’re concerned with, it nearly always emerges as interesting, and therefore invokes an enthusiastic reaction,’ Leigh-Pemberton himself had told the Old Lady shortly before taking office. ‘And I find it easy to get on with people and therefore to respond to them – whatever their role.’ He certainly did not come out of central casting as the modern technocratic central banker – and Dow soon after his arrival sighed that ‘conversation at lunch is less amusing; the other day the new Governor and Charles Goodhart discussed sheep’ – but at the top of any institution there is much to be said for the human touch.20

What about relations across town? Leigh-Pemberton was so much a political appointment that in July 1983 Bruce-Gardyne (no longer a minister) confidently predicted the governor having ‘less tense’ times at No 10, but warned that ‘relations with the new Chancellor could prove more demanding’. He knew his man. ‘Nigel Lawson is an unusual Chancellor,’ he wrote a few years later. ‘Ever since his years in Fleet Street – as a “Lex” columnist on the Financial Times, and subsequently as City Editor of the Sunday Telegraph – his admiration for the City and its ways has stopped well this side of idolatry. A politician of exceptional determination, he would have been a cross for any Governor to bear.’ In their important 1998 survey, The Politics of Central Banks, Robert Elgie and Helen Thompson put it well:

Apparently unbruised by the failure of the MTFS, Lawson brought to the job an overriding confidence in his own judgement not only about the big strategic issues but the day-to-day operation of policy. In the ensuing years he never waited for the Bank to take the initiative about monetary policy nor bowed to the Bank’s technical advice about the exact timing of interest rate changes and government bond issues. On occasions Lawson would even, against all previous protocol, telephone directly the Bank’s foreign exchange market operators to give instructions. In all senses, Lawson believed he could decide for himself. As he told the House of Commons Treasury and Civil Service Select Committee, ‘we take the decisions but they do the work’.

Thatcher for her part kept a beady, suspicious eye on the Bank – in May 1984 the governor was rung by Lawson to tell him that she was ‘strongly opposed’ to the raising of fees for non-executive directors – but it was Great George Street that really made life difficult. ‘Of course relationships have always been up and down,’ reflected McMahon in December 1985. ‘But what worries me about the present situation is the amount of evidence we keep getting from friendly journalists of really savage attacks from Treasury officials …’ Not long afterwards, in May 1986, came a serious blow-up, indicative of a mutual lack of trust, following a newspaper article in the context of a major City row about Lawson’s proposed charge on the conversion of ADR (American depository receipt) shares to native stock:

The Governor made it clear that he could not acquiesce in stories of this kind. It was quite unacceptable for the Bank, or for him personally, to be said to be giving wrong and inaccurate advice to the Treasury when this had not been the case …

The Chancellor said that, far from advising against the 5% rate, David Walker had said that it would be acceptable to the City. The Governor said that this was simply not so, and that the Bank had never agreed that any rate in excess of 3% could be argued for. The Chancellor said that he distinctly recalled David Walker’s having said this at a meeting at which other officials were present, and the officials’ memories tallied with his own. He said that if the Bank had not advised him to impose a 5% rate he would not have done so. The Governor made it clear that all the information in his possession suggested that the Bank had not given any such advice to the Chancellor, and at the very most had been forced by circumstances into acquiescing in a rate of 5%.

Almost certainly the early years were the worst in the Lawson/Leigh-Pemberton relationship, with the latter recalling many years later that the politician had been ‘initially fairly domineering and so on, but gradually we became quite close, genuine friends’.21 Even so, those early years left their mark in Threadneedle Street: to be remembered for long afterwards as a low point in the operational autonomy of the nationalised Bank.

Lawson himself played a significant part in the forging of the July 1983 settlement between the government and Stock Exchange – the former getting the court case dropped, the latter promising to reform – that ultimately led to the City’s ‘Big Bang’ a little over three years later. The Bank, which of course had done much to prepare the way, naturally welcomed the deal; and over those three years it equally naturally continued to mediate between government and the Exchange. Within weeks, in September 1983, the governor was reporting to Cecil Parkinson (the trade secretary who had reached the deal with the Stock Exchange’s Sir Nicholas Goodison) ‘an atmosphere of growing uncertainty and nervousness’ in the market about ‘the future structure of the securities industry’, accompanied by an increasing desire ‘for abolition of all minimum commissions in one full swoop, at a date to be announced well in advance’; while next day, amid a growing sense that it was not only minimum commissions that were a dead duck but also single capacity, John Fforde reflected on the broader approach that the Bank should take to the future of the securities industry. It would be wrong, he argued, to give ‘the impression that officialdom has the power to choose, and to decide, and to implement, some particular middle-course outcome to a structural revolution’. Instead: ‘It would be better to emphasise that a revolution rather than an evolution is now in prospect; and that officialdom can best help by responding correctly to what happens and consolidating the regulatory apparatus etc when things look like settling down.’ By this time, the term ‘Big Bang’ (coined in this respect by the Bank’s Douglas Dawkins) was poised to enter the City vocabulary; and at a meeting in early October, Lawson and Parkinson agreed with Leigh-Pemberton and Walker that ‘the “big bang” might in practice make more sense than a phased programme of abolition’. So it would be, with in due course all roads leading to 27 October 1986. ‘He found himself open-mouthed at the pace of change he saw going on in London,’ recorded McMahon in December 1984 after a conversation with Volcker; and it was indeed a high-speed City revolution – one that in many ways the Bank had spearheaded.

Arguably its most crucial aspect was ownership, the subject of keen debate in the Bank during the months immediately after the Parkinson/Goodison agreement, given that it was already clear that 100 per cent outside ownership of Stock Exchange firms was almost inevitable. ‘It is plainly undesirable that the entry of foreign firms to the London market should swamp the UK securities industry, either by taking it over wholesale or by dictating the terms on which business can be done,’ argued John Footman as early as August 1983. ‘Yet the UK industry looks on the face of it peculiarly vulnerable to both possibilities …’ That was undeniably true, and in mid-September he set out what he saw as the imminent reality:

A rather stark choice may have to be made between, on the one hand, seeing the Stock Exchange lose market share and dominance, and on the other seeing large parts of it fall into non-member, probably foreign, hands. The balance of disadvantage will be difficult to assess. The preliminary conclusions of this paper [on ‘Ownership of the UK Securities Industry’] are that the consequences of a significant foreign investment in the Stock Exchange are by no means as unacceptable as is commonly supposed …

A colleague, Leslie Lloyd, disagreed. ‘You see no reason to suppose that foreign firms could not be relied on to exercise efficient self-regulation,’ he responded to Footman. ‘I do not find this convincing.’ And he went on, specifically in relation to American firms: ‘I do not think we can expect them to adapt either to collective self-regulation or to watching people’s eyebrows in the way most UK establishments are used to. The consequence of greater foreign involvement would probably tend to be a shift towards greater statutory regulation.’ Lloyd raised other objections, including the possible conflict of interest between the UK government and the Bank on the one hand and the parent bank on the other, before concluding:

While in present circumstances one may confidently expect foreigners to play the game, we are talking about a blue-print for a long-term scheme …

While not noticeably xenophobic I tend to see a case for favouring courses of action which, while welcoming foreign participation, preserve indigenous control for an indigenous core of the UK securities industry.

A few days earlier, Walker and Dawkins had received a visit from Christopher Reeves of Morgan Grenfell, with that British merchant bank already in discussions with several Stock Exchange firms and now wanting to discover whether the Bank foresaw any ‘impediments’. In reply, Walker pointed to how full external ownership ‘would of course open the Exchange to Morgan Stanley as well as Morgan Grenfell, and while instinctively we would prefer to see the UK houses providing the capital for and having ownership of securities trading in this country, the logical case for protection was not wholly compelling, and in practical terms explicit protection was probably not acceptable in any event’. The rest of Walker’s message to Reeves struck a delicate balancing act. No, ‘possible UK entrants could not expect preferred treatment’, given ‘the evident need to reverse the decline in UK securities trading capability’, which ‘in practice meant greater competitiveness’; but yes, in the sense that ‘within this general concern we wished to be as helpful as we could to UK firms or groupings’.22 In the event, over the next couple of years or so as the marriage market for Stock Exchange firms went its merry way, there was no bar to foreign ownership; but in relation to the ownership of British banks, a larger – and longer – debate still awaited.

For Eddie George, the executive director responsible for the Bank’s gilt and money market operations, the paramount worry by the autumn of 1983 was that the process of deregulating the Stock Exchange might, in his own graphic words, ‘bugger up the gilts market’. Accordingly, he set about designing a comprehensive restructuring of that market in order to make it ready and fit for purpose in the coming post-Big Bang world. A report by the Fed’s Peter Sternlight, following a series of conversations in London in October 1984, accurately caught the mood as preparations began to be made. At the Bank, Bill Allen acknowledged that ‘they face great uncertainty in seeking to launch a rather fully developed system sometime in 1986 rather than see a system evolve more gradually and modify their approach as that process takes place’; also at the Bank, Peter Cooke expressed ‘some concerns about the rapid pace of new developments as he sees banks taking on additional obligations and risks’; while outside the Bank the chairman of Union Discount, Graham Gilchrist, was ‘quite concerned about profit prospects as they anticipate that there could be many firms battling for a share in a limited market’, but David Jones of Goldman Sachs said ‘they take comfort from the Bank of England assurances that there will be a level playing field’.

