18

Welcome and Long Overdue

By the early 1990s the cult of the central bank was gathering global momentum. ‘By far the most persuasive case for central bank independence was the rise of stateless money and global financial market integration,’ Steven Solomon would convincingly argue in retrospect about the growing trend since the 1987 crash. ‘Broadly put, in a landscape in which tears anywhere in the interwoven financial fabric or abrupt alteration in the direction or size of international capital flows could disrupt prosperity across borders, it served the enlightened self-interest of citizens and capitalists everywhere to pool their sovereignty through the upgraded independence of all central bankers.’ Examples of this new prominence included preparations for an eventual European Central Bank, the creation of authentic central banks in Eastern Europe after the fall of the Berlin Wall, and the well-publicised, fully transparent development in New Zealand, where from 1990 the governor of the central bank was given an inflation target and required to adjust monetary policy to meet it. ‘The Triumph of Central Banking?’ was the bold if necessarily provisional title in September 1990 of Paul Volcker’s Per Jacobsson lecture in Washington. ‘I am convinced,’ declared this fairly recently retired central banker who had won renown as the great inflation-slayer, ‘there is objective reality in my impression that central banks are in exceptionally good repute these days’; and he looked ahead with a reasonable degree of confidence to a time when few would disagree with the proposition that ‘an effective central bank must be a strong central bank, with substantial autonomy in its operations and with insulation from partisan and passing political pressures’.

That was not quite how at least two prominent British politicians saw it. Not only did Thatcher in her last year in office not change her mind about independence, typically pushing through in October 1990 an interest rate cut against explicit Bank advice, but she kept as tight a grip as ever on Bank appointments. ‘I think that the Chancellor really has battled hard on our behalf to secure an industrialist,’ noted Leigh-Pemberton in February 1990 after lunch with Nigel Lawson’s successor, John Major. ‘The Prime Minister, however, has decided that she would like to have an economist on the Court and Mervyn King is her choice. I said that I was content to accept this …’ Moreover, despite his help on this occasion, Major when it came to the bigger question was on the other side. ‘He said that he doubted whether there was much support in the House of Commons for an independent Central Bank,’ the governor also recorded after that meeting with the chancellor; while in his autobiography Major would be bluntness itself: ‘I considered giving the Bank of England independence over interest rate policy, as Nigel had wished to do … I dismissed the idea because I believed the person responsible for monetary policy should be answerable for it in the House of Commons.’ Nor was there any sign of that adamantine stance altering after he succeeded Thatcher at No. 10 in November 1990, albeit by the second half of 1991 his own successor at No. 11, Norman Lamont, was picking up on the New Zealand model and starting to try to engage him on the independence issue.¹

At the Bank itself, much discussion naturally ensued after Lawson’s resignation speech had revealed his unsuccessful initiative. From the start, there were some vexed, difficult aspects to consider, and not only the obvious ones of remit and accountability. ‘Would greater autonomy over monetary policy make it likely/possible that some functions would be taken away from the Bank?’ asked the governor’s private secretary Paul Tucker on his behalf in February 1990. ‘Specifically, would we lose the debt management function and/or the industrial finance or bank supervision functions, or anything else?’ And beyond that, really drilling down to fundamentals: ‘Do we believe that greater autonomy would be a good thing?’ Over the next half-year, at least three intense meetings sought to get to grips with what was at stake.

At the first, an informal Court discussion, the main voice was George Blunden’s, essentially a warning one. The Bank, he argued, not only in practice already enjoyed considerable operational autonomy, but ‘was almost unique in that its functions were not laid down in statute’. Nor could it be automatically assumed, he went on, that ‘placing a central bank under a mandate to pursue price stability would guarantee a better inflation performance’; while crucially the British public did not yet share the ‘strong aversion to inflation’ felt in Germany and Switzerland, ‘the two obvious countries where success was combined with considerable independence’ – indeed, ‘on the contrary, public opinion probably regarded a bit of inflation as no bad thing’, given that ‘a wage offer of less than five per cent was widely viewed as insulting’. Blunden as it happened was about to step down as deputy governor, and it was the deputy designate, Eddie George, who later at that meeting took a strongly pro-independence line, especially on the grounds of clarity of both objectives and responsibility. ‘Who,’ he asked, ‘was responsible for the policy mistakes of the past few years – Bank or Treasury officials, the Chancellor, the Prime Minister or the Cabinet?’ And he declared: ‘Placing the central bank under a mandate to pursue price stability would resolve both these difficulties.’

The second meeting, two months later in April 1990, saw a continuation of the Court’s informal discussion. Sir David Scholey, by now one of the senior non-executives, was ‘inclined to think that it was better for the Bank to settle for something short of independence and statutory accountability for monetary policy, and rather to continue to work behind the scenes’; Leigh-Pemberton, like George, reflected on ‘the unsatisfactory position whereby it was unclear who was responsible for determining monetary policy in the UK’; a pair of non-execs, the trade unionist Gavin Laird and the industrialist Brian Corby, tended to agree with Scholey, with the latter warning that ‘it would be the worst of all worlds for the Bank if it were given responsibility for bringing down inflation but could not succeed because of public attitudes’; David Walker (no longer an executive director, but still on the Court) deemed it ‘important that the Bank should not be constrained from continuing with its present wide range of roles and that, in consequence, careful consideration should be given to any prospective trade-offs before pressing for a change’, as well as noting that he ‘thought it inconceivable that government (any government) would give up ultimate responsibility for monetary policy’; the new boy, Mervyn King, ‘said that there was no doubt at all that a greater role for the Bank in monetary policy was definitely on the agenda’, pointing out that ‘it was quite something when the Economics Editor of the Guardian and the IEA [the free-market Institute of Economic Affairs] shared an economic policy objective’; and George concurred, reflecting that he had been ‘quite surprised by the extent of support for the idea of making the Bank statutorily accountable for monetary policy, both in the City and in Parliament’, where a recent survey had ‘suggested that seven out of ten Conservative MPs would support a change’.

Finally, in July, a handful of senior executives assembled. They began with Leigh-Pemberton and George accepting that no fundamental change was likely in the near future, but with George stating that he ‘nevertheless believed that the Bank could help to improve the climate as regards the Bank’s constitutional position by continuing to press the point that price stability was an absolutely essential pre-condition of stable long-term growth and the proper functioning of the economy’. Attention then turned to various possible models for the Bank/Treasury relationship, as well as the question of whether enhanced responsibility on the monetary side might lead to the removal of other Bank functions, including bank supervision. Two of those present, Andrew Crockett and the economist John Flemming, agreed that this might well be the case; but George for his part ‘did not believe there was a logical case for removing functions from the Bank’, and Leigh-Pemberton broadly concurred, adding that the Bank should ‘resist’ any attempt to remove functions. There was, in short, all still to play for.

Publicly, of course, the Bank played a pretty straight bat on the whole issue. ‘Talking about an independent central bank may not be the best way of describing it,’ the governor told an interviewer that summer. Instead:

The question to think about is rather whether the central bank as a free-standing body should have some sort of statutory accountability for monetary policy. Is there something about the operation of monetary policy that makes it quite different from other elements of economic policy or indeed other elements of government policy? If you believe this is true, it is a highly political question. This is something politicians will have to make up their minds about.

Indeed, he seems to have gone to some pains at this stage to ensure that the Bank was seen not to be canvassing for independence – whatever that word meant – too blatantly, especially after a steer to that effect in 1991 from the broadly sympathetic Lamont, well aware of sensitivities at No. 10. Even so, for both governor and deputy that was now the goal. ‘In some senses,’ Leigh-Pemberton revealingly observed to George in March 1992 a fortnight before Major’s somewhat unexpected election victory over Labour’s Neil Kinnock, ‘the most unsatisfactory outcome would be a hung Parliament, but in a narrow sense I think that it could actually create an important situation and even an opportunity for us, as there may be a need in those circumstances for the politicians to announce that the monetary reins had been placed in our hands …’²

Increasingly the pivotal day-to-day figure at the Bank during these years was Eddie George, deputy governor from March 1990. Reputedly the Treasury was not keen, taking the line that his appointment should not be viewed as automatically presaging his governorship, while Leigh-Pemberton would have preferred Crockett; but the probability is that Thatcher and her economic adviser Sir Alan Walters pushed it through, encouraged by the pro-George lobbying of her confidant at the Bank, the non-executive director Sir Hector Laing; while Blunden had already paved the way for George by ensuring that David Walker was safely parked at the SIB. Undoubtedly the old deputy recognised in the new deputy not only a hugely capable operator but also, like himself, a Bank man to his core; and in his first message to staff, George wrote wholly sincerely of his pride in working for ‘an institution with a long tradition of solid values as well as solid achievements’. He went on:

Those values must not change. The trust essential to all our dealings has been built up over years on the basis of integrity and discretion: without that it could be rapidly destroyed. The authority we enjoy, and sometimes need to exercise with firmness, can only be effective if it has at least the tacit support of those it affects: this we will retain only if we are prepared to consult, listen and understand, and to persuade rather than dictate. And it is our style to seek to further the public good by stealth rather than self-promotion.

The new order at the Bank coincided with the protracted and painful recession of the early 1990s, but prompting little support from George for what he saw as soft, politically motivated options. ‘There was no way of curing cost-push inflation other than severe pressure on margins and thus an increase in unemployment,’ he told the clearers in September 1990, adding that ‘he conceded that this was a hard approach but he thought it had been proved to be the only way’. Similarly, almost two years later, in the context of possible fiscal-stimulus action, he observed to the Treasury’s Alan Budd that ‘while, to date, most emphasis in the public debate had been on actions specifically targeted at the housing market, he felt that the distress in the housing market was a symptom rather than a cause of the problem and it made no economic sense to focus relief on house owners’. As usual with a government in an economic hole, the prime minister of the day (now Major) sought to blame the banks; and in his memoirs, Lamont recorded No. 10 putting pressure on him in 1991 to put pressure on Leigh-Pemberton to put pressure in turn on the clearers to change their lending practices. ‘I have to say the Governor was not very pleased with me, since he felt the banks should not be made scapegoats for the recession. He did not know that I very much sympathised with his view.’³

The banks were closely involved, albeit mainly behind the scenes, in what became known during the early 1990s as the ‘London Approach’ – a significant Bank initiative, largely driven by Pen Kent and inevitably with echoes of the Bank’s activities in industrial finance during the mid-1970s and early 1980s. Against a deteriorating economic background (including an increasingly troubled UK corporate sector), and well aware that the Bank no longer necessarily possessed quite the same feudal authority in the City that it had once commanded, Kent in July 1990 argued that the Bank now needed formally to promulgate some rules about collaborative rescue action for struggling companies that were nevertheless essentially sound. ‘I have to say I take an extremely cautious view of this,’ observed a somewhat sceptical George; but that autumn, in a speech to the annual dinner of the Equipment Leasing Association, Leigh-Pemberton set out the three key principles:

The first is that, when difficulties arise, a lending standstill should be considered so that a proper analysis can be made of whether continuing support – and particularly additional financing – is justifiable. Secondly, the fullest possible information should be gathered to support that analysis and the subsequent judgement. And thirdly, there is a very important role for the lead bank. Whatever its size or home base, the lead bank needs to ensure that all interested bank creditors are informed of the company’s position at the earliest possible stage, and are kept informed. This is of help to all creditors, and particularly the smaller banks. No one should be – or feel – disadvantaged through lack of information.

The governor added that while the Bank was willing in principle to act as ‘a neutral chairman’, depending on the circumstances, it would not ‘seek to protect or favour any particular group of banks or other creditors’ nor would it ‘dictate that a rescue must be agreed’, given that ‘it is the creditors’ money that is at stake’. Even so, the Bank now found itself actively engaged in a whole range of support-cum-restructuring cases – as many as fifty new ones between January 1991 and March 1992, including such names as Nissan UK, Vestey Group and Maxwell Communications. By November 1992, looking back on almost three years of sustained corporate workouts, Kent felt able to conclude that the London Approach continued to enjoy ‘widespread acceptance in the banking community because it is seen to be fair and flexible’; and that ‘a large number of companies owe their survival to their banks, and thus, indirectly, to the London Approach’.⁴

Predating that initiative but overlapping with it, probably nothing on the corporate front occupied more of the Bank’s time than the Eurotunnel saga. Back in the early days, following the Anglo-French treaty of February 1986 that established the project, it was Walker who made much of the running, not only getting a grip on the equity financing but seeking to strengthen the Eurotunnel board and management; crucially, it was his suggestion to bring in the determined if sometimes abrasive Alastair Morton. Progress, though, was seldom straightforward, not least in the company’s relationships with banks and contractors. ‘At times our discussion, which lasted an hour, became rather sharp,’ noted Leigh-Pemberton in January 1990 after a difficult meeting with Morton, ‘and I told him that, while I did not take it upon myself to make judgments in the matter, I thought it would be useful for him to give due consideration to the impressions I had formed as a result of my discussions with the other parties.’ The following month saw a heads-being-banged-together summit, chaired by the governor and featuring one moment of lightish relief. ‘Sir Robert Scholey [chairman of British Steel and a Eurotunnel director] commented, apropos of nothing in particular, that it was bizarre to be in the Bank of England discussing management structures and organograms. The governor responded that he quite understood the point but sadly it was not trivial. A great deal turned on the intentions of the parties and the understandings between them.’ Finally, an agreement was signed – ‘there is only one copy of this in existence (i.e. no photocopies) and this is held in the GPS safe’, noted the governor’s private secretary – but soon afterwards Morton was back to playing hardball with the contractors. ‘A plague on both their houses – I ought not to allow myself such a sentiment but it is tempting,’ Leigh-Pemberton found himself expostulating to Kent. ‘I agree with you that this latest issue is not for us: but how can we generate good will or good faith in such people!’ Further dramas lay ahead – including later in 1990 a decisive intervention with the Japanese banks, in 1993 some tricky arbitration manoeuvres overseen by Kent, in 1994 a quiet but timely governor’s word with Salomon Brothers to ensure completion of underwriting – before eventually the project was brought to full fruition.⁵

A further element during the generally fraught early 1990s was the small-banks crisis. By all accounts it was the opportunity for George to provide a master class in crisis management, resulting in the safe winding up of many of the banks and the merger or acquisition of others. In late 1993 he made public the broad outlines of an episode that had unfolded largely in secret:

We had during 1990 been conscious of growing pressures on a sizeable group of smaller banks. They had some retail deposits, but were generally heavily dependent on large wholesale placers of funds: building societies, local authorities, big industrial companies, as well as other banks. All of these were under pressure of some kind and withdrew funds from the wholesale markets. Meanwhile, the assets of the smaller UK banks were becoming increasingly vulnerable to the recession, particularly as it affected the property values supporting their loans.

In early 1991, three small banks – Chancery, Eddington and Authority – closed their doors, after significant loan losses that were followed by a shrinking of their deposits. At that stage, we saw no clear evidence of systemic fragility so we did not intervene.

The wholesale markets continued to tighten. This process accelerated when BCCI [Bank of Credit and Commerce International] was closed later in the year, trapping some large local authority deposits. Meanwhile – and there is always a meanwhile for banking troubles come in a crowd – there was, quite coincidentally, a run on a building society and growing talk of banks in difficulties overseas.

We had been engaged in prophylactic supervision for some time. But as the bigger picture got more threatening, one particular institution [National Mortgage Bank, a subsidiary of National Home Loans] did run into an immediate liquidity crisis: its auditors could not certify that it had enough assurance of liquidity to allow it to continue to trade. It was then that we decided to provide support to that and to a small number of other banks.

It is, of course, impossible to be sure what would have happened if we had not provided support in this, or any other, particular case. It is easy to slip into the position of the man on the train to Brighton who kept snapping his fingers out of the window to keep the elephants away. Since he saw no elephants, his technique was self-evidently effective. But in the early 1990s, we were quite clear that had we failed to intervene, the pressure would have spread and we would then have found it harder to stop. It was the first time since 1973–74 that we had offered such widespread support …

Overall, reckoned George subsequently about the crisis as a whole, ‘we were monitoring 60-odd institutions and I think we lent to about seven or eight’; in the case of National Mortgage Bank, the Bank eventually acquired it for £1, thereby assuming some £100 million of losses on its balance sheet that in due course were worked out.⁶ Throughout the ultimate fear was contagion, and among bigger houses giving cause for concern was the merchant bank Kleinwort Benson. But, as so often in these situations, the Treasury was inclined to suspect the Bank of being trigger-happy: it was a thought that lingered in the institutional memory.

One bank above all, though, really worried the Old Lady in the early 1990s. ‘It is a bank which is shrinking and will continue to do so,’ declared The Times in December 1990 after the increasingly enfeebled Midland had suffered the humiliation of its main minority shareholder, HSBC, deciding temporarily to walk away from a long-mooted union. Or as the Investors Chronicle put it: ‘Midland is now fully exposed for what it is: a troubled, financially weak, second-rank clearer.’ The following month, in January 1991, the governor and his senior colleagues met to consider Midland’s future – a far from easy meeting that ended with a decision in effect to withdraw support from McMahon, its beleaguered chairman and chief executive. Within weeks the Bank had put in place a duo – Sir Peter Walters from BP and Brian Pearse from Barclays – to replace him. ‘Sir Kit indicated that he did not necessarily agree with the need for such radical changes but had seemed to accept the Bank’s right to impose them,’ recorded the tactful note of the conversation in which the governor indicated to his former deputy that he had run out of road. Market reaction was positive; and indeed, before making his move, Leigh-Pemberton had carefully checked with the senior partners of Cazenove that it would be.

The new team at Midland made a good go of it in impossible circumstances, but by the closing weeks of 1991 it was clear that both HSBC and Lloyds were seriously interested in taking over the ailing, recession-hit bank. In Threadneedle Street, the preference was unambiguous. ‘A merger with HSBC would not produce the same economies as would a merger with one of the clearers,’ George in late November frankly told Pearse, adding that HSBC ‘could not provide the same degree of credit rating enhancement as one of the clearers’. By contrast, he continued, the Bank would be ‘fairly supportive’ of a bid from Lloyds, not least since an ensuing merger would be ‘in the family’. Shortly before Christmas, the two men met again, with George emphasising to Pearse that, as far as HSBC’s top man William (‘Willie’) Purves was concerned, the Bank ‘were’, noted Pearse, ‘determined to see him off’ – some ten years after the far-from-forgotten episode of HSBC’s blatant defiance of Richardson’s wishes in relation to RBS. Everything changed, however, in the early months of 1992. The Bank reluctantly came to accept the near-certainty of a bid by Lloyds being referred by government to the Monopolies and Mergers Commission; Midland itself started to cool towards Lloyds; and on the vexed matter of ‘Hong Kong risk’, three years after the Tiananmen Square massacre and five years before Hong Kong’s handover to China, Quinn by early March was telling Leigh-Pemberton and George that ‘as he and the supervisors studied the Hong Kong situation more carefully, they were becoming slightly less concerned about the problem, especially given the integration of Hong Kong with the South Eastern PRC [People’s Republic of China]’. Soon afterwards, Midland’s board finally came down on the side of an HSBC bid, leading in turn to a series of increasingly harmonious discussions between the Bank and HSBC. For its part, the Bank laid down certain conditions: all major non-Hong Kong subsidiaries (including Midland) to become subsidiaries of HSBC’s UK-based holdings company; the ‘mind and management’ of HSBC Holdings to be exercised in London, which meant in practice that Purves and his top team would have to leave Hong Kong and become resident in the UK; the Hong Kong businesses to be entirely funded from local sources; and the Bank to be the overall lead regulator for the HSBC Group. HSBC was happy to accede on all these points and on 13 April the Bank gave an informal green light to its bid. That bid duly went ahead; the City’s institutional investors had their say; and Lloyds pulled out in early June, with its chairman, Sir Jeremy Morse, adamant that his bank had not been leaned on by the Bank to do so.⁷ Undeniably the outcome, whatever the Bank’s initial scepticism, strengthened the British banking system – and importantly, left it with four main high-street clearers, not three.

The other big banking story in the early 1990s, but going back a long way, was of course BCCI. Founded in 1972 by a charismatic Pakistani, Agha Hasan Abedi, the Bank of Credit and Commerce International expanded rapidly around the world (mainly servicing Muslim and Third World clients) and, although registered in Luxembourg, had London as its international operating headquarters. The Bank cast a beady eye. ‘I gave him a frank account of our reasons for taking a distinctly cautious view of BCCI and for impressing on them the need to pause for consolidation,’ noted Jasper Hollom in 1979 after a visit from the Conservative politician Julian Amery, hoping to become a consultant at BCCI. ‘I had no doubt that while Abedi would pay some heed to our advice, it would go against the grain with him and we should therefore have to continue to rein him in.’ Nor physically was BCCI allowed in the heart of the City: when the following year Royal Insurance was looking to develop an empty site at 1 Cornhill into a prestigious banking hall, and the only serious offer came from BCCI, the decisive word from across the road was that that bank would not be an acceptable tenant. Then during the rest of the 1980s, as BCCI lost huge amounts through ill-judged proprietary trading and looked increasingly to provide money-laundering services to Latin America’s drug barons, while at the same time its structure became ever more byzantine, the Bank continued to view its UK activities with considerable mistrust. ‘Bank’s [that is, Bank of England’s] locus technically confined to UK branches of Luxembourg bank, and objective the protection of UK depositors,’ recorded a retrospective internal memo in July 1991:

Bank anxious to avoid being dragged into becoming supervisor for group world-wide, given the complexity and opacity of the group and the false comfort that could have been taken by depositors and the market.

Nevertheless, Bank’s supervision consistently more rigorous than for any other branch operation. In the last ten years, six special visits by Bank teams and six reports (by reporting accountants) commissioned under the Banking Act. Nothing material discovered; any remedial action quickly taken. Since October 1988, weekly statistics and monthly meetings with UK management.

That anxiety about taking on global supervisory responsibilities was for a long time very real. ‘We have a difficult matter over BCCI where Lord Callaghan [the former Labour prime minister] came in to try and persuade Brian Quinn and myself to allow BCCI to register in London and to come under B of E supervision,’ Leigh-Pemberton informed Blunden in May 1989. ‘We both feel that we must resist this, but this particular request from this particular source may need careful handling.’⁸

The endgame came fairly swiftly. To quote again the Bank’s July 1991 retrospective:

Firm evidence of dishonesty in the group emerged in 1988/89 through the Tampa drug-money laundering trials and, separately, in 1990 through evidence that BCCI had acquired control of a Washington-based bank by deception. In the first of these cases, there was no demonstrated link with UK management or with senior group management, but rather the evidence was that the problem was specific to Miami. And in the second case, the American investigations are still under way; no charges have yet been brought. We have been co-operating with the relevant US authorities.

Evidence of financial malpractice and fraud involving the UK operation was first suggested to us at the beginning of this year and this was immediately investigated by Price Waterhouse, with a section 41 report [under the Banking Act] being commissioned by the Bank in March. This was received 10 days ago, on the basis of which co-ordinated action was taken urgently by the main supervisory authorities concerned.

The global closure of BCCI in July 1991 was a huge event – though with only 6,500 of the bank’s 150,000 depositors being in the UK, and with no systemic threat to the British banking system, there was no real question of a government or Bank bail-out. ‘The Governors felt that this would not be appropriate,’ noted Leigh-Pemberton’s private secretary of the possibility of offering financial help to British depositors. ‘There was nothing obvious to distinguish BCCI from other deposit-taking institutions in this respect, so that offering help would be unjustified on its merits, could set an unfortunate precedent and might even prompt commentators to suggest that the Bank felt a degree of culpability.’ But was the Bank culpable? ‘Ministers are standing well back,’ and ‘none has had a word to say for the Bank’, observed Christopher Fildes in the Spectator later that month, adding that Leigh-Pemberton was looking ‘an isolated figure – flying to the Gulf to mollify the sheikh [in the context of BCCI having in 1990 moved its headquarters to Abu Dhabi], hauled to Westminster once a week for a grilling from backbenchers’; while, as Lamont had already told the governor, Major was ‘adamant’ that there had to be a formal inquiry into the closure of BCCI, with Lord Justice Bingham soon commissioned to produce a report.⁹ In the event, there would be no fewer than three reports on BCCI – from the House of Commons Treasury Select Committee and from the US Congress as well as from Bingham – and in all three the Bank featured prominently.

The British parliamentarians were in action, as Fildes intimated, within weeks of the enforced closure. Against a backdrop of mounting press criticism – typified by the Sunday Times’s claim that ‘even armed with a file of press cuttings the Bank of England should have done a better job’ – they interviewed the governor, accompanied by George and Quinn, over a two-hour session. Predictably, some of the most hostile questioning came from two Labour MPs. ‘Let me ask you this,’ Diane Abbott put it to the Bank team after summarising some of the information contained in two audit reports the previous year by Price Waterhouse on BCCI. ‘If 10 per cent of your [BCCI’s] capital base is shovelled out in unsecured, undocumented and dodgy loans does that not amount to evidence of fraud on a scale which justifies revocation [of BCCI’s licence]? How much of your capital base does, in fact, have to be shovelled out in dodgy loans for the Bank of England to raise an eyebrow?’ ‘I think the answer to Ms Abbott,’ replied George, ‘is it is actually possible with a sophisticated fraud of this kind for that sort of thing to go on undetected for a considerable period.’ The other MP, Brian Sedgemore, made much of how when several years earlier Leigh-Pemberton had appeared before the Treasury Committee (on that occasion with Blunden and Rodney Galpin) he – Sedgemore – had referred to BCCI’s West African desk as ‘a financial cesspit’. That comment, responded the governor now, ‘would have been noted down’, but it was ‘not the sort of evidence on which we can safely embark to revoke the licence of a bank’. Sedgemore, previously a vocal critic of the Bank in relation to the Johnson Matthey episode, was predictably unimpressed:

When somebody in a quasi responsible position, not obviously a complete lunatic, has had the benefit of a massive British education, when they gave you this warning – I did not think it up off the top of my head, I had a source obviously – did anybody around the Bank ever think to say, because they did not at this meeting: ‘What is their evidence’? Nobody wrote to me.

‘I am afraid we did not think of saying that,’ replied the governor. ‘Part of the difficulty of this is that the West African branch of a bank incorporated in Luxembourg is rather remote from the jurisdiction of the Bank of England in England.’ Further exchanges followed, ending with Sedgemore accusing the Bank of ‘a cover-up’. That was the Bank’s main evidence, but seven months later, in February 1992, the Bank’s two top supervisors, Quinn and Roger Barnes, appeared before the Committee. ‘We had no shortage, if I may use that term, of allegations and accusations about BCCI,’ accepted the former about the period going back to at least the mid-1980s. However, he went on, ‘Allegations and accusations are one thing. The provision of evidence on the basis of which we can act is something very different.’ And later Quinn elaborated:

The Section 41 report completely transformed our view of BCCI. What we had seen hitherto had been indications. We had seen suspicions voiced by the auditor. We had seen concerns expressed by the auditor. What we saw in June 1991 was hard evidence for the first time that fraud had been conducted and supporting information to corroborate that: information that could trace the money flows, could show how accounts in one institution were used, indeed established, to keep accounts in other institutions current and alive. It was a complete picture and the picture it painted was of widespread pervasive fraud over a long period of time …

The Treasury Committee, though, was unconvinced. Its report the following month accused the Bank of having been neither ‘adequate’ nor ‘speedy’ in its remedial action prior to July 1991; and in particular, it focused on how the Bank had failed to respond satisfactorily to the Price Waterhouse audit report of April 1990 identifying BCCI transactions, mainly booked offshore, that were either ‘false or deceitful’.

The other two reports appeared in October 1992. The Congressional inquiry had some unpalatable words for the Bank: it had ‘colluded in the suppression of the true facts concerning BCCI’s financial status and its involvement in fraud’; it had been a ‘partner not in crime but in a cover-up’ by discounting for too long evidence of fraud and not objecting to Abu Dhabi’s capital injection into BCCI; it had attempted to throw a ‘veil of secrecy’ over its actions; and altogether, its regulation of BCCI had been ‘wholly inadequate’ to protect depositors and creditors. As for the Lord Justice’s findings, perhaps the most lucid summary came from Quinn, once he had sight a few weeks ahead of publication:

The Bingham Report criticises the Bank for lack of alertness in picking up signs of fraud in BCCI; for failing to follow-up warnings given by others; for inadequacies in communicating with other agencies, here and abroad, which had knowledge of, or interest in, BCCI’s activities which were relevant to our or their statutory responsibilities; and for a general lack of suspiciousness in our dealings with BCCI.