What about the architect himself? ‘Mr George’s attitude, like that of many market participants, is a mixture of eager anticipation and apprehension’:

The apprehension reflects concerns over market safety and stability, hence the desire not to go too fast and to keep some separating of functions [between broker and jobber, in the event impossible]. At the same time, he feels the changes will be beneficial to the U.K. financial markets in the long run. He is not wedded permanently to tap issuance of Treasury debt [where the Bank retained part of a gilt issue for release as and when market conditions were favourable], although he would want to see the new dealer market get started before he would consider switching to auctions … He likes the flexibility of the tap system and does not see this as a threat to dealers because the past history of the Bank of England’s behavior shows it to be reasonable; it won’t clobber the market …

On another topic – the proposed Stock Exchange tape to record transactions – he was pleased to hear my report that market participants are unanimously against such a record. He said he had been arguing this point for some time with U.K. Treasury representatives who claim that it is hard to make the case that a tape record is desirable in the equity market but not in the gilt edge market. It seems to make gilts ‘second class’, they say. As Mr George views it, however, ‘central liquidity’ is very much the essence of the gilt market and revelation of all transactions could inhibit dealers’ willingness to take long and short positions.

All this was important, technical stuff, of which George was an acknowledged master; and long afterwards, Allen would recall how at that time ‘there weren’t all that many people even in the gilt market itself who really understood how all the parts fitted together’.

The process was not without controversy. The following summer, the Bank’s Hilary Stonefrost attended as observer an FT Conference on ‘The City Revolution’ – where ‘the atmosphere was by no means relaxed’ – and noted two interventions by the uncompromisingly self-assured senior partner of the broking firm Greenwell & Co:

Mr Eddie George set out arguments for separate capitalisation of the gilt market makers. Mr Gordon T. Pepper expressed the view that dedicating capital in this way runs counter to the macro interest of the financial sector as a whole. In his view, while high liquidity and abundant capital enable a supervisor to sleep soundly, both hinder the efficient allocation of resources in the financial sector …

Mr George’s comment that letters of comfort would be requested from major shareholders to their gilt-edged subsidiaries also provoked Mr Pepper. Mr Pepper took the line that if the intention was to prevent contagion of financial difficulties between subsidiaries of the same group, then such letters ‘should be banned by the Bank, not requested’.

George also gave a keynote address, looking at Big Bang as a whole, in which he ‘commented on the prevailing belief in the benefits of competition to lenders, borrowers and intermediaries, and noted that the burden of proof now rests with those who want to stop the change’. ‘No one,’ recorded Stonefrost, ‘rose to this challenge, but the concerns of the speakers and participants seemed to suggest not so much imminent golden opportunities for the financial sector, but the need to negotiate the change with minimum damage.’23

That rather apprehensive sense was felt not only in the City. Two months later – in September 1985, just over a year before Big Bang’s due date – Leigh-Pemberton had a revealing conversation with Thatcher, recently back from her summer holiday in Austria with the British honorary consul, a local timber merchant. ‘It became clear,’ noted the governor, ‘that the Prime Minister is much concerned that “the reputation of the City is at a very low ebb. Indeed it was put to me in Austria that the City was my equivalent of the Austrian wine scandal.”’ Unsurprisingly, some governor’s reflection followed the conversation:

Freedom of competition is very much part of the Government’s philosophy. It must therefore be ready to accept big changes in the markets, especially with the arrival of international operators, financial conglomerates, high salaries, poaching of key staff, and the risk of some failures in the new markets, which are all features which I think we need to put into perspective since the PM connects all this with the low level of the City’s reputation.

By this time, after significant input from the Bank, a Financial Services Bill was going through Parliament that involved a major shift away from traditional self-regulation, involving as it did the creation of the Securities and Investments Board (SIB) that would closely monitor the City’s handful of main self-regulatory organisations. ‘I believe that the regulatory changes now in preparation are well suited to our great financial centre at a time of continuing change,’ Leigh-Pemberton told the Overseas Bankers’ Club in February 1986. ‘They will help to foster the conditions in which high standards can thrive; and in which the City of London can continue to flourish.’ In retrospect, of course, there are questions to ask. Did that shift away from self-regulation go far enough? Would it have been better to go the whole hog and move towards something like New York’s Securities and Exchange Commission (SEC)? Instinctively, that was not the Bank’s view in the mid-1980s, and it was certainly neither the government’s (notwithstanding Thatcher’s anxieties) nor the City’s at large. ‘There is,’ Walker in 1984 informed the permanent secretary at the Department of Trade and Industry (DTI), ‘a fairly general view that self-regulation should continue to play a major role in the future regulatory structure overall’; and he added that ‘this is, as you know, a view in which the Bank strongly concurs …’

Importantly, Leigh-Pemberton in his speech to the overseas bankers was not just referring to the Financial Services Bill; he also had in mind, he told his audience, ‘the Bill to amend the 1979 Banking Act which the Chancellor intends to introduce in the next parliamentary session’.24 Three words formed the essential backdrop for that other legislative initiative: Johnson Matthey Bankers (JMB) – the Bank’s most difficult single episode of the entire decade.25

Since the 1979 Banking Act, there had existed a two-tier system of authorisation: recognised banks and licensed deposit takers, with the former category subject to a less onerous range of statutory requirements. Naturally, the recognised banks were keen that the Bank should not lose sight of their superior status. As early as April 1980, at a meeting between the governor and the chairmen of the clearers, Morse of Lloyds made ‘a plea for flexibility in relation to capital adequacy and foreign currency exposure’, to which Richardson responded by assuring them that, in its general approach to supervision in the new era of the statutory framework, ‘the Bank intended to be flexible’. Among the recognised banks was JMB; and almost certainly it was that status that contributed to the Bank failing to realise earlier than September 1984 that it was in a seriously bad way – poor management, inadequate controls and most immediately two highly questionable loans to Third World borrowers standing at the equivalent of 115 per cent of its capital. Crucially, JMB was one of the five London banks authorised to deal in the London gold market. That fact determined much that ensued.

The archival trail begins on Wednesday, 26 September, when McMahon – with Leigh-Pemberton away at the IMF’s annual meeting in Washington – called on the Treasury’s permanent secretary Sir Peter Middleton to tell him ‘something of the Johnson Matthey developments’: specifically, that ‘a large part (but not all) of the bank’s capital had been lost’ and that the Bank was ‘exploring ways of putting the situation right before news breaks and a run develops’. The deputy governor’s note for record included a revealing rider: ‘I thought it appropriate to tell him this much because Johnson Matthey is a recognised bank and because things might develop in such a way as to call for a Bank of England guarantee. Fortunately, however, he did not raise this last question in any guise. Nor did I.’ Next day, following a meeting with the senior general managers of the clearers, McMahon was back at the Treasury to see the permanent secretary:

I told him that while we were still working for a clean solution which would probably involve the purchase of the bank from the Group [the parent group Johnson Matthey] against warranties, we could not be sure that we would have achieved this before the weekend (or of course even later). If the news broke, we needed to be in a position to stop a run on the bank. To this end we were putting together a standby facility with the clearers, backed by some form of indemnity from the Group. The terms of this standby would be those hallowed by the lifeboat [a reference to the secondary banking crisis]: i.e. the clearers would be involved in proportion to their eligible liabilities as to 90% and the Bank of England would be in for 10% of a total of £200 million.

To this, noted McMahon, the response from Middleton was that the Bank was ‘doing the right thing’.26

Then, over the next few days and with rumours inevitably starting to circulate, the focus was on who might be JMB’s new owners, with the main hope being that the Bank of Nova Scotia would put in a bid, against certain indemnities from other banks; on the morning of Saturday, 29 September, representatives of Rothschilds and Kleinworts – two of the other four banks authorised to deal in the London gold market, the latter through Sharps Pixley – made it clear to McMahon that there was a real danger to the London gold market, and possibly even the London inter-bank market, if JMB was allowed to go. Nor was that all: another of the banks dealing in the gold market was Midland (through Samuel Montagu), and McMahon was well aware of its seriously weakened financial state as a result of its ill-advised purchase three years earlier of the American bank Crocker, an awareness that made him fear a possible domino effect if JMB went. In the course of Sunday the 30th, with the Bank by that evening full of representatives from all possible interested parties (including London’s clearing banks), it emerged eventually that the Bank of Nova Scotia was not willing to take on JMB, having failed to receive adequate indemnification from other banks against potential lawsuits; and at some point before midnight, McMahon took the decision that systemic risk was involved and that therefore there was no alternative to the Bank itself acquiring JMB.

The governor himself was present by midnight, following a weekend in Kent, and ‘at about 3.00 am’ he rang the chairmen of the clearing banks ‘to ask for their co-operation in agreeing to indemnify the Bank for part of the JM bank loan book’, saying that he was ‘looking for a £70mn contribution’. If he was anticipating a smooth relaunch of that celebrated Lifeboat, he was in for a shock:

Lord Boardman [NatWest]. Very reluctant to participate because of difficulty in justifying it to shareholders. But would stand their corner if all the other clearers took their share.

Sir Donald Barron [Midland]. Knew very little about Johnson Matthey. But provided there were no open-ended commitments on the gold market, would reluctantly come in – again provided that the others did likewise.

Sir Jeremy Morse [Lloyds]. More banks should come in – e.g. Standard Chartered and the Scottish clearers. Lloyds in a weak position, but would come in to a maximum of £5mn on public duty grounds provided that the list of contributors was widened. Meanwhile, the Bank of England should carry the extra load.