On the other hand, he noted gratefully, the report ‘acknowledges the exceptionally complex nature of the BCCI affair and sees it as in many respects unique’. During the days immediately before publication, internal discussion turned to the press: the Telegraph, it was agreed, ‘would need special handling’, while ‘there was little point in seeking to influence the Guardian’. The fourth estate did not disappoint, exemplified by another excoriating piece in the Sunday Times, referring scornfully to Leigh-Pemberton’s ‘patrician amateurism’ and claiming that Bingham had compelled the Bank to move in a single week ‘from the 1950s into the 1990s, wiped clean of its traditional arrogance’. The shadow chancellor, Gordon Brown, called for the governor to go, but Lamont insisted that he still had ‘every confidence’ in him, emphasising that the report showed no evidence of duplicity or bad faith on the Bank’s part. Even so, it was still a very dark moment.

Perhaps unsurprisingly, all things considered, BCCI as an episode did not go quietly into the good night. In January 2004, over twelve years after the plug had been pulled on the bank, which left undeclared debts of £7 billion and some 80,000 depositors out of pocket, BCCI’s liquidators, Deloitte & Touche, brought a case in the High Court endeavouring to prove that the Bank had committed ‘misfeasance in public office’ in its supervision of BCCI. The Bank fought the charge vigorously; retired officials gave lengthy evidence; and eventually, in November 2005, the liquidators dropped the hugely expensive case and paid the Bank’s costs. All that, though, was only a minor footnote, compared to the significant reputational damage suffered by the Bank in 1991–2. In retrospect, amid the overwhelming mass of documentation, arguably one particular exchange stands out. Early in 1987, in a note on BCCI’s management, a Bank supervisor reflected that ‘the style of supervision customarily applied to British banks, based as it is largely on trust, would be totally inappropriate’; to which Leigh-Pemberton minuted, ‘Haven’t we got to make up our minds one way or another about this bank?’ Four years later, the Bank still had not made up its mind. Of course there were many understandable reasons for continuing indecision, not least towards the end the genuine international supervisory progress being made towards breaking up BCCI into separately capitalised and ring-fenced UK, Hong Kong and Abu Dhabi banks; but that indecision, ultimately the governor’s responsibility, was the fatal error.¹⁰ It is tempting to speculate that in an earlier, more Normanesque era, when banking supervision did not involve statute, the governor of the day would simply have followed his nose and sought, once and for all, to expunge the bad smell.

There was one other crucial element in the challenging early 1990s kaleidoscope. ‘Thank God – now down to some strong discipline,’ applauded the Sunday Telegraph, as Britain in October 1990 at last joined the Exchange Rate Mechanism (ERM). The decision was taken by Major as chancellor and reluctantly acquiesced in by Thatcher, with the Bank playing ‘very little role’, reckoned Charles Goodhart. ‘Its views were anyhow mixed. It recognised the risks of a pegged, but adjustable, exchange rate; on the other hand there was a need for a nominal anchor for policy.’ Among those instinctively at the more sceptical end of the spectrum was George, though grudgingly coming to accept there was perhaps no alternative; whereas the governor was entirely sincere when in his Mansion House speech, ten days after entry, he declared that membership of a fixed-rate regime was ‘necessary to get us back on track – to restore the conditions for sustainable non-inflationary growth’ through providing ‘a discipline on policy-makers, on lenders and borrowers, and on wage bargainers’.¹¹

It did not quite work out. George would look back on the fateful episode in a 1996 lecture:

At the time of our entry into the ERM our policy needs appeared to coincide with those of our partners. The economy was responding to the high though falling level of interest rates and inflation was coming down. In principle, it seemed possible that with the enhanced policy credibility that ERM membership was expected to bring, we could hope to complete the domestic economic stabilisation with lower interest rates than otherwise, and so at less cost in terms of loss of output …

In the event, reunification meant that Germany needed to maintain a tight monetary policy at a time when the domestic situation in a number of other ERM countries, including the United Kingdom, required an easing of monetary policy …

It can certainly be argued that the problems within the ERM – including our own problem – could have been avoided by timely adjustment of the relevant parities. And so in principle they could. But in practice it is never as easy as that makes it sound. By the time the developing tension became apparent, the Deutsche Mark anchor was already entrenched as the absolutely key element of the monetary policy framework in other member countries – on which their anti-inflationary credibility crucially depended. To give that up, without a real fight, would have imposed real economic costs. These costs might have been less if it had been possible to agree upon a unilateral Deutsche Mark revaluation – making it clear that the root of the problem lay in the exceptional circumstances of German reunification. But that approach could not be agreed.

We were then confronted with a situation in which raising interest rates made no economic sense in terms of our domestic conditions and so we sought to maintain the parity [back in October 1990, an unfortunately high DM2.95 to the pound] through intervention in the hope that the pressures in Germany would ease …

That was essentially the situation by the late summer of 1992, a situation not helped by the Danish referendum in June rejecting the European Community’s Maastricht Treaty and thereby increasing tensions within the ERM. During July and August, sterling was under serious pressure, as concerns grew about the likelihood of a French rejection of Maastricht, with the referendum due to be held on 20 September. The August issue of the Bank’s Quarterly Bulletin soberly noted the ERM’s ‘strains’, but sought to calm markets by emphasising the importance of the credibility derived from the authorities’ macro-economic policies.

The crunch was inexorably coming. In an update for George on 7 August, Leigh-Pemberton noted that the Bank’s Anthony Coleby had recently attended a meeting at the Treasury which had ‘included a discussion to the effect that the only alternative to the present policy was to leave the ERM, unilateral devaluations and a realignment being out’. A palpably disconcerted governor went on: ‘He [Coleby] spoke as though Treasury officials thought it prudent to prepare for such a drastic reversal of policy as a precaution. Presumably they have more experience than we do of Ministerial jitters but I simply cannot believe that such a reversal of policy would be indulged in by the PM.’ Just over a fortnight later, on the 24th, three days after the coordinated intervention of eighteen central banks proved unable to bolster the US dollar and thereby weaken the deutschmark, George himself was discussing market developments with the Treasury’s permanent secretary, Sir Terry Burns. ‘The Deputy Governor noted that he was reluctant to initiate overt intervention in support of sterling at this stage. This was partly because pushing sterling through $1.9725 would be equivalent to pushing sterling uphill.’ That afternoon, the deputy was on the phone with the chancellor. When Lamont asked George what he proposed to do ‘in the event that concerted intervention did not materialise’, the reply was that he proposed to continue with ‘covert intra marginal intervention to keep in touch with DM2.81, but being ready to go overt should the exchange rate fall close to DM2.805’; and Lamont said he was willing to spend up to $1.5 billion ‘in the covert intervention phase’. Three days later, George and Burns were on the phone: they ‘discussed the forthcoming reserves figure and agreed to publish a figure of £1280mn’.

The pace of events then quickened during the first half of September. At the start of the month, sterling went to its lowest level against the deutschmark since May 1990; barely a week later, Major publicly insisted that ‘the soft option, the devaluer’s option, the inflationary option, would be a betrayal of our future’ and was therefore ‘not the government’s policy’; over the weekend of 12–13 September, the Italian government decided to devalue the lira by 7 per cent against all other ERM currencies; and on the afternoon of Tuesday the 15th, in a development that genuinely shocked the British authorities, it emerged that Dr Helmut Schlesinger, president of the Bundesbank, had given an interview to a German newspaper stating that ‘the tensions in the ERM are not over’ and that ‘further devaluations are not excluded’. Major did not exaggerate when he recollected in only semi-tranquillity that ‘such views from one of the most influential central bankers in the world sent out only one message to the markets: “Sell sterling”’. That same day, George gave a journalist a defiant update on the previous week or so – ‘it’s been a bit of a battering but we’re still in there with our troops intact!’ – but this changed everything.¹²

Next day was of course Black Wednesday, the day that the pound took such a heavy, intensive battering (costing some £3.3 billion) that the UK government had no alternative but to suspend its membership of the ERM. For the Bank, inevitably somewhere near the eye of the storm, it was a day with three main components: the markets; the fellow central banks; and the politicians.

Heavy selling of the pound (both by speculators such as George Soros and by institutions such as banks and pension funds) duly began first thing that Wednesday morning, immediately prompting massively expensive intervention by the Bank, as agreed the previous evening with Lamont in the wake of the Schlesinger bombshell. ‘We went into the market very early,’ recalled Ian Plenderleith (the associate director responsible for market operations), ‘did a substantial amount of buying of sterling, and it was the most extraordinary feeling, I remember describing it to Leigh-Pemberton, that the rate lifted off the bottom for a few seconds and then just slipped down again, and I said it’s exactly like driving a car and you suddenly realise that the steering wheel has come away from the column …’ At 11 o’clock there was a belated rise in interest rates, from 10 to 12 per cent. Lamont was watching the Reuters screen at the Treasury as the announcement was made: ‘The pound did not move at all. From that moment I knew the game was up … I felt like a TV surgeon in Casualty watching a heart monitor and realising that the patient was dead.’ Over the next few hours, pending a conclusive decision from the West End of town, the Bank had no alternative but to continue to spend Britain’s currency reserves at an alarming rate, before Major further delayed that decision by going for a final throw of the dice, with a 2.15 pm announcement stating that interest rates would rise next day from 12 to 15 per cent. Again, the move was viewed by the foreign exchange markets as a sign of weakness, not strength (George had been opposed to it for that reason); and after sterling had staged a tiny, flickering rally the Bank was soon buying yet more pounds. ‘That afternoon,’ Soros recollected, ‘it became a veritable avalanche of selling.’ ‘It was the most bizarre experience,’ remembered the Bank’s Michael Foot of that afternoon in the dealing room, ‘because there was a bank of phones basically with every light blinking, every light of course being a sell order for sterling at the minimum rate, and the dealers had no choice but to accept this, they could be a little bit slow picking up the phone, but that was it, that was all they could do.’ Eventually, at 4 o’clock, with the UK’s obligations under the ERM at last ended for the day, it was agreed to let sterling go. ‘Suddenly the Bank of England wasn’t supporting pounds,’ recalled Mark Clarke of the Bank of America from a dealer’s perspective. ‘Instead of a load of noise coming out of the voice boxes and everything, and around the dealing room, everyone sat in stunned silence for almost two seconds or three seconds. All of a sudden it erupted and sterling just free-fell. That sense of awe, that the markets could take on a central bank and actually win. I couldn’t believe it …’ Three and a half hours later, Lamont stood outside the Treasury and announced to the television cameras that, following ‘an extremely difficult and turbulent day’, UK membership had been suspended – a de facto devaluation.¹³

What about the other European central banks as the ERM drama unfolded? In the course of that afternoon, Leigh-Pemberton, George and seven senior colleagues assembled three times for a telephonic ‘concertation’ with the various top central bankers on the Continent. To judge by the rather muted official record, the Bank’s men did not get all that much joy. During the first one, at 2.15, Leigh-Pemberton began by explaining that ‘the drain from our reserves was barely sustainable’; and added that if the second interest rate rise failed to stem the outflow, ‘we would need to look to the other central banks in the system for help in the form of intervention on their own account in substantial amounts’, given that otherwise ‘the UK government was going to need to contemplate suspending its ERM obligations, and an announcement to that effect might have to be made during the afternoon’. The overall response was that ‘the UK should be contemplating realignment within the ERM rather than a suspension of its obligations outside the rules’. The second concertation followed soon afterwards, at 3.15, during which a range of views was given to Leigh-Pemberton about the possibility of a UK realignment, with the governor observing that ‘suspension was very likely to have to be accompanied by realignment if sterling could manage to rejoin after the weekend’. Finally, at 6 o’clock, the governor informed his fellow central bankers that ‘the UK government had reached the conclusion that the turbulence in exchanges was such that there should be a general suspension of ERM obligations’, but added that ‘if that did not prove acceptable, the UK had decided that it must in any case suspend its own ERM obligations for the time being’; to which the Bank of France’s Jacques de Larosière responded by stating that ‘it would be impossible for the French to accept a general suspension of ERM obligations’, which ‘would have dramatic and negative consequences for the market and for the general climate in France before their Referendum at the weekend’; thereupon ‘Duisenberg [Wim Duisenberg of the Dutch central bank], Tietmeyer [Hans Tietmeyer of the Bundesbank] and Doyle [Maurice Doyle of the Central Bank of Ireland] agreed with Larosière, whereas Ciampi [Carlo Ciampi of the Bank of Italy] and the Portuguese argued for a generalised response to the market turbulence, and impliedly a general suspension.’ Overall, the weight of opinion was towards UK suspension alone; and within weeks, Lamont was making a Eurosceptic speech to his party conference, observing sardonically of that Continent’s ambition to become a state that ‘no one would die for Europe’.

Could the Bundesbank in particular have done more to help? Jim Trott, the Bank’s chief dealer, would add an intriguing tailpiece to this central banking aspect of the day. ‘The cavalry were the Bundesbank,’ he recalled about those hours during which the Bank was furiously buying sterling, but the Bundesbank was notably reluctant to sell deutschmarks. ‘We kept on looking over the hill, but there was no dust and there were no hats and no sabres. And then later at the conference call they suddenly didn’t speak English, which was extraordinary. So we were kind of stretched on that day.’¹⁴

Ultimately, it was with the chancellor and his Cabinet colleagues that the buck stopped that very long Wednesday. At an early stage, George was trying to push Lamont towards a 4 per cent rate rise, but Lamont argued that ‘the markets would regard 4 as excessive and so would lack credibility’, and in the end they settled on 2 per cent, with the announcement then significantly delayed by Lamont having to persuade Major. Further delay in resolving the whole issue of British membership came with a lengthy lunchtime ministerial meeting, attended by Leigh-Pemberton and George. By this stage both the Bank and Lamont wanted immediate withdrawal from the ERM, but to their frustration – certainly to Lamont’s, probably to the Bank’s also – the broad consensus, supported by Major, was to keep going until at least 4 o’clock, while announcing at 2.15 the second interest rate rise. That frustration would provoke a telling passage in Lamont’s memoirs:

Later on Kenneth Clarke [like Michael Heseltine and Douglas Hurd, refusing to accept immediate withdrawal] claimed, ‘The whole thing was taken out of the hands of the politicians by the technicians. We were just there to sign on the dotted line.’ The opposite was the truth. It was the politicians who had interfered with the technicians and only succeeded in making things even worse with their amateur and bungling intervention. Later on Kenneth Clarke also claimed the meeting had no information from the outside world and that we were cut off from the markets. In fact Eddie George had with him a pocket Reuters monitor that told him the value of sterling every minute. In no way were we cut off from the markets. But you didn’t need a TV to know what was happening: the pound, having been in free fall, was now stuck at DM 2.7780, at which we were obliged to pay out to all those speculators who had sold sterling short. We were bleeding to death, and all we were doing was talking. We had clearly lost the battle but the generals refused to recognise it.

George, like Leigh-Pemberton, was back at the Bank at around 2.45 when he had a long telephone conversation with Lamont. George pointed out that the already substantial loss of reserves could become ‘much heavier’ in the quarter of an hour or so before 4 o’clock; and in answer to a series of specific questions, he reckoned it ‘very unlikely’ that a realignment could be achieved that evening, reassured Lamont that up to 4 o’clock ‘the authorities would be able to raise sufficient liquidity to withstand the outflow, though it would be extremely painful’, and promised that he would ‘advise the Chancellor if he felt that the UK was being irresponsible in continuing to meet its obligations until the end of the official ERM day’. Finally, at around 3.45, Leigh-Pemberton and George were back in the West End, joining the ministerial meeting at which the decision was conclusively taken to suspend that evening, as well as to announce that the second interest rate increase would be rescinded. At that point at least two ministers, Clarke and Heseltine, wanted the first rise also to be scrapped; but partly under pressure from the Bank, aware of the possibility of sterling once again going into free fall, that decision was apparently parked for the morrow.¹⁵

That Thursday morning, amid a general sense of national humiliation and government incompetence, saw a vivid coda to Black Wednesday. As early as 7.50, George was on the telephone to Burns, having learned that Major and Lamont had agreed the previous evening to cut interest rates back to 10 per cent before the Cabinet met at around 9.30. Such a move, he explained, ‘would be disastrous, giving an impression to the markets of total confusion among the authorities’; and he added that he was ‘not in principle averse to reducing rates to 10%, but it was extremely important that it should be done in an orderly manner’. Half an hour later, Burns phoned back ‘to say that the Chancellor was content for the announcement of the interest rate reduction to be delayed until Friday’, but that Alex Allan in the prime minister’s office ‘was much more resistant for presentational reasons’. Straightaway, George was on the phone to Allan, reiterating that reducing interest rates to 10 per cent that morning would, in the view of the governor as well as himself, ‘give an impression of panic and gross incompetence on the part of the authorities and could produce a massive over-shoot in the exchange rate’; but Allan, after asking George not to repeat to Lamont what he had to say, told the deputy that ‘for political reasons the Prime Minister was adamant that interest rates should be reduced before the Cabinet met that morning’, adding: ‘If the Chancellor made the interest rate announcement before the Cabinet meeting, he could regain some of the initiative. But if he waited until later it would look as if he had been forced into doing so by the Cabinet.’ The conversation ended with George remarking, perhaps rather grumpily, that ‘someone, whether the Chancellor or the Prime Minister, needed to give the Bank a direct instruction to make the rate reduction’. The rest of this chamber drama played out in three more phone calls:

8.35. Sir Terry Burns telephoned the Deputy Governor to say that he had just received a message from Number 10 to the effect that, unless there was an announcement before 9.15 am, that there would be a reduction in rates to 10% either that day or on the following day, the Chancellor would not survive the Cabinet meeting. The Deputy Governor asked whether that was an instruction to the Bank to make the change and Sir Terry replied that it was not clear; the Chancellor was not aware of the message and had previously said he would be content for the announcement to be made on the Friday. It was agreed that Sir Terry would consider how best to approach the Chancellor and in the meantime the Deputy Governor would think about how best to carry out an instruction to reduce rates.

8.45. The Deputy Governor telephoned Sir Terry to say that, after taking advice, he had concluded that if a rate cut was to be announced that day, it would be best to implement it straightaway rather than announce it that day to take effect on the following day; this would have the minimum disruptive effect on the markets.

9.07. Sir Terry telephoned the Deputy Governor to say that the Chancellor had agreed that the cut should be announced that day at 9.30 am, just before the Cabinet meeting began.¹⁶

Black Wednesday in September, the Bingham Report in October – the autumn of 1992 was hardly a happy moment as the Bank began to think about how to mark its imminent tercentenary. In a highly critical assessment in the Spectator, Stephen Fay argued that the ERM debacle owed at least something to the Bank’s ‘culture of secrecy’, a culture resistant to explaining to the outside world either motives or arguments and reasons; as for Bingham, that had revealed the Bank as ‘an introverted organisation, unwilling to trust outsiders, especially from abroad, and reluctant to take advice’. A member of the Treasury Select Committee, Giles Radice, was similarly critical. ‘We are astonished by the complacent attitude of Eddie George,’ he recorded in his diary a few days later, after the deputy governor had given evidence about the Bank’s handling of BCCI. ‘In the end, after persistent questioning, he admits that mistakes may have been made. He would have done well to say that at the beginning.’ Yet, even during that autumn, developments were under way that would transform the very nature of the Bank by early in its fourth century; and within weeks, there were some insiders who were privately referring to the tumultuous events of 16 September not as Black Wednesday but as Grey or even White Wednesday.

The charting of a new course started, albeit somewhat uncertainly, as soon as Thursday the 17th. ‘Yesterday was, in an obvious sense, a crushing defeat for policy,’ began George’s memo to senior colleagues. ‘But it also presents us with an opportunity to break free from the intense conflict between domestic and external objectives which ERM membership in the exceptional circumstances of German re-unification has involved us in over much of the past year.’ Thus, in the welcome absence of monetary policy having to be ‘directed solely towards maintaining the exchange rate’, necessitating ‘interest rates at levels which were inappropriately high in relation to domestic inflationary pressure and domestic activity’ – in turn resulting in fiscal policy being relaxed by government ‘to a degree that would otherwise have been clearly inappropriate’, indeed even leading to the Bank itself ‘untypically’ advising the chancellor ‘to undertake further fiscal expansion’ – George instead looked forward to a post-ERM context in which ‘the opportunity now presents itself to revert to a more appropriate policy mix’. Another memo came from Mervyn King, who since the previous year had been chief economist and an executive director. ‘If we remain outside the ERM, and there is no independence for the Bank,’ he concluded, ‘a clear and coherent framework for the formulation of monetary policy will be necessary, in my view, to restore any semblance of credibility to our policy stance. Otherwise, we shall have to hope that we shall be given the opportunity to build up credibility by the pursuit and achievement of price stability.’

That afternoon, the Bank’s top men assembled to discuss what, in the vacuum left by the suspension of ERM membership, the framework for UK economic and monetary policy should be. The first speaker was King:

It would not be enough to cast policy in terms which boiled down to an assurance that the authorities would make the right judgements, since ultimately these judgements would fall to politicians and be prey to the political pressures which they inevitably face. Independence would be an ideal outcome but absent that a new framework was needed. In response to the Deputy Governor [George], Mr King offered monetary aggregates as one possible candidate and said that a ‘trust us’ approach would have zero credibility. If an alternative framework could not be found, the arguments for going back into the ERM were, in his view, strengthened.

Others present expressed their views. Crockett said that he was ‘anxious that the Bank should not simply abandon the objective of using the exchange rate as some sort of guide for monetary policy’; Plenderleith observed that if the choice of ‘framework’ – defined as ‘a published definition of policy from which the authorities could not easily depart’ – lay between adherence to the ERM or what ‘might be no more than a statement of intent to pursue a policy designed to produce stable non-inflationary growth’, the reality was that ‘either approach needed to enjoy broad-based credibility and legitimacy’, adding that ‘it was clear that the public had not been persuaded that the ERM was the right way of pursuing growth’; while Leigh-Pemberton, after noting that in the short term ‘the inflationary bogey was not that great’, accepted that ‘we plainly did need to have a framework and it would not be good enough to rely on “seat of the pants” judgements and to encourage the market to “trust us”’, but was disinclined to change horses, telling his colleagues that he ‘continued to find the exchange rate a potentially attractive criterion, since it was a visible and well-understood indication to the market and the international community of our position and policy’. Accordingly, the meeting ended with the governor expressing his belief that ‘the ERM remained a potentially attractive framework once conditions had improved’.

A week was a long time in central banking that autumn; and exactly seven days later, amid the ongoing policy vacuum and an increasing realisation-cum-acceptance in both the Bank and the Treasury that Britain’s ERM era was over, King had an important message for the Court:

Our immediate problem is that we need a nominal anchor. This takes us to the old debate between rules and discretion for the conduct of monetary policy. Until last week we had a rule – our ERM parity. We now have total discretion but precisely for that reason no credibility. The policy of ‘trust us we are clever’ is associated with Mr Lawson. And look where that got us. But I do not want to pretend that there is any new simple rule – such as a monetary or other aggregate – that would carry conviction. The obvious alternative, and one that has been canvassed by most academic and journalist commentators, is independence of the Bank of England.

In the meantime, it would make sense to focus directly on the objective most relevant to a central bank, namely the rate of inflation. We have a target path for the inflation rate that leads us to price stability. We also have a number of indicators of inflationary trend. These can be weighted together by the information content in each indicator. And the Economics Division is carrying out the statistical analysis necessary for this. Policy then compares the expected inflation rate with its target path, and monetary policy is tightened if expected inflation exceeds the desired target range. In one sense that is the usual discretionary policy which in practice we followed for some time before entering the ERM. But it has a much more precise focus because it is clearly targeted on inflation. That should be the main responsibility of the central bank. The immediate problem, however, is to find a way of restoring some semblance of credibility to UK economic policy.¹⁷

Inflation targeting, in short, was moving towards the centre of the picture; but it was not quite there yet.

King himself was emerging as the key Bank figure during this tantalisingly – but also seductively – blank-canvas phase. An academic economist for most of his working life before coming to the Bank full-time in March 1991, initially on a two-year contract, he more than anyone seized the moment, in the process doing much to raise the standing within the Bank of the Economics Division. That was not an uncharged matter. Back in 1983, an earlier chief economist, Christopher Dow, had listened to ‘an hour’s quiet monologue’ from George about how the economists in Threadneedle Street were as a species ‘incapable of being useful to him’ and how ‘he would not trust them with information anyhow’; King himself had already ruffled some feathers by restructuring the division so that, in his subsequent words, ‘those dealing with the analysis of financial markets and those dealing with economic analysis worked together’, with the aim of ensuring that ‘the analysis matches the operations’, as distinct from there being ‘just a group of economists working on a large econometric model’; while when in June 1992, during the annual review of ‘Objectives and Resources’, Leigh-Pemberton asserted that ‘it was important for the Bank to recruit economists, but the Bank should not restrict itself to economists, because we would then lose some of the most able generalists’, and added that he ‘wondered whether the policy of concentrating on economists was short-sighted’, King countered by saying that he ‘thought non-economist graduate recruits should be willing to become economists and that that should be made clear to them before recruitment’.¹⁸ Traditionally, of course, the Bank had always prized the generalists. It was an irony of the situation that King himself, heading the economic specialists, possessed one way and another an appreciably broader hinterland than some of the generalists.

Late September and early October inevitably involved, whether at the Bank or the Treasury, considerable discussion about the future direction of policy. King went to the Treasury and floated to Burns the idea of putting considerable focus on the inflation target; Burns responded quite positively; and in due course, he and the Treasury’s chief economic adviser, Alan Budd, sought to persuade their political chief to go down that road. Even so, there were still some distinct qualms at the Bank. On 6 October, two days before Lamont was due to unveil the government’s new, post-ERM economic strategy, George rang Burns to say that he and the governor were ‘very exercised about the possibility that future monetary policy would become set in stone before the Bank had had a chance to give its input’; and he added that ‘the Bank was keen to be able to line up side by side with the Government on any new policy statement, but if this were to involve specific inflation or monetary aggregate targets, the Bank would find it very hard to support’. Understandably, after his various experiences going back to the early 1980s, George had no great fondness for targets – whether of a monetary or an exchange rate nature – and, befitting his own technical virtuosity, instinctively preferred discretion to rules as the basis for policy. Even so, the tide was now irresistibly flowing towards a new orthodoxy: based not on the money supply, not on the strength or otherwise of sterling, but on the requirements of the inflation target. On 8 October, in a speech to the Tory conference at Brighton and in a letter to the chairman of the Treasury Committee, the chancellor set out his stall, at the heart of which was an inflation target in the range of 1–4 per cent, to be reduced by the end of the Parliament (probably 1997) to a range of 1–2.5 per cent. Such an approach, Lamont assured the faithful, would restore the confidence of the markets. And if the government failed to hit its inflation target? ‘It will have a duty,’ he pledged, ‘to explain how this had arisen, how quickly it intended to get back within the range, and the means by which it could achieve this.’

A certain whiff of Mr Solomon Binding was undeniable, to sceptics anyway; but just under a fortnight later, on 19 October, Burns visited Leigh-Pemberton to put forward a proposal, duly summarised by the governor’s private secretary:

Treasury Officials, impliedly although not absolutely clearly with the Chancellor’s support, were giving very serious consideration to the ‘openness’ issue and the general arrangements by which monetary policy decisions were formulated and reached. In particular, Burns envisaged a monthly monetary policy meeting between the Chancellor and the Governor, each supported by Officials, to review the economic and monetary situation on the basis of a [Treasury] paper which would be published …

The objective would be to make it much more difficult for No 10 to intervene in interest rate decisions, and make it similarly difficult for a non-orthodox Chancellor to make interest rate movements which were – or at least whose timing was – motivated by political considerations …

Next day, at an internal meeting, George supported the idea of a monthly chancellor/governor discussion of monetary policy and suggested that the Bank undertake for public consumption a quarterly ‘Inflation Report’ – a report, insisted King, that would be ‘entirely free from Treasury comment’. A week later, on 27 October, two days before the chancellor’s Mansion House speech, Lamont, Burns, Leigh-Pemberton and George gathered to discuss its intended proposals ‘for greater openness and accountability in the conduct of monetary policy’. After observing that they would be ‘very welcome’ from the Bank’s point of view, the governor additionally proposed as part of the package the Bank’s own quarterly inflation report, a suggestion that the chancellor ‘welcomed’; and both sides agreed that, in Leigh-Pemberton’s reported words, ‘the validity of the inflation report would depend in part on acceptance in the markets that, in the end, the inflation report represented the opinions of the Bank and not the Treasury’. On the 29th, Lamont spelled it all out, with one or two extra twirls, to the City’s bigwigs: the Bank, as monitor of the government’s progress in meeting its inflation target, to publish a quarterly inflation report assessing ‘thoroughly and openly’ the outlook for inflation; the Treasury to have an early sight of that report, but no powers to change it; monthly meetings between chancellor and governor, with the dates to be revealed in advance; a report of each meeting to be published by the Treasury; and a panel of seven independent economic forecasters to be established which ‘would publish regular assessments of economic conditions’.¹⁹ Greater credibility, greater openness – those by now were the government’s buzzwords, and the almost inevitable implication was an enhanced role for the Bank.