Sir Timothy Bevan [Barclays]. Initially refused to contribute – impossible to justify to shareholders. After much persuasion agreed to £5mn.

Soon afterwards, at about 4 am, ‘the Governors and those Executive Directors still in the Bank rang all the other Members of Court that could be contacted’. They explained the state of play since the Court meeting the previous evening – no outside buyer of JMB; instead, the Bank to acquire JMB ‘for a nominal sum’; the parent group Johnson Matthey to ‘put £50mn into the bank’ – and noted circumspectly that ‘indemnities were being sought from the gold market and the clearing banks against a proportion of the remaining loan book’.27 Why were those banks proving so recalcitrant? Perhaps because, contrary to Morse’s warm words at the time, they really did feel let down three years earlier by Richardson’s failure to prevent the draconian one-off levy; but perhaps more because, when it came to it, the Bank could no longer, for a mixture of personal and institutional reasons in the new City that was so rapidly taking shape, realistically expect to exercise its familiar powers of moral suasion.

Once day had broken, there were three significant moments that Monday morning. The first was Leigh-Pemberton and McMahon going to No. 11 at 7.30 and putting Lawson (who had also been in Washington the previous week) in the JMB picture – very belatedly, as Lawson felt it, though with his retrospective account not discussing whether his permanent secretary should have mentioned something already. The chancellor was also told that an announcement would have to be made by the time the London market opened at 8 o’clock. ‘As a result,’ recalled Lawson, ‘I was being given only a few minutes to decide whether or not to give an open-ended guarantee of taxpayers’ money in support of a rescue about whose wisdom – as I made clear to Robin and Kit at the time, and subsequently in a minute to Margaret – I was far from convinced. I had to make up my mind with no time to secure the information on which to base a considered decision. In the circumstances, I had no option but to rely on the Bank’s judgement.’ The second moment was the announcement itself: a blandly drafted press release, about the Bank ‘acquiring’ JMB consequent on ‘problems’ in the latter’s commercial lending book, that was received reasonably calmly. And the third was an awkward telephone call from Morse to Leigh-Pemberton:

He had seen the Press Notice that the Bank had put out and he wondered how much had been arranged in terms of indemnities and standby facilities.

The Governor explained that the clearing banks were committed for indemnities totalling £20mn, with £5mn from both Barclays and Lloyds; the gold market were providing £30mn and Johnson Matthey PLC £50mn …

Sir Jeremy’s response was that he had thought that there would be a wider circle of banks involved in providing indemnities and that, as the picture was not as he expected it to be, he could not yet commit the bank even to £5mn, although he was not actually withdrawing the offer he had made. The Governor made it clear that he regarded Lloyds as fully committed for £5mn, as the other clearers had all agreed to play their part in providing support.

Even so, £20 million from the clearers: that, to put it mildly, was well short of the £70 million that the Bank had hoped for.

‘All the various hitches have been overcome,’ an exhausted McMahon was relieved to tell the governor and senior colleagues on Tuesday, 2 October, ‘and we have now bought the bank (out of IFD’s petty cash!).’ IFD was the Industrial Finance Division, with its petty cash box being conveniently at hand to be raided by Walker for a pound coin as a somewhat theatrical gesture. Within days, the Bank’s Rodney Galpin was ensconced as executive chairman at JMB, where in his obituary’s words he ‘swiftly sacked the top three executives, recruited their replacements and steadied the ship’ – so successfully that the Bank would finally lose only about £30 million as a result of its acquisition. This was little thanks to the clearers, who remained in entrenched, unhelpful mode, not least when the governor and his deputy summoned Bevan and Boardman to the Bank on the 11th. After Leigh-Pemberton had told them that he wanted the clearers to double their proposed contribution of £20 million, McMahon explained that the Bank had received £10 million from the merchant banks and ‘probably’ £10 million ‘from the Scots and Standard Chartered’, and then ‘went on to spell out for them the consequences of an ultimate very large loss for the Bank of England, viz either or both inability to play a credible role in future banking crises, or calling for a retrospective Treasury bail-out which would put the Treasury in the driving seat of banking rescues forever afterwards’. Unfortunately, reflected McMahon in his note, ‘none of this seemed to make much impression’. That meeting was of course below the public radar, but a week later the governor gave an altogether more harmonious impression at the lord mayor’s dinner for the City’s bankers. It had been, he emphasised, ‘a collective operation’ in which ‘a large number of banks came together and quickly subordinated their direct and immediate interests to those of the wider system’ – in short, ‘the rescue operation was characteristic of the City of London’.28

Very soon afterwards, the political dimension began to come into play. ‘Treasury ministers,’ reported the Financial Times on 22 October, ‘have made known their major reservations about the Bank’s handling of the events leading up to JMB’s collapse and of the rescue itself’; while at a luncheon meeting that day Lawson told Leigh-Pemberton that he was ‘concerned’ that some of the governor’s remarks in his recent speech ‘might be interpreted as giving too liberal an approach to Bank rescue policy’. Next day saw an improbable alliance working together. The left-wing Labour MP Dennis Skinner, motivated by what he saw as the hypocrisy of public funds being used for unprofitable banks but not for unprofitable coal mines, asked Lawson in the Commons if public money had been employed in the JMB rescue; and the leader of the Social Democratic Party, David Owen, in a letter to the chancellor, not only pursued that tack, but argued that the danger to the gold market had been seriously overestimated and that the Bank’s decision to take over JMB was mistaken, especially as ‘such treatment has not been accorded to a number of other and much larger industrial and commercial companies which have also collapsed in recent years’. Lawson, already irked by being left in the dark in late September, dead-batted as best he could, but over the next few weeks Owen continued his campaign, amid gathering talk of an establishment cover-up. By mid-December, moreover, the ominous word from the Financial Times’s Peter Riddell to a member of McMahon’s office was that ministers felt that the Bank had ‘acted too much on its own’ and presented them with ‘a fait accompli’. Lawson himself tried to take the political heat out of the situation by announcing to the Commons on 17 December that he was setting up a joint Bank/Treasury inquiry into the system of banking supervision. By a cruel stroke for the Bank, he was asked by the Labour backbencher Robert Sheldon (seventeen years after his costly question to Callaghan) what exactly the Bank’s liability was. Wrongly believing that the Bank’s only significant liability with regard to JMB was its half-share of a £150 million indemnity, and not having been told that on 22 November the Bank had transferred to it £100 million of liquid (sterling) reserves as working capital, Lawson gave a reply that inadvertently misled the House. When that emerged he understandably (if mistakenly) ‘felt badly let down, as I made clear when I learned about it’. As every so often at that time of year, festive cheer and goodwill did not abound, as spotted by Christopher Fildes at the Stock Exchange’s Christmas lunch: ‘The Chancellor showered Sir Nicholas [Goodison] with praise, said not a word about the Bank or the Governor who was sitting by his side, and then left, pleading an engagement at Westminster.’29

Six months later, in June 1985, the report of the joint inquiry (chaired by Leigh-Pemberton himself) appeared. Its proposals included ending the 1979 Banking Act’s two-tier system; its replacement with a single authorisation to take deposits, thereby giving the Bank broader powers over all banks; regular dialogue between the Bank and the banks’ auditors; and the Bank’s much criticised supervisory staff (for instance by Euromoney in its recent investigative piece, ‘How the Bank of England Failed the JMB Test’) not only to be increased, but to be given commercial banking experience. Lawson himself, in his accompanying statement to the Commons, did not deny the Bank’s culpability: ‘On this occasion the Bank did not act as promptly as it should have, and to some extent fell down on the job.’ These were carefully measured words, but there was at least one person who wondered whether the Bank should even retain its supervisory role. Leigh-Pemberton the following month recorded a characteristic encounter with Lawson:

He opened by wishing to speak to me privately and went on to say that he had had a difficult time with the Prime Minister on the question of banking supervision. She was arguing that the function should be taken away from the Bank of England, but he said that he had succeeded in dissuading her from this, largely on the grounds that it would detract from the Bank’s standing. I went on to say that it was not likely to make much difference whether the function was in the Bank or not in terms of the people who had to do it, since there was clearly a limited cadre of qualified personnel. He cut me short and said there was no need to argue the merits of the case since he had dissuaded the Prime Minister, but he wished to emphasise to me the need to ‘sharpen up’ the supervisory function.

Leigh-Pemberton, thinking about it afterwards, was a little sceptical. ‘I am inclined to wonder just how deeply the Prime Minister’s attack really went,’ he reflected. ‘Information reaching me from No. 10 suggests that the Bank is still held in reasonable esteem there and I think I have to make up my mind about the extent to which the Chancellor may be both using and exaggerating this threat.’ That was probably unfair to Lawson, given that when two months later the governor was given the treatment by the prime minister in her fiery, post-Austria mood, she not only requested ‘a paper on banking supervision’ but ‘seemed to feel that the Bank of England was barely adequately equipped to supervise the City and that we should need “some system of inspection”’.30 In any case, Lawson’s White Paper on Banking Supervision appeared in December 1985, embracing much of the substance of the June report and directly creating the path to the 1987 Banking Act.

Newly in charge of the Banking Supervision Division by this time, having sorted out JMB, was Galpin. ‘JMB has left its imprint,’ he observed in January 1986 after two months in post, pointing to how ‘particularly among the younger members of the Division there is a desire for more bureaucracy and more ratios with a consequent loss of flexibility – and some danger of eroding one of the strengths of the system’. Other causes of concern were that ‘the search for consensus leads to policy decisions taking far too long to establish’; that ‘there is no clear sense throughout the Division of the direction in which Banking Supervision is moving’; that ‘the records of prudential interviews while generally of high quality do not always comment on those issues which should be of primary concern such as liquidity, capital adequacy and the quality of assets etc’; and that ‘though welcome, the 25% increase [announced the previous September] in staff resources is not, at working level, regarded as sufficient’, with Galpin wanting 160 people, as opposed to the 125 currently budgeted. Just as after the secondary banking crisis, there had, perhaps inevitably, been a post-JMB scapegoat: this time Peter Cooke, moved to concentrate on coordinating international bank supervision, particularly in Basel. Cooke himself, renowned for his objectivity, would in later years recall the difficult hand he had been dealt in the early to mid-1980s. ‘One of the big problems was that the resources simply were not available to do the work, which patently we knew needed to be done, in order to block all the holes up … We were constantly on short rations and constantly really stretched … I think the juxtaposition of “let’s trust management” on the one hand and “let’s be professional about this” on the other was being bridged slightly uneasily at times …’ It was indeed an uneasy bridge, and the fact was that until the JMB disaster there was still, again to quote Cooke, ‘a fairly strong ethos within the Bank, and within banking supervision, which derived from as it were the environment of the 70s, which said that the essential issue for supervisors was good judgements of management’.31 Judging management? Or poring over all the figures? For better or worse, it was now going to be a swing to the latter.

In another area altogether, but of equally pressing concern to the Bank, the mid-1980s confirmed that the question of Britain’s membership of the ERM (the Exchange Rate Mechanism, the operating arm of the European Monetary System) was coming to matter more than the arcane shibboleths of monetary policy. ‘Monetary targets were adopted in the belief that the relationship between the monetary aggregates and nominal incomes, the velocity of money, would be reasonably stable and predictable,’ recalled Leigh-Pemberton in an important lecture at the University of Kent in October 1984. However, he went on, ‘the hopes of those who looked for a simple, close and reliable relationship, that would hold even in the short term, have not been fulfilled’. What, then, was the alternative ‘in place of a monetary domestic target’? Noting that ‘the adoption of an exchange rate objective, through a pegged relationship with a foreign currency, or in earlier times with gold’, had ‘tradition’ behind it, the strongly pro-Europe governor wondered aloud whether ‘for the United Kingdom with its close political and economic ties with our European neighbours, there could be a number of attractions in taking a full part in the exchange rate mechanism of the EMS’. Within the Bank, he had support from McMahon and Loehnis; and from early 1985, if only on a provisional basis, from the hitherto sceptical George, for whom the sterling crisis that January – threatening to create the one-dollar pound and causing a serious hike in interest rates – may perhaps have been a signal of the desirability of a collective attempt to tame the financial markets. On 6 February, ahead of a ‘seminar’ at No. 10 the following week, McMahon put the case on paper – for internal consumption. Acknowledging that the question of joining the ERM was ‘a complex one, which has been argued back and forth in the Bank for more than five years, and on which a very large number of complex considerations can be adduced on both sides’, he nevertheless argued unambiguously that ‘we should join now’, noting that ‘it is hard to believe that, whatever happens after joining, developments in our exchange rate would be less welcome than they have been from time to time in the past’. Among the positives he cited were that ‘we would be linking ourselves with a demonstrably anti-inflationary bloc’ and that ‘the public at large understand better the anti-inflationary constraint of holding the exchange rate than they do one of holding the money target’. Moreover: ‘Floating exchange rates seem to me demonstrably getting out of control and producing economic disequilibria and policing difficulties for the world’s major economies which by now are surpassing those distortions and difficulties provided by the Bretton Woods system in its late and damaging phase.’32 The understandable desire, in short, was to return to the once familiar certainties of a more orderly framework.

At the 15 February seminar – the first of the three ERM political set-pieces during 1985 – both Lawson and Leigh-Pemberton argued for joining, though not necessarily immediately, while Thatcher for her part (recalled Lawson) ‘chose to dwell on the consensus that now was not the right time to join, and ignored the majority feeling that the right time was not far off’. Ironically, in the weeks that followed, Leigh-Pemberton then became anxious – with the ERM question in abeyance – about Lawson ditching prematurely in the MTFS the significance of the broad aggregates as monetary indicators. ‘While we wholly understand the present discomfort over broad money,’ he wrote to him in March, ‘we do not think that broad money can be simply set aside’; and he warned against anything that could be seen as ‘a significant weakening in commitment to monetary discipline with potentially substantial adverse market consequences at a time when we need to do all that we can to re-enforce credibility’. Some four months later, in July, McMahon expressed similar anxiety. ‘The Chancellor wished to discard £M3 as a target,’ he told a briefing meeting at the Bank, and accordingly he was ‘concerned that targets for the monetary aggregates would lapse without an alternative discipline being in place, such as joining the ERM’. But lapse they would: in October, in his Mansion House speech, Lawson announced that he was dropping the £M3 target, declared that henceforth ‘the inflation rate is judge and jury’, and in effect abandoned monetarism. Leigh-Pemberton at the same dinner made tactfully sympathetic noises – ‘real life is far too complex for absolute rules’ – but no mention of the ERM as a possible alternative anchor.

By this time, in fact, the second ERM summit at No. 10 had already taken place: on 30 September, with the governor accompanied by McMahon, Loehnis and George. After Lawson had made his case for joining, above all in terms of reinforcing the government’s anti-inflationary strategy, ‘Robin strongly supported me, claiming that the need to make subjective judgements about the interpretation of the monetary indicators, coupled with our resistance to the increasing pressure from the market to disclose an exchange rate “target”, were undermining the credibility of policy.’ Thatcher, however, remained unconvinced, though agreeing to a further meeting on the subject; following a post-mortem lunch with Lawson, the governor reflected that ‘it seems that we [Bank and Treasury] may have overplayed our hand at the last meeting and appeared to be “ganging up” on the PM’. The final summit, involving a broader spread of ministers, was on 13 November, with Leigh-Pemberton again present, this time flanked by George. As usual, Lawson put forward his pro-joining arguments; other ministers now had their say, on the whole in favour of joining; and Leigh-Pemberton asserted that (in Lawson’s words) ‘the difficulties of sterling outside the ERM were greater than they would be inside the ERM’. The crunch came at the end. ‘If the Chancellor, the Governor and the Foreign Secretary are all agreed that we should join the EMS then that should be decisive,’ declared the deputy prime minister, Lord Whitelaw. ‘It has certainly decided me.’ To which Thatcher instantly responded: ‘On the contrary: I disagree. If you join the EMS, you will have to do so without me.’ End of meeting – and, according to Lawson’s retrospective account, end of ‘an historic opportunity’, when ‘the time really had been right’.33

All this, with the JMB episode starting to recede, probably brought chancellor and governor rather closer together; and during the next sterling crisis, in January 1986, the two men were allies as they tried to persuade Thatcher that there was no alternative to an interest rate rise:

I told her [recalled Lawson] that the pound was under severe pressure, and I was afraid that if we did not act that day the bottom might fall out of the market. She insisted that it was quite unnecessary, that it would be a positive disaster, and much else in the same vein. Eventually, after a particularly unpleasant harangue, she concluded, ‘Go ahead if you insist, but on your own head be it’. After we had left her room, Robin said to me, ‘I don’t know how you put up with this sort of thing’. I explained that she had a great deal on her mind.

As it happened, it was all for nothing. Leigh-Pemberton returned to the Bank, discovered that pressure on sterling had eased, and rang Lawson to tell him, leaving the chancellor to inform a ‘suitably pleased’ prime minister that they would not now be going ahead with the interest rate hike.34

By this time there was a new deputy governor. In September 1985 it was announced that McMahon would be leaving at the end of the year to go to Midland – in effect, to try to dig it out of its deep hole – and that his successor would be George Blunden, who had retired in 1984 as an executive director but was still on the Court. Why Blunden? There were perhaps three main reasons. Firstly, because of the impossibility of choosing between David Walker and Eddie George – the former the Bank’s principal architect of the City revolution and manifestly energetic, capable and ambitious, the latter increasingly respected by the Treasury for his technical expertise and calm judgement, with Lawson by now asking the governor to bring him along to meetings at which interest rates and the money markets were under discussion. Secondly, because one of the more influential non-executive directors, Sir Hector Laing, who was close to Thatcher, pushed hard for the appointment. And thirdly, above all, because Blunden was generally seen as the man, following the JMB trauma, ‘to impose discipline and restore morale’ (as Stephen Fay put it in his 1987 study of the Bank, Portrait of an Old Lady). Certainly Blunden’s qualities were considerable: a silver-haired, avuncular look hiding a tough, thick-skinned operator; a dry sense of humour; a ferocious disciplinarian; a good, pragmatic mind; and a Bank man through and through. ‘He will bring authority, entangling humour (he is a gladiator who prefers the net and trident), and banking skills and experience which have long earned him a position of respect among bankers, central or commercial,’ commented Fildes at the time of his appointment, and all that proved to be the case.35His return to Threadneedle Street proved a particular boon for Leigh-Pemberton, who had not warmed to the more overtly intellectual McMahon; and together, during the second half of the decade, they formed an increasingly effective double act, starting the long haul of restoring the Bank’s rather battered (fairly or unfairly) standing.