On 11 November the governor gave the inaugural LSE Bank of England lecture, written for him by King and in effect laying out the underlying long-term economic justification for the new emphasis on price stability:

In this country, inflation became a serious problem only after the Second World War. Creeping inflation at an average rate of around 3% a year in the 1950s and 1960s caused concern but little revival in official circles of the traditional view that inflation was a monetary phenomenon. In the 1970s inflation rose rapidly and prices more than trebled. Progress was made in the 1980s with the adoption of firm counterinflationary policies. Nevertheless, we should not forget that prices rose by more between 1970 and 1990 than they had done in the previous 200 years. Some of you here tonight are part of a generation – the inflation generation – which grew up believing that rapid rises in prices were an inevitable feature of a growing economy. I want to persuade you that inflation is not a natural condition. Far from it. It is a condition which derives from a combination of outdated economic theory and flawed policy implementation. And now that both theory and practice have been immeasurably improved, it is a phenomenon which should be confined to the history books once more.

Some serious economic history followed – invoking such names as Irving Fisher and Bill Phillips as well as Maynard Keynes – plus a lengthy disquisition on both the explicit and hidden cost of inflation. ‘The simple choice,’ declared the governor, ‘is between a variable and unpredictable inflation rate caused by instability in monetary policy, and a more stable monetary policy framework that delivers price stability.’ His preference was of course for the latter, and near the end, in ringing tones, he committed the Bank to an ‘unwavering effort’ to direct policy towards price stability. Almost a month later, on 10 December at 8.30 am, the first ‘Monthly Monetary Meeting’ between chancellor and governor took place at the Treasury, with Leigh-Pemberton accompanied by Crockett, Coleby, King and Plenderleith; two months later, in February 1993, the Bank’s first publicly available Inflation Report appeared, at this initial stage as part of the regular Quarterly Bulletin.²⁰ It was very much King’s baby: he gave a press conference and privately took satisfaction from the fact that the report’s abundance of charts and suchlike had largely thwarted any potential editorial interference by the Treasury.

What about independence as such? ‘One cheer for the chancellor’ was the title of the Financial Times’s leader on Lamont’s institutional reforms announced in his Mansion House speech. ‘What is needed is comprehensive reconsideration of the roles of the Treasury and the Bank of England. Mr Lamont wishes to persuade the world that the citadel on Great George Street still knows best. It does not. As the whole world now knows all too well.’ The Bank itself was disinclined to campaign at this point – so soon after BCCI and Black Wednesday – with an internal note shortly before Christmas recording that George had ‘come to the view that the only way to make progress is through an evolutionary (i.e. non-statutory) approach’. Instead, the great – if at this stage covert – champion of the independence cause was Lamont, who despite the opposition of his permanent secretary (Burns) submitted two papers, one in November 1992 and the other in January 1993, that followed Lawson’s example by calling for statutory independence over monetary policy, predominantly on counter-inflationary grounds. Just as in September 1991, when Lamont had made a similar initiative, Major refused to budge. Not only did the prime minister continue to believe that the person responsible for monetary policy should be directly answerable to the Commons, but he (in his subsequent words) ‘also feared that the culture of an independent Bank would ensure that interest rates went up rapidly but fell only slowly’. To which he might have added that he also had no appetite for needlessly vexing his backbench Eurosceptics, inclined to view Bank independence as a sinister step to meeting the Maastricht criteria for monetary union. Moreover, in the here and now of a hostile political climate, Major badly wanted to keep monetary policy in his own hands, not even the chancellor’s – and twice, in October 1992 and January 1993, he unilaterally imposed interest rate cuts, the second time despite that cut’s clash with the Bank’s attempts to hold an important auction of gilt-edged stock. ‘For the future he thought that interest rate moves should be related more closely to the economic events that determined them,’ recorded in guarded language Leigh-Pemberton’s rebuke to Lamont (the innocent party) at their monthly meeting in early February. ‘Any gap between the event and the move leads to suspicion in the markets.’²¹

The governor himself was approaching the final months of his second term. Who would succeed him? The fullest account of a tricky, invidious process comes from Lamont’s memoirs, revealing that although he and the Court wanted George to step up from deputy, Major ‘kept repeating that he wanted “a man of stature”’. One of those possible men, as in 1983, was David Scholey – pushed by the Sunday Times as ‘the obvious candidate with the standing, weighty personality and skill to restore the Bank’s credibility’, but in his own mind certain that George was the right man; while Major himself had an inclination for JP Morgan’s Sir Dennis Weatherstone, a British meritocrat after his own heart. In the end, Lamont managed to persuade the prime minister that there was no realistic alternative to George; and the announcement, generally welcomed, was made at the end of January. Even so, Major was insistent that George’s replacement as deputy governor must be an outsider; and between them, Lamont and Sarah Hogg (running the No. 10 office) settled on Rupert Pennant-Rea, who had worked in the Bank’s Economics Division in the 1970s but was now the forty-five-year-old editor of the Economist. ‘He could be a splendid fellow and a fountain of ideas and a breath of fresh or hot air, but that in itself would no more qualify him to be Deputy Governor than to fly a Boeing 747,’ commented a fellow-journalist Christopher Fildes, while Banking World noted that ‘there are some in the Bank who secretly express doubts’. Central Banking’s Robert Pringle was more generous. ‘Why not a journalist?’ he asked, and penned Pennant-Rea an open letter in which he explained how the new deputy governor could not only help the Bank cope with the increasing publicity attendant on being a central bank in the 1990s, but also ‘help them to get onto terms with the baby-boomers who are inheriting the world (the Clintons, Larry Summers, Michael Portillos)’, whom he described as ‘a different breed – and a very strange species to most central bankers, who come from another generation’. Pennant-Rea himself had been given only four hours to accept the job, but apparently had done so readily.²²

The independence question continued to preoccupy during the spring and summer of 1993. ‘The Governor should not pull his punches in making the case’ that ‘operational autonomy for the Bank was the best way to achieve price stability’, argued King at an internal March meeting about how best to proceed; Leigh-Pemberton for his part ‘noted the list of political moves on interest rates – the most recent cut to 6%, cuts made at the time of municipal elections, cuts at the time of the row about coal mines, cuts to coincide with the Conservative Party Conference and with the presentation of the Budget’; while George ‘felt it was not necessary to mount a public campaign for independence, but if asked the Bank should continue to explain its view’, adding that ‘the objective was to persuade the Prime Minister to agree to think about the topic seriously once Maastricht was behind him and before the next election’.

In late May the prime minister and the governor had a face-to-face on the issue. Major asserted that, while he ‘recognised the arguments for independence on anti-inflationary grounds’, he was ‘not at all sure that Parliament would agree to such a change’; observed that ‘even if it did, it was bound to insist on much more oversight of the Bank’; noted that ‘interest rates were particularly sensitive in the UK because of the link to mortgage rates’; and held out the somewhat distant carrot that ‘if low inflation and economic growth were maintained and the Government were in a stronger position politically, it might be possible to contemplate a change’. After Leigh-Pemberton for his part had pointed to ‘the prospect of Britain becoming the only major country where the markets perceived a risk of short-term political interference in monetary policy and demanded a risk premium accordingly’, the prime minister ‘repeated that greater independence could only be contemplated from a position of strength’:

The first step was to convince political and market opinion that the Government’s economic policies were credible in their own right and that economic recovery was happening because of these policies, not in spite of them. It needed to be clearly established that recovery had begun before Britain left the ERM – and indeed that recession began before we joined it. The more the Governor and Deputy Governor could do to reinforce the message in speeches and in the Bank of England Quarterly Bulletin, the better the prospects would be.

Shortly afterwards, Kenneth Clarke replaced Lamont at No. 11, and on 3 June the governor called on the new chancellor for ‘a very relaxed, informal and open discussion’. Specifically on independence, Clarke said that he ‘was not himself particularly opposed to the possibility’, but ‘felt that it was not an issue for him to raise with the Prime Minister in the immediate future’. Six days later, in a notably plain-speaking resignation speech to the Commons, Lamont à la Lawson publicly revealed his unsuccessful attempts to convince the prime minister of the merits of independence – to which Major almost immediately responded in the chamber by highlighting his ‘very real concern’ about ‘the need for accountability to Parliament for decisions on monetary policy matters’. Back behind closed doors, that left Leigh-Pemberton and Clarke to bat around the issue a second time, on 17 June. ‘The Chancellor said that he was temperamentally inclined to the position that both Norman Lamont and Nigel Lawson held. He believed, however, that the party was evenly divided and that it would therefore be some considerable time before constitutional change could be achieved.’ And the two men agreed that ‘the next step in the process’ was likely to be the Treasury Select Committee’s report on the issue, expected by the end of the year.²³

Robin Leigh-Pemberton, with a life peerage in the Queen’s birthday honours, retired at the end of June. ‘It was generally acknowledged,’ noted Central Banking soon afterwards, ‘that he handed over the Bank in good shape to his successor; it now has a mandate to fight inflation and a more open relationship with the Treasury than at any time in its history.’ Subsequent views of his governorship were mixed. According to someone who worked for him, his gentlemanly approach and predominantly non-executive role made him analogous to the non-playing captain in the Davis Cup; according to someone else, who worked for him more intimately, his outstanding qualities of ‘integrity, dignity, resilience, toughness, decency, good judgement and leadership’ all contributed to a central banker who possessed ‘a deep commitment to stability’ and ‘a strategic cast of mind’ (the latter attribute often overlooked), as well as being ‘an extraordinary team builder’ and ‘an internationalist’. Somewhere in the middle, the verdict recorded in his 2013 Times obituary is perhaps about right, namely that at the end of his ten years ‘it was widely agreed not only that he had comfortably exceeded the experts’ low expectations of him but also that he had in fact coped gracefully with a series of stern challenges’.²⁴

His successor, Eddie George, was of course an altogether more professional operator, now becoming governor almost thirty-one years after joining the Bank; like Leslie O’Brien he was a lifer who had risen to the top, though in George’s case, as a Cambridge graduate in economics, he did not start from such a lowly position. Technically expert across the field (whether macro-economics or markets or financial institutions or financial infrastructure), possessing formidable policy intelligence as well as remarkable powers of concentration, a skilled chairman of meetings, principled but with a degree of flexibility if circumstances changed, not afraid of tough judgements of people, often charming outside the Bank if more seldom inside – George was in many ways the central banker’s central banker. ‘Part of his success was undoubtedly attributable to the good personal relations he established with bankers, central bankers, and civil servants,’ Forrest Capie would observe. ‘From his time as Assistant Director onwards he would drop in on his counterparts in the Treasury in the evening, drink whiskey, smoke cigarettes and talk about their respective approaches.’²⁵ Perhaps above all, no one could doubt the depth of his attachment to the institution itself – ‘You know,’ he once remarked to a journalist when off duty (relatively speaking), ‘I really love this place.’ At one of the cusp moments in its history, the Bank could hardly have been in more capable hands.

‘Would you be in favour of a stronger, more independent role for the Bank of England, together with a specific brief from Parliament to fight inflation?’ George was asked in one of his first interviews as governor. ‘Yes, I would,’ he replied, and the rest of his answer carefully set out what had become the Bank’s studiously crafted official position, a position that in essence held through the mid-1990s:

I have said very publicly, very often, that the really important thing is stability. That is the big issue and if the present arrangement can achieve that then I shall be entirely happy with that. The institutional question is subordinate to that, because if you don’t have broad public and parliamentary support for the idea of stability and actually having an independent mandate, firstly it is not likely to happen but, secondly, if you were to have it, it could prove to be a poisoned chalice, because the moment you did what was necessary you would run into broadly-based opposition.

The issue is whether having a change in the institutional arrangements would make it more likely that on balance and over time you would be more successful at controlling inflation, and therefore actually have a more successful economy. There is a presumption that if you had a mandate from Parliament to achieve and maintain price stability, properly defined, and that if you were accountable directly or indirectly to Parliament, then the likelihood is that you would be more successful. This is not because we have any particular expertise that is not available elsewhere, but because policy-making is all about balancing risks on either side.

With a clear mandate from Parliament actually to deliver price stability, one would always tend to take the risk a little bit in favour of stability and that would produce a more consistent performance over time. The other thing is that with a clear measurable mandate, and pure accountability, there would be nowhere for us to hide if we got it wrong. That concentrates the mind wonderfully and although it wouldn’t be comfortable for the Bank, it would actually be healthy.

‘I claim no monopoly of wisdom for central bankers,’ George wrote during his first month to one of his predecessors. ‘I do believe, however, that on balance and over time the cumulative decisions of an autonomous central bank are more likely to lead to stability than those taken by the government of the day whose decisions would be more likely to lean towards exploiting the short-run trade-off between inflation and growth.’ Lord O’Brien, though not disagreeing with the principle, was understandably sceptical. ‘My doubt,’ he replied, ‘is whether, when it comes to the crunch, Ministers will be able to surrender control over this important part of economic policy.’ Another sceptic, but for a different reason, was Sir John (‘Chips’) Keswick, chairman of Hambros and recently appointed to the Court. ‘I would like to make a plea with regard to the independence debate which is hard to articulate,’ he wrote to the new governor in late July:

I am concerned that the executive [of the Bank], in a very civilised way, underestimates its cohesive strength and diverse achievements. I believe it would be very foolish to abandon some parts of the Bank, i.e. Supervision, International and Industrial, as part of a package to secure independence. The quality of economic analysis, in my judgement, is only as good as the quality of real activities which it rubs against. Please do not be persuaded that apparent flying buttresses should be dispensed with – you would be less effective in the round without them.

It was a resonant plea. But when, three months later, Pennant-Rea reported to the executive about the state of play in the Court’s discussions on the independence issue, he noted ‘fairly widespread agreement that a Bank with full responsibility for conducting monetary policy might find some of its current functions a distraction, and might want to give them up to concentrate on the crucial task the Bank had been given’.