Much of 1986 was dominated by the looming Big Bang. On the gilts side, all proceeded reasonably smoothly: over two dozen market makers, many of them non-British, limbering up for what was anticipated as a highly competitive marketplace, possibly a bloodbath; and in the Bank itself, the successful completion of a state-of-the-art dealing room, where from March the Bank conducted its own gilt-dealing operation and thereby, after 200 years, took over from the government brokers Mullens the conduct of official business. More generally, the process continued of gearing up intellectually for the new world – not least the vital and sensitive question of whether the Bank would be content in that new world to see foreign ownership of British banks. In terms of the clearers, Leigh-Pemberton reminded an internal meeting in January, the Bank was already publicly committed to opposing any foreign takeover, whereas Lawson was seemingly more relaxed. ‘The Chancellor’s view might not be widely shared by the electorate,’ argued Blunden, adding that ‘to the “man in the street” the ownership of an industrial conglomerate was usually immaterial, but if the High Street bank came under foreign control, he might feel very differently’. Walker likewise ‘disagreed with the Chancellor’s argument that a bank should not be treated differently from an industrial company, as the systemic influence of a major bank in the economy was very much greater’; but George ‘said that he was not entirely persuaded that there were no circumstances in which foreign ownership could be envisaged’. What about the merchant banks? ‘It would be sad if the five largest all became foreign-owned,’ remarked Blunden, but again it was George who took the less protectionist stance: ‘The larger Accepting Houses were in a quandary. They were neither sufficiently small simply to be specialists in a particular area, nor big enough to compete globally … It was therefore arguable that their prime need was for more capital … So a “British-only” policy might not be in the Houses’ best interests.’

The whole ownership debate still had a way to run, but more immediate was the necessity of calming the politicians’ nerves. Thatcher called for a pre-Big Bang seminar at No. 10 in early June, and the governor a week before asked Lawson what her purpose was:

He said quite simply, ‘What is likely to go wrong between Big Bang and the General Election?’ I told him that my main anxiety would be operators dropping out of the market as a result of competitive pressure, lack of volume and, I hoped least likely, bad judgement. The Chancellor said that the important thing would be that the losers should not be widows and orphans … I said that I was also anxious that large operators from overseas might adopt a loss-leading policy which could have serious effects on UK operators, but I had not been able to think of any means whereby this could be checked. Discriminatory restrictions would hardly be consistent with our philosophy and would be extremely difficult to operate.

The seminar itself, attended by Leigh-Pemberton and Walker, was notable for Lawson’s frankness. After agreeing with the prime minister ‘that the Big Bang posed risks’, he went on: ‘Some things were bound to go wrong. But the changes were inevitable if the City was to maintain its competitiveness.’36

The final stages had their moments. ‘The Times had a very silly and totally incorrect article about gilt-edged market unpreparedness for Big Bang,’ Blunden updated Leigh-Pemberton in late August. ‘We are trying to feed correcting stories to the FT and Telegraph.’ A month later saw a devastating fire at the Bank, starting in contractors’ huts and gutting much of the east side, including the International Divisions area on the third floor. And on 16 October, the governor in his Mansion House speech solemnly declared that ‘it will be vital for all market participants to exercise a degree of restraint’. The following week, his internal message was also heartfelt:

After some three years of intensive efforts on the part of so many different departments and divisions in the Bank and so many individual members of staff, we completed the second dress rehearsal of the new gilt-edged market arrangements very successfully on Saturday. Big Bang is now only a few days away. Whatever now happens I cannot think that there is anything more we could have done to have been better prepared for the change …

It has been Bank-wide co-operation at its best, and that best has been magnificent. It has brought home once again to everyone concerned the total interdependence of all parts of the Bank, and the dedication at all levels which is such a valuable asset.

Yet of course, quite apart from the institutional changes about to come into effect on 27 October, the new world was already becoming a reality – and, from the perspective of politicians, central bankers and commentators, often a disturbing reality. Back in July, in a note to the governor for his eyes only, Walker related how he had been rung the day before by Fred Vinton of Morgan Guaranty, to inform him that ‘a proposition’ had been put to two of his bank’s ‘young capital markets Group traders’ that ‘they should leave MG and go as a team at a salary for each of £400,000 a year with a minimum two-year contract, with provision for bonus payments on top’. The rest of Walker’s note reflected the Bank painfully starting to wrestle with an increasingly mobile, avaricious world where the City was no longer a club and where club rules no longer applied, let alone Cobbold-style Etonian standards:

Vinton said that he was not asking the Bank to intervene to seek to abort this proposition, but felt that we should be aware … I thanked Vinton and said that I fully shared his concern that remuneration on this scale marked an extraordinary escalation beyond anything that I had previously encountered.

Vinton told me this afternoon that the house is Kleinworts and that the deal has now been done …

All this seems to me to represent a very unsatisfactory state of affairs, and I have no hesitation in recommending that you or the Deputy call in Michael Hawkes [of Kleinworts] for a sharp word. We have of course accepted realistically that City remuneration in internationally competitive business has had to go up and you have gone to considerable trouble to explain this to sceptics and to the City’s many detractors. But performance-linked remuneration on this scale for two under-30-year-olds takes the inflation into a quite different league from anything seen hitherto. It suggests that Kleinworts are envisaging a pace of activity and turnover that, prima facie, might give supervisors cause for concern; it gives a quite unhealthy inducement to the young individuals concerned to think that they can walk on water, a dangerous state for executives in any business; and it is hardly likely to reflect well on Kleinworts’ judgement or the reputation in the City when, as seems certain, the terms of this transfer become publicly known.37

On 7 November, a fortnight into the Big Bang era, the Bank’s Ian Bond briefed Blunden: ‘It is already clear that the objectives of the changes have been met: the equity market is more liquid and deals are more keenly priced. The gilts market passed its first test – with the tender offer – very well.’ The gilt-edged market was of course the Bank’s particular responsibility; and Ian Plenderleith, head of Gilt-Edged Division, would describe the immediate prelude to 27 October and its reassuring reality once that half-dreaded date finally arrived:

I promised the banks that if ever the world came to an end and something went terribly wrong, we’d have what came to be called an ‘Armageddon button’, which they could ask us to press, which would bring the whole thing to a grinding halt, which would have been terrible but was some sort of comfort to them. And when Big Bang started the banks very kindly got together and gave me a wooden plaque with a brass door bell on it with a little thing saying ‘the Armageddon button’, and I used to keep it in my room.

If that was gratifying, so too was election night in June 1987, as Thatcher won her third decisive victory, the market shot up and the Bank’s gilt-market dealers spent the night in the dealing room, with the Bank issuing stock at 2 am. ‘It sold out straightaway,’ recalled Plenderleith, ‘and we issued some more at about 7 am and that sold out straight away, and by the time we went off to breakfast we had sold about 5 billion gilts during that night and done about 10 per cent of the year’s borrowing requirement, which I regarded as a great coup.’ More generally, the Bank felt able by early 1989 to publish a positive report on the first two and a bit years of the gilt-edged market since Big Bang. Liquidity had improved; dealing costs had declined; despite fierce competition, there were still almost two dozen market makers (compared with what was virtually a jobbers’ duopoly prior to Big Bang); the Central Gilts Office Service, a joint venture between the Bank and what was now called the International Stock Exchange, provided ‘computerised book entry transfer facilities and assured payments arrangements’, operating with ‘a high degree of reliability’; and in terms of official operations, the market’s ultimate rationale, the new structure had ‘enabled the authorities to extend the range of their funding techniques, eg through the use of auctions’.38

Infinitely less satisfactory in the Bank’s eyes during these years was the City’s reputation: high in profile but low in esteem. As early as December 1986 the Guinness affair (involving a share-support operation earlier in the year) was making the headlines; and the following month, possibly after a degree of government prompting, Blunden successfully demanded the resignations of two top people at Morgan Grenfell, the merchant bank most heavily implicated. Soon afterwards, in February 1987, Leigh-Pemberton accepted in an interview that standards were coming ‘under great strain’, and that it was ‘inevitable’ that ‘we are going to have to have more bodies, more rules, and more law’. One of those new bodies was the Board of Banking Supervision: set up by the 1987 Banking Act, and part of the Bank (in the same sense that the present-day Monetary Policy Committee is part of the Bank), its stated purpose was advisory, reviewing decisions rather than making them. In practice, the banks still essentially looked for their supervision to the Bank’s more familiar supervisory faces, with Morse that February, in his capacity as chairman of the British Bankers’ Association, paying a telling visit to the governor, in which he emphasised that ‘the problem of secret and confidential information and the close relationship between supervisor and supervised’ meant that ‘there was no other alternative’. What about SIB? ‘I am increasingly coming to the view that it would be desirable for Kenneth Berrill [its first chairman] to go as soon as we have a successor,’ Leigh-Pemberton wrote in September 1987 to Lord Young at the DTI. ‘I sense a distinct hardening of opinion in the City on this question, not only among those who have always been sceptical or opposed to the SIB.’ The governor was soon taking soundings. ‘I am told that what is most important is that the new Chairman should listen to advice from practitioners,’ he informed the minister – as opposed, he added, to someone who ‘spends his time asking his in-house lawyers for advice’. In the event, the person chosen was one of the Bank’s own, David Walker, who became SIB’s new chairman in 1988: a victory for the City, undeniably, although Walker was hardly a man for the easy life or soft option. The scandals, meanwhile, continued to come. One was the investment firm Barlow Clowes, which collapsed in May 1988 some eight months after Blunden had issued a written early warning, ignored by the DTI; another, more intimately concerning the Bank, was the Blue Arrow scandal, involving a share-support operation in September 1987 hatched by NatWest’s merchant banking arm. The DTI very belatedly launched an investigation in December 1988, and two months later Blunden learned from the Treasury that ‘there are those in the DTI who are not adverse to seeing this as an opportunity to put the Bank into as embarrassing a position as they have found themselves over Barlow Clowes’. The report was published on 20 July 1989, and soon afterwards Lawson observed to Leigh-Pemberton that ‘it was very important to maintain the prestige of the Bank of England, and of the Governor in particular, and this would be reinforced if it was known that the Bank had acted firmly in this case’. The Bank did act accordingly. NatWest’s chairman, Lord Boardman, resigned next day; a week later he was in the governor’s office, complaining to Leigh-Pemberton about the Bank’s ‘press treatment’ and declaring that in the whole Blue Arrow affair he had been ‘constantly wrong-footed by the Bank in terms of public relations’.39