During much of 1993 the Treasury Committee, chaired by John Watts, heard evidence on ‘The Role of the Bank of England’. ‘You do take the point,’ one of the MPs, Diane Abbott, put it to George (the day before he became governor), ‘that one of the reasons people are slightly wary of the Bank of England, which has no democratic controls at all, is that you do lead relatively cloistered lives, you do earn these huge salaries and do not appear to be quite in touch with the effects of your policies on people who earn slightly less than a quarter of a million a year?’ ‘I would dispute a great deal of that with the greatest possible respect,’ answered George. ‘Our contacts with industry and business are very strong at every level, from the Court down through our agencies, to our contacts here in London. We understand just as much as anybody else the impact that it has on people who lose their homes and lose their jobs. As a matter of fact I think many of us are affected in terms of our own families. So I rather resent the suggestion that simply because we work in the Bank we are not sensitive to the impacts of the policies that we pursue.’ Later, he emphasised the importance that the Bank attached to the phrase ‘statutory accountability’ – in order ‘to try’, as he put it, ‘to get rid of this idea that independence, which is the popular name for the debate, is about a lot of appointed bureaucrats exercising arbitrary powers’; and he added that he would have no problem at all with a statutory provision giving the chancellor of the day the ultimate power of over-ride, as long as that provision was ‘open and explicit’. O’Brien did not give evidence, but his successor did. ‘I am not quite certain from your evidence so far whether or not you are in favour of a more independent central bank,’ a mildly exasperated Giles Radice observed at one point, but in the fullness of time Lord Richardson did explain that he was indeed in favour of greater Bank autonomy in the operation of monetary policy: ‘If it could be established, if it could gain a reputation and you really built through time that deeper and more intense consensus about inflation, then I think it would be vital.’ By contrast, the definitively retired Sir George Blunden stuck to his by now well-established line that the Bank already enjoyed a considerable degree of autonomy and that it might lose influence and freedom of action more broadly if it demanded that its role be rigidly defined by statute.

Two former chancellors also gave evidence. ‘I think the markets are going to feel that there is something sinister almost about any government that does not confer independence on its central bank,’ declared Lord Lawson, adding that under the present system the Bank had ‘much too easy a time’, enjoying ‘considerable influence’ but subject to ‘virtually no accountability at all’. ‘There really is no point,’ he argued moreover, ‘in saying we have an inflationary culture so there is nothing we can do. You have to ask what the best institutional arrangement is that we can have … You will not create a Bank of England which has the credibility and public esteem of the Bundesbank overnight but you have to make a start somewhere.’ His predecessor but one could hardly have disagreed more strongly. Lord Healey began his typically trenchant evidence by asserting that the fashion for independent central banks was essentially a gimmick; attacked the Bank’s recent record (not only failing to control ‘the explosion of irresponsible lending and borrowing’ that had led to the Lawson boom and bust, but also the previous September throwing away ‘a large part of our reserves in a clearly doomed attempt to save sterling’); and finished with a stirring defence of the need not to be enslaved by the markets, which ‘we talk about as though they were God in heaven, but they are numerous men in red braces in dealing rooms who talk Cockney working for a lot of men in grey suits with red bow ties’.

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

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

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

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

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

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

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

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

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

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

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

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

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

The tercentenary in 1994 was not the only anniversary that year; it was also 100 years since the recruitment of the first women to the Bank’s clerical staff. By this time there were some distinct signs of progress – Merlyn Lowther was made deputy chief cashier in 1991; Frances Heaton, director general of the Panel on Takeovers and Mergers, became in 1993 the first woman to be appointed to the Court; Carol Sergeant later that same year was promoted to the rank of senior official, as deputy head of Banking Supervision – but overall the Bank remained a very male-dominated organisation. ‘There is still a glass ceiling,’ Anne Skinner told the Old Lady in 1992 as she prepared to retire, having risen to become head of the Administration Division and also a senior official. ‘Men choose men.’ Her interviewer asked why that should be. ‘They feel more comfortable,’ was her incontrovertible reply.³³

Irrespective of gender, the big domestic picture in the 1980s and 1990s was of the Bank starting seriously to slim down. During 1979 the average number of staff employed (banking staff plus technical and services staff plus Printing Works staff) was 7,700; during tercentenary year, the equivalent figure was 4,440. Two years later, in May 1996, a lengthy paper on severance by Sue Coffey (an analyst in Personnel) provided helpful context:

As with many organisations operating in dynamic business environments, the Bank has been forced to streamline its practices, upgrade its technology and, consequently, to reduce numbers. Largely, this has been achieved through natural wastage and voluntary severance schemes, although it has been necessary to raise the question of enforced redundancies on a number of occasions – following the relaxation of exchange controls in 1979, closure of note-centres at Newcastle and Glasgow in 1981 and the closure of the Liverpool and Southampton Branches in 1987 and, of course, at present, the rationalisation of the remaining branches.

The branches indeed seemed during these decades under almost permanent review. ‘Changes by the clearing banks in the way in which they handled notes, involving in particular the increased deployment of used note sorting machines, were beyond the Bank’s control,’ Blunden pointed out in 1986 to a union representative, adding that ‘it was an unfortunate fact of life that the present areas of growth in the Bank’s work were concentrated in the regulatory and supervisory realms and were essentially London-based’; three years later, he observed to senior colleagues that ‘our banking work there was declining, partly because an increasing amount of Government work was put out to tender’, leading in turn to ‘over-staffing’; and in 1996, the year that Newcastle was closed, George explained to the chancellor how the Bank was ‘rationalising’ the role of its branches: ‘They were pulling out of banking business and their role in the note issue would be substantially reduced. However, he wanted to strengthen their role in gathering economic intelligence. The net effect would be to reduce significantly staff and office space in the regions, but the number of agencies might be increased.’ In London itself, an emblematic moment was the complete departure by 1992 of the Accountant’s Department – following years of falling numbers because of computerisation – to a new home in Gloucester, leaving just the odd Bank outpost at New Change. More generally, what had traditionally been an organisation long in tooth – prizing above all else the wisdom of practical experience and institutional memory – became during this period distinctly less so. ‘The Bank has experienced a significant reduction in its older workforce in the last few years,’ noted a senior executive in May 1997, offering a twofold explanation. ‘Firstly, the Bank needed net reductions in staffing to cope with reduced workload in some areas (notably exchange control and gilt registration). But, secondly, the skill mix required in the Bank was changing quickly. Many of those who had been working here for a large number of years were not equipped with the kinds of analytical skills which are in the greatest demand across the institution at the present time.’³⁴

Little of this was brilliant for staff morale. Back in September 1983, shortly after becoming governor, Leigh-Pemberton had a lengthy encounter with Ray Shuttleworth of the Bank of England Staff Organisation. ‘Although his manner was entirely affable,’ the note for record observed of BESO’s man, ‘he was unable to avoid a slightly didactic approach, with a good deal of finger-wagging.’ As for substance:

Shuttleworth freely acknowledged the difficult position of the Bank with regard to cash limits [imposed by the Treasury on public bodies since 1980]. Nevertheless, many Bank staff felt that over the last three or four years their pay had fallen noticeably behind that of their traditional analogues. He thought that middle and senior management were particularly affected by this. As a result, considerable resentment was building up. On the other hand, Shuttleworth admitted that the Bank remained an attractive employer in today’s circumstances.

Tellingly, he added that he ‘regretted the increasing tendency for the Bank to act not as one integrated institution, but as a series of individually-directed components’.

More broadly, with promotions blocked and pay differentials (especially with the Treasury) eroded, just as the City at large was starting to revel ostentatiously in serious money, the Bank in the mid-1980s found itself the subject of some rather fundamental soul-searching. Admirably the Old Lady published during these years a trio of notably objective assessments.

‘Few of us in the Bank, if we are really honest with ourselves, have much to complain about with regard to the dissatisfiers, such as salary and working conditions,’ reflected Mark Stephenson in December 1984. ‘The Bank, even in these days of public sector wage restraint, have always been a good employer, endeavouring to pay us fairly for what we do and to take a keen interest in our welfare.’ Even so, he accepted that ‘the log-jam in promotions’ was having detrimental consequences for ‘ambitious people’ at the Bank: ‘They see no prospect for self-realisation because there is little recognition of achievement nor evidence of advancement. This has a counter-productive affect because these people no longer approach their work in a creative manner. They begin to tick over, doing just enough to stay out of trouble but never injecting any new ideas into the job. Confronted with the prospect of waiting many years until the next promotion, there remains little incentive to work harder because, no matter how good your reports, promotion will not come until you reach the median age for someone of your potential.’ A year later the magazine’s editor, David Pollard, declared that, in comparison with the 1960s, ‘there can be little doubt that the bulk of the staff are less satisfied with their lot now than they were then’; and the final paragraph of his editorial had a particular personal resonance:

Perhaps the greatest change that I think I can see is the loss of the pride, if that is the word, on the part of the staff that my father felt in working for the Bank. His Bank was more than adequately resourced, its image in the outside world was impeccable, its staff were molly-coddled and therefore its greatest ambassador. The leaner, meaner Bank we know today seems somehow to have jettisoned the staff’s goodwill and pride in the establishment, the sense of humour of old has been replaced by cynicism. But lean, mean commercial companies, driven by the profit motive, do increasingly imbue their workforce with a corporate loyalty (and not just in Japan); it can be done, it is imbued professionally and presumably it is cost-effective, so when will we see it again?

The third of the trio was Michael Pickering, whose letter to the Old Lady in March 1986 was sent from the Register Office. Not only did he deny that ‘the gravy train’ had ‘hit the buffers at 50 mph’, as opposed to having ‘undoubtedly slowed down’, but he called on fellow-staff to stand back a little as they contemplated their situation:

Unlike a large proportion of the working population we don’t have to pay the full market rate for our housing loans; unlike teachers we don’t have to suffer abuse from a hostile press and an uncomprehending public for demanding a reasonable salary for a thankless task; unlike transport workers and nurses in casualty wards we don’t spend much of our working time in fear of being beaten up; unlike miners (and others) we aren’t at risk of industrial disease; unlike workers in private enterprise we don’t live in fear of being eased out of our jobs through takeovers or through a simple failure to deliver a maximum performance at all times.

‘Yes – we sometimes think about the outside world,’ he concluded in Eliotic mode, ‘but not all that often, because “human kind cannot bear very much reality” and if we thought about it all the time we should probably cease to function.’³⁵

Over the next seven or so years, neither Leigh-Pemberton as governor nor Blunden and George as successive deputy governors were inclined to pursue a major internal shake-up. But in 1993, with the arrival of Pennant-Rea as a deputy governor eager to exercise an outsider’s dispassionate perspective, that changed. In August, barely a month after starting, he shared his early impressions at an Executive Committee (EXCO) meeting. He ‘wanted to avoid giving the impression to the Bank’s staff that the Executive was only interested in shrinking the Bank’; but, he went on, ‘the ratio of support staff to total staff in the Bank seemed very high’, given that he would have expected a figure like 15 per cent though it was in fact 30 per cent; and he noted that he ‘found the Bank’s approach to surplus support staff hard to understand’, in that ‘we were honest in identifying staff who were not needed, but did not then ask them to leave’.

That autumn saw two significant papers, in the context of an ‘away weekend’ having been arranged by Pennant-Rea for later in the year to discuss the Bank’s organisation. One, co-written by Pennant-Rea himself, began with some striking assertions:

The Bank has long seen itself as a centre of excellence, whose comparative advantage is partly in market expertise but also in intellect. That requires staff who are bright and versatile. Such people are in short supply and the subject of fierce competition. Moreover, in our recruitment of graduates we have narrowed the field by concentrating mainly on economists rather than on the full range of university disciplines.

Apart from the narrowing of our catchment area, three things have changed recently. First, our salaries are increasingly uncompetitive, certainly with the best firms in the City. Second, new graduates have a new attitude: fewer now look for long-term careers. The increase in job-hopping means that the Bank’s offer of job security is no longer the pull that it used to be. Third, significant over-staffing in the past enabled the Bank to cope with relatively few people of high ability and a large number of moderate performers. Today, the Bank is leaner: the fewer the people, the better they must be.

The paper also offered a cultural analysis. ‘Many decisions’ were ‘routinely taken at a higher level than is actually necessary’; it was ‘still far too common’ for individuals ‘to produce pieces of work without having much idea of the underlying purpose or, indeed, ever getting a clear feel for how that information is used’; and ‘the balance between praise and blame is wrong’, attributable partly to ‘the Bank’s traditional concept of excellence, in which mistakes are not easily tolerated and perfection is taken as the common currency’. The other paper was by someone, Pen Kent, who was wholly an insider, albeit a notably cerebral insider:

The Bank must be as near a perfect example of a classical bureaucracy in the jargon of management theory as it is possible to create. Bureaucracy has become a term of abuse, but it need not be. It embodies values and behaviours which have a reason peculiarly apt for the Bank because of its role. These include a hierarchical structure calculated to produce consistency of product and accountability. It does not do for a public body for example to seem arbitrary in its application of regulation. This concern, taken to an extreme, can lead to upwards delegation so that only the seniors have the power to communicate with the outside world. Do you recall the ban on anyone below the rank of Zone 1 (b) signing a letter leaving the Bank, which only ended within our own career span? Another value is that of perceived equity of treatment for all Staff – to protect individuals from favouritism or victimisation – hence the elaborate rituals of appraisal, now called assessment. This combination of hierarchy and equity makes our staffing arrangements relatively inelastic, as we are now finding out to our cost. It is possible that a culture change could deliver more efficiency gains than any reorganisation.

‘However,’ concluded Kent, ‘our international stature as a central bank far exceeds the UK’s global weight. We must be doing something right!’³⁶

The brainstorming weekend took place in December at Ashridge Management College in Hertfordshire; over the next few months, three working groups, reporting to Pennant-Rea, thrashed out details; in April came the announcement to staff; and from 4 July 1994 – just over three weeks before the tercentenary – the Bank had a new structure, amounting to the most significant internal shake-up since 1980. In essence, its activities were now divided into two broad wings, supported by a central services area. One wing was concerned with monetary stability; the other wing was concerned with financial stability, including the supervisory aspect; and the casualty was the International Divisions, with some of their members allocated to the two new wings, but also involving a degree of ‘letting people go’ hitherto not seen at the Bank. Undoubtedly it was Pennant-Rea who particularly pushed through the restructuring, but it is likely that he had the wholehearted support of the governor. ‘There has for many years,’ George had observed in 1992, ‘been something of a struggle to persuade the people in International Divisions of the relevance of much of their work to the work of the rest of the Bank. This is, in my view, partly because historically the work has been to study overseas economies etc almost for their own sake.’ Pennant-Rea himself told an interviewer, shortly before the restructuring took effect, that there was a threefold rationale:

One of the things that struck me when I arrived – and has struck other people as well – is that quite a few people here do not see the connection between what they do and the Bank’s ultimate purposes. I think the Bank’s employees would like to know where they fit into its ultimate goals. So that’s one important focus.

Secondly, we will bring the operational work and the analytical work closer together. Very often you have had people doing things – say in monetary policy or banking supervision – and some distance away you have a bunch of people of shouting ‘Watch out for this!’, ‘Watch out for that!’ These are the analysts looking at, say, the economic background; and the distance between them and the operational people means there is a risk that their words get lost in the wind. As far as one can, one needs to get them working close together so that the operational person can turn to the analytic person sitting at the next desk for his views. Those links are there in the reality of our work and we needed to find ways of making them as close as possible in the structure of the organisation.

Thirdly, we will make sure that we have the staff – numbers and quality – in the right places to match the demands made on them. One of the features of a well-established, multi-winged bureaucracy is that you tend to get an imbalance between resources and needs. This is difficult to change within an existing framework, but once you shift that framework, you have a once-in-a-decade opportunity to get the balance right.

Sadly or otherwise, an in-house foreign office no longer had a place in the trimmer, more focused Bank of its fourth century. ‘It will be some time before the effects of the Ashridge restructuring become clear,’ noted the Financial Times’s Peter Norman on tercentenary day. ‘But it would be unwise to assume it marks the end of change at the Bank.’³⁷

Would there be parity of esteem between the two wings? Pennant-Rea’s interviewer put it to him that ‘all the glamour goes to people involved in monetary policy and all the brickbats to people in supervision’; but the deputy governor was adamant that ‘the two sides will be seen as of equal importance in terms of numbers, intellectual content and public profile’, adding that ‘there is no sense in which one is the Cinderella’. Within weeks of the new structure becoming operational, EXCO had a revealing discussion. Expressing concern about the possible creation of ‘two banks with little mobility between them’, George was worried about a situation in which graduates recruited as economists would tend not to move from monetary analysis to financial stability, while non-economist graduates (by this time usually less than half the annual graduate intake) would likewise tend not to move in the reverse direction. ‘Mr Sweeney [Tim Sweeney, management development manager] said this was the reality already. Many economists, especially MSc economists, already wish to work only in areas involving primarily economic analysis.’ On which Mervyn King, the executive director in charge of the monetary analysis division of the Monetary Stability Wing, commented: ‘The challenge was for the Bank to motivate them [the graduate economists] to be interested in central banking through the work that they were given. At present the prospect of making what was perceived to be a big switch from economics to other work was terrifying for many junior staff.’

For all these understanding words, King himself remained uncompromising about what he wanted in his own patch. ‘A priority would be to recruit quality from outside,’ he told Pennant-Rea later in 1994, adding that in terms of the initial two-year training period for graduate recruits ‘he would also like people to spend more time in his area when they first joined the Bank in order to properly consolidate what they have learned at University’, while ‘looking ahead to the future, he said that he would like to recruit more PhD students’. Two years later saw another telling moment:

Mr King noted [at a meeting with the governor and deputy governor] that he was aware that some people in Monetary Analysis were thought to be arrogant and did not communicate adequately with the Bank. Allied to this was a reported feeling in some quarters that Monetary Analysis is a clique. He felt that such arguments were exaggerated …

Mr King said that he was still worried about any plan to bring substantial numbers of non-economists into FSW [Financial Stability Wing] who would have no Bank-wide utility. He firmly believed that economics was the right qualification for people joining both wings of the Bank.

Undeniably the economists were buzzing in the mid-1990s. Among those recruited in 1994 was the former Guardian journalist and future government minister Ruth Kelly, who for two years was part of the team compiling the quarterly Inflation Report. ‘Being offered a job at the Bank was an unprecedented opportunity,’ she recalled in 2002. ‘I was hugely impressed with the rigour with which Bank staff approached issues – very different from the way journalists approached them.’³⁸

Tercentenary celebrations and growing influence notwithstanding, these were not happy times across the Bank as a whole. ‘EDP Talks Break Down’ was the main front-page story in March 1994 in the first issue of a new staff paper, The Bank Fortnight, detailing how BIFU was that week balloting the Electronic Data Processing staff on strike action over the Bank’s proposals for a new pay structure. In the context of management having written to each member of EDP staff, ‘inviting them individually to indicate whether they were willing to accept the Bank’s package and whether they wished this to be reflected in March salaries’, a BIFU press release accused the Bank of ‘living in the 17th Century’. A year later the Court formally endorsed an end to the traditional approach to personnel matters. ‘The shift from a 1950s paternalism (with its implication that there was automatically a job for life) has left a vacuum, with staff expectations that are inconsistent with 1990s economic realities,’ observed Pennant-Rea in the key paper. ‘There is thus some distrust of the Bank as an employer.’ And: ‘Post-Ashridge changes have brought to the surface some sizeable staff mismatches, with more limited senior opportunities; a move away from paternalism; the absence of effective management development programmes; continuing relatively low staff turnover but above-average absence rates caused, in part, through additional stress; and inconsistent messages to staff.’ What was now needed, in order ‘to attract, retain and motivate quality people’ – in a larger context in which ‘the majority of staff cannot have, and should not expect to have, continuous advancement over 30–40 years’ – was ‘a commitment by the Bank instead to help the continuous personal development and re-skilling of staff’.

Soon afterwards, one of the senior banking supervisors, David Swanney, had a heart-to-heart with his chief, Brian Quinn:

He [Swanney] said he thought the concept of the reorganisation of the Bank was good, but had not been well handled, particularly the treatment of people; and he mentioned the treatment of some long-serving staff as having been particularly brutal. He said that in his experience people were complaining but still got on with the work. Nevertheless, we could no longer rely upon their commitment …

There had been too abrupt a change of culture from the old Bank to the new approach, by which he meant that people had been obliged to accept a very rapid switch in their career expectations and outlook. He thought this might have been introduced more gradually …

He said he was acutely aware he was not an economist, not because he felt that it exposed any great deficiency in his ability to do his job, but really because he thought it might cause an obstacle to moves in other parts of the Bank in the course of his career. He asked whether there might be any short courses available for people like him so that he might do something to fill in the gap.

At the heart of the new personnel strategy was internal appraisal. ‘We managed,’ the governor was informed in June 1995 after a negotiated settlement with BIFU, ‘to get the union to “accept” that the principle of merit bonuses will be a main element of our remuneration structure from now on’; though the following February the new deputy governor, Howard Davies, was lamenting the lack of frankness in performance appraisals and noting how the recent round of comments on the forms ‘suggested that all was for the best in the best of all possible worlds, and that the performance of HoDs [Heads of Division] was almost entirely even across the Bank’.

Another difficult area in this changing environment was the delicate and emotional issue of voluntary severance. ‘Many staff (particularly those approaching mid-career) have factored the expected severance windfall into their long-term planning,’ observed Sue Coffey in May 1996; she also highlighted ‘the reactions of those satisfactory and good performers who have been refused severance’, even leading to ‘protracted depressive illnesses brought on by the refusal’; and finally, there was what she called the ‘morbid fear of redundancy’, or in other words ‘the cultural difficulties for some staff who, even with the support of the Transition Centre, an exit secondment and the severance package, are unwilling or unable to accept leaving the Bank’. A Darwinian might have argued that the underlying problem for those unfortunates was that they had existed too long in an unnaturally sheltered, monocultural environment. ‘What I found disappointing,’ recorded Davies later in 1996 after a visit to the soon-to-close Birmingham branch, ‘was that most of the staff, even long-service career staff, had done no external training whatsoever’ to improve their subsequent job prospects. And he reflected: ‘I imagine that this is a side-effect of the “cradle to grave” proposition which the Bank has made to staff in the past.’³⁹

It was an indication of how seriously the Bank took all these related matters that in 1995 it commissioned its first comprehensive (though excluding the Printing Works) staff attitude survey. The process, undertaken by International Survey Research Ltd, began in May with fifty-nine diagnostic interviews with a cross-section of staff. Some of the reactions were positive:

The re-structuring has given people a much clearer focus on their own and the Bank’s roles.

The Bank has a very collegiate culture. The atmosphere is a supportive, co-operative one, with very little backbiting or politicking.

The Bank is still the most amazingly generous employer, and in that respect I’m very pleased to work here.

Staff are still delivering the goods to a very high standard. If something needs to be done everybody will rally round.

This is an exciting time for the Bank. We have a prominent role in influencing policy, and we seem to be getting it right for a change.

The great majority of quoted reactions, however, were at the more negative end of the spectrum:

The Bank’s real structure is a number of fiefdoms. The reorganisation hasn’t changed that.

What we do in the Bank is conceptualise, analyse and criticise. What we don’t do is do. We’re reactive, not proactive. We can’t institute change and we can’t manage it.

Staff are now very cynical. The traditional Bank culture is being eroded but nothing positive is being put in its place.

The problem isn’t the ‘reactionary old guard’. Many of them genuinely care about their staff. The problem is the ‘uncaring new guard’. Most of them don’t give a damn.

The Bank is very hierarchical. People are sometimes inhibited from responding to senior management by a feeling that to do so would be disrespectful.

The smallest possible minutiae are passed right up the line. Responsibility rests entirely at the top.

If you want to retain capable people in a Mateus Rosé structure you have to delegate authority.

Everything the Bank does is geared to the Officials. The Officers are an after thought. [The officials/officers terminology was a short-lived replacement for the previous distinction between principals and clerks.]

Staff aren’t recognised for good work. They’re not penalised for bad work either. It doesn’t matter what you do really.

The pyramid has narrowed, but we still have too many people in senior positions who are past their sell-by date.

The Bank is seen to have acted in bad faith by abandoning the 40 year career.

We’ve managed to keep people so far by a mixture of job interest, career mobility and camaraderie. But we’re now dealing with Thatcher’s children. We must find some more money from somewhere.

We give people generous appraisals, and then fail to meet their expectations due to budgetary constraints. We therefore have a morale problem which is entirely of our own making.

Nobody is ever praised. We never say ‘thank you’. It’s alien to the ethos of the Bank.

We’ve had 15 years of death by 1,000 cuts. It’s bitten deep into the psyche of the Bank. Morale is shot to pieces.

A final comment was, in its way, perhaps as damning as any: ‘I don’t boast about working for the Bank as much as I did.’

Then later that summer, between late July and early September, came the full-scale survey, with 3,010 questionnaires sent out and 1,911 returned. What emerged, as summarised in October 1995 by ISR’s managing director, Roger Maitland, was a mixed and even contradictory picture. Seven areas coming out broadly on the plus side of the ledger were followed by nine that clearly raised troubling issues:

Employees are proud to be associated with the Bank.

They understand the Core Purposes of the Bank and believe that it is highly regarded by its customers.

Downward communications are rated relatively favourably.

Divisional management are viewed in a relatively positive light.

Employees are involved in their work and their contributions are recognised.

Employees understand how their job performance is assessed and believe that it is assessed fairly.

Pay and benefits are responded to favourably.

The Bank is seen as being poorly managed and as lacking leadership and direction.

Teamwork across the Bank is seen as being poor, and employees are not well informed about the work of other Divisions.

The culture of the Bank is seen as being ‘closed’ and as resistant to challenge and innovation.

Bureaucracy is felt to be rife and decision-making to be too slow.

There is a lack of delegation and employees feel that they are not respected.

Technical skills are valued at the expense of people management skills.

Performance management is felt to be poor. Neither superior performance nor expertise are adequately recognised.

Opportunities for either personal or career development are seen as being very limited.

Confidence in the future is low, and senior management are felt to be doing a poor job of managing change.

Tellingly, only one in six believed that action would be taken to address the issues raised by the survey; as for those replying in the affirmative to the question of whether they thought that morale could be said to be good across the Bank as a whole, the figure was a devastating 4 per cent.

Later in October, an early high-level reaction to the survey came from King, who had seen a disaggregation of its results:

There are significant differences between Officials and Officers … What is striking is that in both wings [monetary stability and financial stability] those primarily involved in analytical jobs respond much more favourably, especially towards ‘change in the Bank’. The least favourable responses come from EDP staff, Property Services staff, and Bank Officers generally. This is not surprising. Since Ashridge we have done nothing on pay and career structure for Officers. And the Bank has been contracting steadily since exchange controls were abolished in 1979. There aremanagement problems in the Bank … But I feel the impression given to Court that the morale position is uniform across the Bank is in fact misleading.

The final sentence of King’s memo drew short shrift from Sue Betts, a senior manager in HR. ‘This is pure rubbish,’ she scribbled on her copy. ‘Only 76 people commented favourably on morale – even if all were Officials (the only group M. is interested in) the result would still be very bad indeed.’ Her broad thrust was surely correct: the following month, at a meeting with Davies to discuss the survey, the heads of division ‘described the reactions they are encountering from staff – fatigue, resistance, distrust etc’. What was to be done? ‘There are no easy, pat answers,’ Davies confessed in the Old Lady the following spring. And though he took comfort in the fact that ‘we are not alone’, given the ‘mounting evidence that employee satisfaction across the UK has declined markedly in recent years’, and also pointed to the irrefutable truth that ‘by most external standards the Bank of England is still a very stable culture, with a great number of long-serving staff, and relatively low turnover’, he did not seek to deny that ‘a dangerous gap has opened up between the managers and the managed in the Bank, a gap which urgently needs to be closed’.