NatWest and the other main clearers were presumably paying attention when the governor in October 1987 spoke in Belfast about the ownership and control of UK banks. ‘We are now seeing London emerge,’ he told an audience of local businessmen, ‘as a focal point of the world’s financial markets; and this is due, in no small part, to our willingness to see foreign companies come to the United Kingdom to do banking business and, on occasion, to take control of British institutions. In my view that policy invigorates the London markets and their participants.’ He went on, however, to assert his conviction that ‘it is of the highest importance that there should be a strong and continuing British presence in the banking system of the United Kingdom’, given that ‘it runs counter to commonsense to argue that the openness of the London market must be carried to the point where control of the core of our financial system – the payments mechanism, the supply of credit – may pass into the hands of institutions whose business aims and national interest lie elsewhere’.

That would remain the Bank’s formal position, but two years later saw further significant internal debate. At a first meeting, it was generally agreed that there existed a UK banking ‘core’ of the ten or twelve largest banks and building societies, with the merchant banks being outside that core and not necessarily to be given the protection more likely to be accorded to the core institutions. At a follow-up meeting, discussion opened up. Brian Quinn, an economist at the Bank who was now in day-to-day charge of banking supervision, declared that, quite apart from possible ‘prudential considerations or economic arguments in the traditional sense’, he ‘felt that there was something special about the banks at the centre of the credit and payments system’; Leigh-Pemberton said that he ‘broadly agreed’; but George countered that he not only ‘found it extremely hard to envisage circumstances in which the UK national interest could be damaged by foreign-owned core banks’, but ‘believed it was important not to damage the interests of shareholders by preventing takeovers by foreign institutions willing to pay the highest price’; and Andrew Crockett (recently returned to the Bank, after some sixteen years at the IMF, to be in charge of the international side) agreed that ‘only in very rare circumstances would a foreign takeover of a core UK bank be liable to damage UK interests’, noted that he was ‘concerned that our policy might be swimming against the tide of history’, asserted that ‘the trend was towards fewer, larger, multi-national institutions’, and concluded that ‘competition between cultures could be beneficial to the UK’.40 All these were revealing observations, on the cusp of the decade of globalisation.

Back in 1987, Leigh-Pemberton’s Belfast speech had a particular context. Late that July, the governor received a visit from Midland’s Sir Donald Barron, who told him that the bank (once the world’s largest) had received an unwelcome takeover approach from the advertising agency Saatchi & Saatchi. Maurice Saatchi, reported Barron, had said that he ‘felt capable of handling the management and financial side of Midland Bank, though admitted to some ignorance of the supervisory requirements’. Next day, the governor passed on the news to Lawson, who ‘said that on the face of it, it was difficult to take this bid seriously’; a month later, Blunden informed the governor that Rodney Galpin had been asking Saatchi ‘a number of searching questions’. Even the venerable Jasper Hollom, seven years after leaving the Bank, was drawn into this episode of pure top-of-the-market froth, with Blunden noting in mid-September that the former deputy governor had called in to see him, apparently ‘in his new role as adviser to Maurice Saatchi on his determination to enter the financial sector’; but, added Blunden, it had been made clear to Hollom that ‘we would be determined to resist a move such as that threatened against the Midland’. Unsurprisingly, the brothers did not get very far with their audacious initiative, but Leigh-Pemberton still made a point in his Belfast speech not long afterwards of emphasising that he would ‘need some persuading before an industrial or commercial company is allowed to take control of a bank’.41

That was on Tuesday, 13 October. Later that week, on the Thursday night, the great storm caused scenes of devastation across much of southern England, including the loss of many of the finest trees on the governor’s Kent estate. That Friday, with the City barely functional, Blunden was to be seen wandering around asking whether any of the juniors knew how to call a Bank Holiday – no one did. A deceptively calm weekend ensued, before on Monday the 19th and Tuesday the 20th came the greatest crash, across the stock markets of the world, for over half a century, a long overdue correction of overpriced shares exacerbated in New York by waves of automatic selling from computerised program traders. That week, Leigh-Pemberton was mainly in the Balkans, deciding not to cut short his prearranged trip; so that left Blunden in charge, as he and his colleagues worked harmoniously with the Treasury and the deputy governor himself stayed in constant touch with Gerald Corrigan at the New York Fed. Led by the Fed’s Alan Greenspan, and generally supported by the politicians, this generation of central bankers consciously sought not to repeat the mistakes following the Wall Street Crash of 1929, but instead relaxed monetary policy and pumped large volumes of liquidity into the system. Panic was thereby averted, but it was still a line in the sand. ‘1987 was the first time that central banks and governments ran scared because of concern for securities markets,’ Robert Pringle (founder-editor of the magazine Central Banking) would write five years later. ‘Someday they will have to stand and fight …’42

In any case, in October 1987 itself, Bank/Treasury harmony failed to last the month. The cause of a new if temporary bout of friction was the controversial fate, following the market crash, of the government’s huge privatisation issue of $7,250 million of BP shares – fully underwritten the week before the crash, despite the obstinate Sir John Nott, now at Lazards, resisting Leigh-Pemberton’s personal plea that the issue would not be complete without the participation of that merchant bank. As markets plunged, Lawson came almost immediately under pressure, particularly from the North American underwriters, to pull the issue. At a meeting on the 20th, he was supported by Blunden in his instinctive determination not to, though with the Bank compelled by the terms of the underwriting agreement to be playing the role of neutral umpire between the Treasury and Rothschilds, whose silky-tongued Michael Richardson spoke for the underwriting group. With dealing in the new shares due to begin on the 30th, the pressure on Lawson to save the skin of the underwriters was almost unrelenting. On the 27th a tantalising might-have-been occurred when Blunden took a phone call from Robert Maxwell, offering to put together a consortium of ‘five or six people’ to cover the issue. ‘He said that this group’, noted Blunden, ‘would be “buyers of last resort” and would be motivated by the dual opportunity of profit and service.’ The deputy governor ‘thanked Mr Maxwell for keeping us informed, adding that he would not seek to discourage him from this initiative’. The crunch came on Thursday the 29th. Some six hours late – to Lawson’s considerable annoyance, given that he was due to inform the Commons that evening how he proposed to resolve this intensely invidious situation – the Bank shortly after 6 pm faxed through its five-page recommendation, mainly written by George. The chancellor’s vexation increased when he read it: the Bank’s first preference was to pull the issue; its second preference was for Lawson to institute a buy-back (or ‘floor’) arrangement that would save the underwriters roughly three-quarters of the £1,000 million that they stood to lose. Thoroughly unimpressed, he rejected both solutions and announced a far more robust compromise, by which the issue went ahead but with a much less generous buy-back arrangement. In this he was strongly supported by Thatcher, who was as disappointed as her chancellor was by the Bank – perhaps unduly influenced by Richardson – seemingly giving so little weight to the sanctity of contract and the international reputation of the City. In the event, Lawson’s scheme proved a resounding success: so much so, indeed, that in an ill-advised initiative the Bank’s press office sought to claim the public kudos for the Bank, something which the chancellor not unnaturally found a bit rich and which prompted him to ring the governor at his Kent home. ‘He was genuinely horrified,’ recalled Lawson, ‘and I am sure was entirely innocent.’43

During the dramas that autumn, Leigh-Pemberton perhaps took comfort from the progress being made on a vital – if far less high-profile – international front.44 Since the mid-1970s the Basel Committee on Banking Supervision, chaired by the mid-1980s by the Bank’s Peter Cooke, had been addressing the question of capital adequacy, with an increasing emphasis on the question of harmonisation of standards in order to ensure a level playing field for global banks. The critical impetus, though, came in 1986 from a Fed/Bank bilateral initiative, with a Leigh-Pemberton/Volcker dinner at New Change early that autumn starting to get things moving. The original push was from the American, much concerned about global economic imbalances, but the governor responded positively, not least in the context of the imminent Big Bang; and quite suddenly, the road opened to a common regime for bank-capital adequacy that would spur wider international agreement. ‘An audacious political choice disguised as a technical regulatory matter,’ is how Steven Solomon would describe the logjam-breaking move in his 1995 account. ‘It was tantamount to a ganging up by the two leading international financial centers. The implicit threat was that other nations would either submit to the US–UK capital definitions and standards or face exclusion of their banks from London and New York. In one bound it by-passed the multilateral negotiations going on within Peter Cooke’s G10 Basel supervisors committee as well as within the EC [European Community] …’ Crucially, it worked: in January 1987, the Fed and the Bank went public with their accord; and a year and a half later, in June 1988 following much cajoling of the Japanese by the Fed and of the Europeans by the Bank, the Basel Accord (subsequently known as Basel I) was formally agreed by the world’s leading central banks – in effect committing internationally active commercial banks to minimum capital worth 8 per cent of risk-weighted assets, with at least half of that capital to be Tier 1 (‘pure’) capital. Inevitably, weaknesses in Basel I would subsequently emerge, such as imprecise risk-weighting methodology, susceptibility to regulatory capital arbitrage and inadequate focus on market and interest rate risk as opposed to simply credit risk; but it was still an important, pioneering agreement doing much to enhance the general authority of central banks, an authority increasingly under challenge since the 1960s and the slow death of the Bretton Woods system; while at home the Bank would make the Basel Accord the cornerstone of its supervisory regime.

Leigh-Pemberton by this time was about to start his second five-year term. It is possible that back in 1983, at the start of his governorship, he had anticipated just a single term, but that the various slings and arrows directed at him, especially during the difficult Johnson Matthey period, made him determined to serve a second. Certainly the question of his reappointment was a live issue, involving considerable press speculation that in turn prompted the Treasury in late July 1987, with almost a year to go of his first term, to issue a press notice in which Lawson expressed his complete confidence in the governor. That very evening, in the anteroom of No. 10 following a drinks reception, an important but very private exchange took place. ‘Quite casually,’ as Leigh-Pemberton afterwards informed Blunden, the chancellor said to him: ‘Anyway, if you want to go on, I am perfectly content for you to do so.’ A full six months later, the reappointment was publicly announced, and thereafter the governor was psychologically as well as politically in a stronger place. As it happened, this development roughly coincided with a significant shift in the Bank itself. ‘Availability and Deployment of Economists’ was the issue of the key meeting in June 1987. ‘It is perhaps time for a step change in the Bank’s attitude to the recruitment of economists,’ asserted Blunden. ‘We have clung for too long to an approach to staffing which favours the amateur, generalist recruit as against the specialist. This contrasts sharply with the policy of many other central banks, where an economics background is regarded as virtually essential.’45 That indeed would be the future direction of travel – and doubly telling, given that Blunden himself would instinctively have sympathised with the Cobbold dictum about the Bank being a bank, not a study group.

This last year or so of Leigh-Pemberton’s first term also marked the zenith of Lawson’s chancellorship. ‘Finally, and by far the most important item,’ noted Blunden in a May 1987 update for his chief, ‘the Chancellor came in this week with a new bouffant hairstyle with a series of waves rising up from his forehead to give him a sort of halo appearance!’ Soon afterwards, his successful stewardship of the economy was the prime reason for Thatcher’s third election victory; and by the following spring, at the time of his boldly tax-cutting budget, his reputation stood higher than that of almost any post-war chancellor. Seemingly, unlike his predecessors, he had cracked the problem of simultaneously achieving high growth and low inflation. The reality, though, was an unsustainable boom – a boom that by 1989 was clearly starting to be followed by a hard and very painful landing.

What had gone wrong? Inevitably there would be many retrospective analyses, putting the blame on different factors: whether excessive financial liberalisation, or sterling’s exaggerated depreciation during 1986, or the exchange rate policy from early 1987 of shadowing the deutschmark, or an overly loose monetary policy (especially after the October 1987 stock market crash), or even that 1988 budget. Lawson himself, in his remarkably detailed 1992 account of his chancellorship, spread the blame generously, with of course the Bank getting its share. ‘The only occasion in all my years as Chancellor when the Bank can be interpreted as having wanted a tighter policy than I was pursuing,’ he wrote, was in ‘the difficult period’ after the stock market crash, when ‘Eddie George argued that sterling should be allowed to rise’. Lawson went on:

Everything else that has emerged from some Bank quarters since my resignation [October 1989] amounts to an attempt to rewrite history with the benefit of hindsight; an understandable activity, but scarcely a commendable one. It is, I suppose, theoretically possible that the Bank from time to time believed that monetary policy should be tighter, but refrained from telling me – even at the markets meetings I regularly held with the Governor and his senior officials. But that would have amounted to a dereliction of duty so grave as to be unthinkable.

That broad thrust may well be accurate, though there is some evidence that in early 1988 the Bank was warning that the expansion of credit, especially after the crash, had become excessive and that there existed a serious danger of overheating. Specifically, the first issue that year of the Bank’s Quarterly Bulletin noted that the growth of domestic demand immediately before the crash had been ‘significantly stronger than many had thought – indeed, unsustainably rapid’; claimed that the effects of the crash had been overstated; and argued for monetary policy to adopt a ‘non-accommodating stance’. But in any case Lawson had a further grievance – namely, the Bank’s general unwillingness, especially in the summer of 1988, to lean on the clearing banks and try to persuade them to be more circumspect in their mortgage lending. According to Lawson, the Bank gave a threefold justification for its refusal to act on his wishes: that the lending involved no risk to bank depositors; that it likewise involved no systemic threat to the banking system; and that mortgage lending (‘bricks and mortar’) was intrinsically safe. ‘While there was undoubtedly substance in all these arguments,’ observed Lawson, ‘I believe that at the more fundamental level at which central bank thinking ought to be pitched the Bank was both unimaginative and misguided’; and with some justification he pointed to how ‘the credit-based house price bubble of the late 1980s, by creating an exaggerated impression of personal wealth and prosperity, led to a great deal of other borrowing and lending of a less secure nature’. His final point was also perhaps valid. ‘The Bank’s strongest argument for inaction was probably the one that it left unsaid: that the commercial banks, driven by a desire to maintain and if possible increase their share of the mortgage market, come what may, would have taken no notice of a call for greater prudence and caution from the Governor of the Bank of England.’ Yet was that truly the case? Lawson thought not. ‘Although it was true that the Bank’s authority had diminished over the years, I very much doubt if it had vanished completely. And if the worst came to the worst, it would have been better to have tried and failed than not to have really tried at all.’46

The chancellor’s controversial policy between spring 1987 and spring 1988 of shadowing the deutschmark was a further source of tension. ‘That experience, I have to say, was disastrous,’ publicly recalled George in the mid-1990s with perhaps surprising candour. ‘We began to shadow the DM after an exaggerated fall in the exchange rate, in 1986, from DM 3.56 to DM 2.82/£. This depreciation generated an inflationary impulse, which we then locked in to the domestic economy by refusing to allow the exchange rate to recover to above DM 3.00, even though this involved an excessive loosening of monetary policy. The result was a violent inflationary boom.’ George, with overall responsibility by 1987 for foreign exchange as well as gilts and the money market, was cross at the time on at least three levels. First, because he thought it a bad policy – at odds with market realities and a potential threat to the prioritisation of domestic inflation objectives; second, because of Lawson’s lack of consultation with the Bank about the policy as such (‘At no point,’ he told colleagues, ‘did Nigel Lawson tell us there was to be a policy of shadowing the Deutschmark’); and third, because of Lawson’s overbearing interference with the policy’s execution (‘I think that decision can be left to us, Chancellor,’ he snapped at one point). Such was the scale and frequency of intervention, irrespective of the policy’s wisdom or otherwise, that these were demanding months. With dealing in foreign exchange continuous around the clock, Michael Foot – then head of the Foreign Exchange Division – would recall sometimes having to ring up George in the middle of the night, in the context of the money negotiated with the Treasury (‘always too small’) having run out: ‘One of the things he was wonderful about was never complaining; he knew that if you rang him up it was because you had a good reason, it was never a difficulty. And he would then talk to the Treasury if need be …’

The shadowing policy eventually ended – at the insistence of Thatcher, supported by the Bank – with the uncapping of the pound in March 1988 and the prime minister herself famously telling the Commons that ‘there is no way in which you can buck the market’. Was that old warhorse, the ERM, a possible way? Lawson still hoped so, despite Thatcher’s 1985 veto on UK participation; but, well aware of the intensifying conflict between No. 10 and No. 11 on the subject, Leigh-Pemberton by May 1989 was instructing Blunden that the Bank’s ‘clearly defined stance’ on the issue needed for the time being to be one of ‘neutrality’. Addressing the Institute of Economic Affairs two months later, the governor turned somewhat wearily to the ‘particularly vexed, if also well-worn, question of the timing of our entry into the ERM’. Not only could there be ‘no assurance that we would enter at an approximately appropriate rate’, given that it had ‘to be remembered that too low a rate would have damaging implications for inflation, just as too high a rate could have severe effects on activity and investment’; but also it remained the case that ‘there is a difference in the cyclical position of the UK economy relative to the major member countries’. Altogether, in short, ‘the problem is not easily solved’.47

That would also be true of another, less immediate monetary arrangement sometimes conflated in sceptical British eyes with the ERM: namely, European economic and monetary union (EMU). ‘The terms of reference of the Delors Committee quite deliberately make no mention of a central bank or a single currency,’ Thatcher told Leigh-Pemberton in person in July 1988 after the previous month’s Hanover summit had agreed to the establishment of a committee ‘for the Study of Economic and Monetary Union’ chaired by the European Commission’s strongly federalist president, Jacques Delors, and mainly comprising the European Community’s twelve central bank governors. ‘Consequently,’ she went on, ‘these are not topics on which the Committee should feel obliged to give a verdict … It is entirely premature to talk about a single currency or a [European] central bank …’ More followed:

The Prime Minister felt that the Governor’s general attitude to the Committee’s work should be ‘if we were actually to have European monetary union then the following conditions would have to be satisfied and the following consequences tolerated …’

She privately warned the Governor to be extremely careful of Delors, whom she described as a ‘Jekyll and Hyde’ character. He will appear to be very co-operative at the meetings and agree to confine the discussions to pragmatic steps – but will then make public speeches or work in the background to achieve quite a different objective. And ‘Don’t forget Delors is a socialist’.

Leigh-Pemberton himself would recall his negotiating instructions from Thatcher being boiled down to a simple injunction: ‘Well, if we stride along with Karl Otto Pöhl [still head of the Bundesbank], that must be the right thing to do.’

September saw the start of the Committee’s deliberations, against from Leigh-Pemberton’s perspective an ominous political backcloth as Thatcher in her famous Bruges speech warned against ‘a European superstate’. By early November the governor was giving a heads-up to Middleton at the Treasury that ‘now that the drafting stage was getting near it was becoming increasingly evident that there might be pressure from the “idealists” in the Committee to suggest a greater degree of early change than might be acceptable to the “pragmatists”’. A month later an early draft of the report was in circulation. ‘We should make it clear what we were aiming for,’ Lawson having read it told Leigh-Pemberton, adding not only that ‘the report might seem so extreme as to play into our hands, in that it gave us a better opportunity to work towards a minority report or to express reservations’, but also that ‘the combination of bad drafting and the influence of Delors might give us an opportunity to dissociate ourselves altogether from the whole exercise’. The governor for the moment kept his counsel, but soon afterwards told Middleton that it would be wrong for ministers to assume the inevitability of a dissenting report from himself. That was ahead of a key meeting on 14 December, where in essence both Thatcher and Lawson told Leigh-Pemberton to stiffen his sinews, stay close to Pöhl – whom (in the prime minister’s subsequent words) ‘we considered strongly hostile to any serious loss of monetary autonomy for the Bundesbank’ – and ensure that the eventual final report ‘would make it clear that EMU was in no way necessary to the completion of the Single Market [due by the end of 1992] and would enlarge upon the full implications of EMU for the transfer of power and authority from national institutions to a central bureaucracy’.

Both central bankers, in her and Lawson’s eyes, let them down. Leigh-Pemberton recorded on 16 February a very difficult meeting the day before at No. 10 with Lawson and the new foreign secretary (John Major) as well as Thatcher. She, having read the latest displeasing draft, took the line that she had agreed to the formation of the Delors Committee ‘only on the understanding that it would not deal with a European Central Bank or a single currency’. To which the governor ruefully added in his note: ‘In some way this has not emerged in the published version and she is now seeking for this omission to be rectified by the Committee – or at least one member of it!’ He also noted that in the meeting all three ministers ‘believed that the draft was so pitched as to be irredeemable by drafting amendments’. Feeling somewhat put upon, having duly stayed close to Pöhl, the governor now wrote to the prime minister, stating that ‘while I shall do my best to comply with the requirements suggested to me and to avoid embarrassment to the UK government, I must be left a proper measure of my personal integrity on a body consisting of my colleagues on which I am acting in my personal capacity’. When in due course, in April 1989, the report was formally unveiled, it not only in Thatcher’s words ‘confirmed our worst fears’, but featured no dissenting report from the governor. Official Bank policy on EMU remained that it was ‘a matter for the politicians’ – as Leigh-Pemberton next month put it to Blunden – but Thatcher never forgave him, freezing him out during the rest of her premiership.48 Nor was the governor forgiven by her successor: when Major blocked his chairmanship of the G10 governors, a position that Richardson had enjoyed, that was little short of devastating.

In the bigger picture, though, it was a minor consideration compared to the great prize for the Bank that somewhat unexpectedly began to hover in the mid-distance during Leigh-Pemberton’s second term. The prize was independence, albeit from the start there would be debate about what precisely that four-syllable word meant; and unexpectedly because of the generally bruising time that the Bank had had during Thatcher’s decade. ‘The traditional role of the Bank as a voice to advise and warn government has been reduced,’ commented the Financial Times in January 1988 on the occasion of Leigh-Pemberton’s reappointment, ‘and its utterings now come more from the wings than from centre stage. The Bank’s function has become limited to the more technical one of administering policy in the markets. Its ability to influence strategy has been further reduced by the personality of the Governor …’ So why independence? A significant early voice was that of the trenchant, sound-money City economist Tim Congdon. ‘Britain should follow West Germany’s example by giving the Bank of England as much independence from government as is currently enjoyed by the Bundesbank,’ he declared in the Spectator in June 1987, against a background of what he called Britain’s biggest-ever credit boom, with its accompanying threat of serious inflation. It was an argument, Congdon wrote, underpinned by his ‘deep scepticism’, after the previous forty years, ‘about the ability and willingness of British governments to conduct financial policy in a consistent, stable and non-inflationary way’. There followed an attractively rigorous, puritanical vision:

In a well-ordered country, decisions on monetary policy should not be subject to the vagaries of the electoral cycle and fluctuations in credit growth should not reflect politically motivated calculations about house price increases and the voting propensities of home-owners.

The Bank of England should be privatised, its autonomy from government should be protected by statute, and both the tactics and strategy of monetary policy should be determined by the Governor of the Bank of England in consultation with its Court of Directors. The Chancellor of the Exchequer would be left with the humdrum but necessary task of keeping the Government’s finances in good shape.

Congdon concluded with the long view. ‘Before 1946 Britain had its own independent central bank,’ he reminded readers; and during those fabled times, ‘Britain’s currency was the hub of a major international trading area’ and ‘Britain’s inflation record had long been better than that of any other European nation.’

The ghost of Montagu Norman perhaps twitched – and would have twitched again if it had been privy to the remarkable memorandum that Lawson in November 1988 sent to Thatcher, proposing ‘to give statutory independence to the Bank of England, charging it with the statutory duty to preserve the value of the currency, along the lines already in place and of proven effectiveness for the US Federal Reserve, the National Bank of Switzerland, and the Bundesbank’. He went on:

Such a move would enhance the market credibility of our anti-inflationary stance, both nationally and internationally. It would make it absolutely clear that the fight against inflation remains our top priority; it would do something to help de-politicise interest rate changes – though that can never be completely achieved; above all there would be the longer-term advantage that we would be seen to be locking a permanent anti-inflationary force into the system, as a counter-weight to the strong inflationary pressures which are always lurking.

It was not, Lawson stressed subsequently, that he had any ‘illusion that the Bank of England possesses any superior wisdom’. Instead, the benefit lay in ‘the logic of the institutional change itself’, through which an independent central bank would necessarily enjoy a far greater degree of market credibility than a government ever could; and ‘this extra market credibility is what would make the successful conduct of monetary policy less difficult’. Thatcher was appalled:

My reaction was dismissive … I did not believe, as Nigel argued, that it would boost the credibility of the fight against inflation … In fact, as I minuted, ‘It would be seen as an abdication by the Chancellor …’ I added that ‘it would be an admission of a failure of resolve on our part’. I also doubted whether we had people of the right calibre to run such an institution.

Faced by Thatcher’s insistence that the control of inflation was ultimately a political problem, not amenable to institutional solutions, Lawson was compelled to let his secret proposal rest.

Less than a year later, however, the genie was out of the bottle. The context was Lawson’s resignation in October 1989, a resignation that quite apart from the independence issue had two piquant Bank aspects: the day before he went, Thatcher tried in vain to dissuade him by dangling the prospect of becoming in due course the next governor; while when it was clear he was going, but with nowhere to live in London, the present governor generously offered the temporary use of his flat in New Change. On the 31st, five days after resigning, Lawson gave his resignation speech in the Commons, touching briefly on his rejected proposal to the prime minister for an independent Bank as a way in which ‘anti-inflationary credibility might be enhanced in the eyes of the market’. Reaction was mixed. ‘It is an excellent idea,’ pronounced Credit Suisse First Boston’s influential economist Giles Keating. ‘The only tragedy is that it was not considered a long time ago.’ The shadow chancellor, John Smith, took a wholly different view, stating categorically that Labour ‘would not be willing to accept any system of central banks which would be independent of political control, just as we strongly oppose an independent status for the Bank of England’. And somewhere in the middle, but leaning to the positive, The Times devoted an editorial to ‘A Freer Bank?’:

There is no reason to suppose that it would not rise to the challenge. One cannot judge its capacity by the advice it may have given in the different circumstances of its present enabling role. The exact nature of its obligation would be a matter for careful thought but it would almost certainly need to be a general responsibility for the value of the currency rather than responsibility for any more specific intermediate target such as the money supply.

Yet there is a conundrum at the heart of the proposal. Why if monetary policy is so important should it be taken out of the hands of elected representatives? Put another way, if monetary policy is too important for the politicians, why not fiscal policy and many other aspects of economic affairs? …

The answer may be that monetary policy is the rock upon which all economic transactions in a modern economy are founded. Unsound money will undermine all other aspects of economic policy. Ways of improving on our capacity to achieve it cannot be dismissed without the most careful consideration.49

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