That would be the challenge ahead – a challenge in an environment in which, as Davies succinctly put it, ‘the number of essentially administrative and executional jobs is on the decline, while the number of analytical occupations is rising’. Yet, however that challenge played out, the Bank would still be the Bank. A small but emblematic issue arose in February 1997: what was the Old Lady’s attitude to be towards Red Nose Day? ‘The Governor and Deputy Governor agreed that the Bank could not be involved in an official capacity.’⁴⁰

Back in the early 1990s, the collapse of BCCI in July 1991, followed in October 1992 by the Bingham Report, inevitably had regulatory-cum-supervisory implications. ‘Alertness is something which the Bank has had cause to address,’ acknowledged Leigh-Pemberton immediately after Bingham. ‘The criticisms of lack of vigour in pursuing signals of possible fraud have been well publicised,’ he went on to note in his Mansion House speech, ‘as I trust has our response involving establishing a Special Investigations Unit and a Legal Unit under seasoned experts recruited from the professions; strengthening our capacity for on-site examination; enhancing the training of our supervisors; increasing the use we make of the Board of Banking Supervision; and participating in the new machinery which the Chancellor has set up to co-ordinate responses to fraud amongst supervisors, and other prosecuting authorities.’

Would it be enough? ‘Supervision: recognise need for open financial centre with sensible regulation, but does not want crooks or scandal,’ was the crisp summary in September 1993 of Kenneth Clarke’s views to the governor, while three months later George and Quinn were at the Treasury to discuss a recent study it had undertaken on banking supervision. George moved quickly on to the front foot. He was ‘surprised that the Bank was characterised as being entirely reactive’; he observed that the study failed to emphasise ‘the dogs that did not bark, such as the LDC debt crisis’; he argued not only that ‘not every bank failure should be seen as a scandal’, but that ‘expectations were too high, the question was how to anchor them’; while as for the Bank’s style of supervision he pointed to how, inescapably, ‘there was a conflict between the need for confidentiality and the need for accountability’. There ensued some dialogue with the Treasury’s Rachel Lomax. She ‘said that there remained a perception, stemming from the Bank’s history, that the Bank was the head of the City club’; George ‘denied that the Bank was protective of banks’, adding that ‘the Bank’s relationship with the commercial banks was quite different from a decade ago’; with which she ‘agreed’, noting that ‘there was now very limited scope for suasion’. Discussion then turned to the balance between the formal and informal approaches to supervision, starting with George:

The Bank favoured the supervisory approach, rather than the regulatory approach, and this had been endorsed by Bingham. What the Bank had learned from the BCCI episode was that the informal system worked well where a basis of trust existed, but that the Bank had to be very sensitive to when that relationship had broken down, and to maintain an ability to change gear. But the trend was towards regulation.

Mr Quinn said that the Bank was now more systematic in distinguishing between whether or not its powers were exercisable and whether they should be exercised. This meant that the Bank thought very carefully about whether it was deliberately pursuing a voluntary remedial path, rather than a path involving using its powers.

Mrs Lomax agreed that she had seen a pronounced change in the Bank’s attitude. She thought that there had been a distaste for using powers in the mid-80s.

The meeting ended with the question of the extent of the Bank’s responsibilities:

The Governor expressed his concern about the trend towards more consumer protection legislation. In the banking industry it was leading to the expectation that banks would never fail. Finance was a risk business. The degree of protection given to customers, however, was a political judgement. The Bank’s role was to point out that there were two sides to the regulatory ledger. Mrs Lomax agreed. She said regulation was increasingly governing the relationship between a bank and its customer, but the Bank’s real interest was in minimising systemic risk. Mrs Lomax asked whether, if the Bank wished to avoid retail regulation, it would wish to supervise only big banks. The Governor said systemic problems could well start in small banks. The issue was the scope of supervision.

All of which was manifestly sensible and proportionate, but of course, out there in the global financial world, the pieces kept moving. ‘Good progress is being made in capturing and confining the risks which arise from derivatives operations,’ Quinn in July 1994 reassured the Annual Managed Derivatives Industry Conference in New York. ‘The supervisors and regulators in the main centres are working hard in specialised groups to find solutions that deliver regulation without strangulation. Perhaps equally important, the market is developing its own form of safeguards by insisting on greater disclosure and transparency, improved accounting rules, collateralisation and margining requirements that protect both them and the ultimate users of the product.’ And he concluded that ‘the earliest apprehensions about derivatives have been replaced by a methodical analysis of the possible sources of difficulty’.⁴¹

Yet should the Bank still be undertaking banking supervision? In the twin context of BCCI and the gathering independence debate, that was becoming by 1993 an increasingly asked question. Taking evidence that year, the Treasury Select Committee heard some views arguing in the negative. ‘The problem about having supervision,’ reflected Sir Peter Middleton (former permanent secretary at the Treasury, now deputy chairman of Barclays), ‘is that it detracts from the Bank’s credibility as a counter-inflationary body because people will always think it is more interested in maintaining the banking system than it is in pursuing its own counter-inflationary objectives’; according to the former chancellor, Lord Lawson, another financial scandal like BCCI could ‘undermine the respect and authority of the Bank of England in the eyes of the financial markets and public opinion in general, and this respect and authority is important to the successful conduct of monetary policy in the real world’; while even Quinn conceded that ‘if the central bank as supervisor gets a sustained hammering in the public domain for its activities there, then that cannot help the authority of the institution’. In November, well aware that the Treasury Committee was considering its report, George used the second of the governor’s LSE lectures – a year after Leigh-Pemberton’s important one on price stability – to press the case that the close, two-way interdependence with monetary stability meant that the preservation of financial stability was inevitably a matter of close concern to a central bank. Moreover, he implicitly argued, no one could do it better:

The central bank has a vital duty to support the soundness of the financial system. We are clear about our objective: it is not to prevent each and every failure, but to ensure that, when a systemic threat arises, it is dealt with quickly and efficiently. We have the ability to do this because we know a lot about all the institutions and markets through which threats can materialise. We get our information largely from the process of supervision – from being a direct supervisor ourselves, and through our involvement in the markets, and through our contacts with other supervisors at home and overseas. And, in our central banking role we have the resources to do this job – not just money, but also the technical skills to manage out difficult positions, and the reputation for impartiality which enables us to co-ordinate commercial solutions.

The following month, the Treasury Committee more or less agreed that the Bank should not go down a Bundesbank-style road. ‘On balance,’ stated its report, ‘we conclude that there is no overwhelming case for separating out the responsibility for prudential supervision to a separate body’; and the report added that this was likely to remain its view ‘even if the Bank gains greater autonomy in monetary policy’. That, however, was far from ending the debate. ‘A super supervisor?’ was the Economist’s headline in May 1994, noting the publication of a paper from the Centre for the Study of Financial Innovation with a double proposal: the Bank to give up its supervisory role, concentrating instead on monetary policy; and a super-regulator to be created, known as the Financial Services Supervisory Commission. For the Bank’s 250 supervisors, overseeing the operations of 488 domestic and foreign-owned banks in the UK, the premium on ‘alertness’ merely grew by the day.⁴²

Such was the state of play at the point of the tercentenary, and in the event the next financial scandal, intimately affecting the Bank, was not long in coming.⁴³ ‘Peter Baring, Andrew Tuckey and Peter Norris met the Deputy Governor, Mr Quinn, Mr Foot and Mr Reid on Friday 24 February at 12.00 pm to make them aware of a major problem in Barings’ Far East operation which had emerged over the previous 24 hours,’ recorded the deputy governor’s office in early 1995. ‘Mr Baring said that if the group survived, it would need substantial recapitalisation,’ while ‘Mr Tuckey noted that the rest of the business was in very good shape.’ In essence, the unwelcome news that the men from Barings imparted was twofold: first, that a Barings derivatives trader, operating from the Singapore futures exchange (SIMEX), had run up huge, fraudulent losses, possibly of at least £400 million; second, that Barings itself – after an impeccable, blameless 105 years since the previous Barings crisis (governor Lidderdale and all that) – was in deep trouble. George had just left for a skiing holiday in France, but at once flew back. On Saturday morning, he spoke to Derek Wanless ‘to ask if NatWest were interested in buying Barings’, but ‘Wanless said the answer was no’; he then ‘asked if NatWest might be prepared to put up some equity along with others’, to which ‘Wanless said it would depend on the deal.’ George and his colleagues then spent most of the day arranging for a mixture of clearing bankers and merchant bankers to assemble at the Bank on Sunday the 26th to see if any collective rescue could be arranged of the City’s oldest merchant bank, if no longer its most important. The deadline set for any rescue was 10 pm that Sunday – before the Japanese market, in which most of Barings’ positions were open, began trading again.

An epic day unfolded, mainly in Threadneedle Street but including occasional gubernatorial forays outside. At the first, calling on the chancellor around lunchtime, George took the line that although it would be ‘a big shock to the markets’ if Barings were not bailed out, nevertheless the risk in his judgement was not systemic – to which Clarke agreed. Would Barings be bailed out? As early as mid-morning, David Scholey was observing to the governor, after a lengthy meeting of the proposed consortium of supporting banks, that ‘as the positions were so big and as they were open-ended, it would be very difficult to finalise the deal’. Essentially, that remained the case throughout the day and into the evening. Meanwhile, hope flickered that the Brunei Investment Agency might perhaps be willing to cap Barings’ liabilities – before eventually at around 8.30, an hour and a half before the deadline, the news came through that Brunei was unable to help, on the understandable grounds that the envisaged deal was ‘too complicated, involving too much risk and with too little time’. By 9.45 the governor was at No. 11, informing Clarke that it had proved ‘too complicated’ to try to save Barings in the time available. They agreed that George should appear on the Today programme at about 7 the following morning; and the governor said that he would emphasise ‘the control failure’.⁴⁴

Next day, George duly gave a round of media interviews insisting that the problem was specific to Barings and that that bank’s failure posed no systemic threat to the banking system as a whole. Should the Bank have done more? William Rees-Mogg in The Times on Tuesday thundered about its ‘grotesque timidity’, arguing that it had ‘avoided risking at most a few hundred million pounds’, whereas ‘the credit of London, which has been put in jeopardy, may be an unquantifiable asset, but it must be measured in hundreds of billions of pounds of Britain’s future earning power’. He concluded gravely: ‘The Bank of England exists to protect British credit. In this instance, it has failed in its prime duty.’ The same paper’s Graham Searjeant and Anthony Harris took a similar line, as did its leader writer; but John Plender in the Financial Times persuasively countered the Bank’s critics:

It is, of course, a case of mistaken identity. A City whose good name has been so dreadfully traduced no longer exists. London’s competitive advantage in international finance has little, if anything, to do with the older cohorts of the merchant banking fraternity who financed world trade in the 19th century. For the best part of two decades the powerhouse of financial innovation has been located largely in the foreign banking and securities community …

Moreover, he added, ‘in the absence of a club, successful lifeboats are not easily launched’. By the end of the week there was widespread agreement that George had got it right. ‘The external impact of the crisis has so far been successfully contained, vindicating the decision not to rescue Barings,’ the Independent noted on Saturday, while next day the Sunday Telegraph’s Bill Jamieson argued that ‘if the impression got around that domestic banks could be counted on to be bailed out by their central bank, that would suggest a playing field so tilted as to drive out every non-resident bank’. And, he asked rhetorically, ‘where would the City be then?’⁴⁵

By this time, not only had the ‘rogue trader’, Nick Leeson, been identified and remanded, but a buyer, the Dutch bank ING, had been found for Barings, priced at an attractive £1. In the course of that process, George firmly declined an invitation from ING’s advisers, Flemings, either ‘to take on the risk of any potential subsequent claims from SIMEX or the Japanese’ or ‘to pick up (in an indemnity fashion) some form of capped liability in relation to possible claims from Tokyo and Singapore in order to give their client comfort’; but quietly and behind the scenes the Bank did take on Barings’ swap exposures and some custodial responsibilities, as well as providing liquidity for ING to acquire Barings. A fortnight or so after the main drama was over, George spoke – at length and privately – at the annual dinner of the Cornhill Club, a City-based dining club. ‘It has been a torrid time,’ he acknowledged. ‘Emotions have understandably run high and a good deal of uncertainty has been generated.’ Why had the Bank ‘been unable to orchestrate a rescue by the rest of the banking community’? The answer, he asserted, was not any waning influence on the part of the Bank, but rather because commercial banks ‘do not easily act against their perceived commercial interest just because the Bank of England asks them to’. ‘That probably always was true,’ he added. ‘It certainly is true. And long may it continue.’ Why, then, did not the Bank ‘ride to the rescue itself’, in other words as lender of last resort, or ‘persuade the Government to do so’? ‘No financial institution has a right to support,’ the governor declared. ‘It is deliberately intended that there should be constructive ambiguity about whether or not in any particular situation we would be prepared to support any particular institution. If that weren’t the case, and any institution felt that it was guaranteed, then that would introduce, of course, a great deal of moral hazard into the monetary system.’ Accordingly, given that the specific ‘solvency problem’ faced by Barings was in the Bank’s judgement ‘unlikely to have very major systemic risks’, he and his colleagues ‘could see no basis for suggesting to the Government that they should write the blank cheque that would have been necessary to produce the cap on the liability’. And, he went on, ‘whatever you may read in some newspapers, the knock-on effects were in fact both limited and short-lived’. George finished by looking ahead: ‘The shock of Barings’ failure will take time to pass. But in the end the reputation and the prosperity of London, and of the British banks operating out of London, will depend much more fundamentally on the quality of the services which they provide.’⁴⁶

He was speaking on Thursday, 16 March. Three days later, a Sunday tabloid’s lurid, but in the circumstances irresistible, headline – ‘The Bonk of England’ – was accompanied by the revelation that a journalist, Mary Ellen Synon, had been smuggled into the Bank under an assumed name and that she and the deputy governor had made love on the carpet of the governor’s dressing room. Briefly it seemed that Pennant-Rea might survive, as the quality papers temporarily declined to touch the story; but then the Financial Times gave it a seven-column splash, and very soon the deputy was penning his resignation letter. ‘Montagu Norman,’ he reflected, ‘once said that “the dogs bark, but the caravan moves on”’ – though quite what the great defender of the Bank’s honour would have made of it all rather beggared belief. Brian Quinn briefly stepped in as acting deputy governor, until the appointment of Howard Davies, director general of the CBI and already in his mid-forties a man for all seasons, having worked previously in the Foreign Office, the Treasury, McKinsey and the Audit Commission. An almost absurdly classic meritocrat – son of a publican; Manchester Grammar School; Oxford – he had been, he told Ruth Kelly in an interview for the Old Lady before he took up his position in September 1995, ‘circling round the Bank for the past twenty years’.⁴⁷

The Pennant-Rea episode was particularly ill timed. The Bank’s decision not to bail out Barings may have been vindicated, but there remained the troubling, high-profile matter of whether in the first place it had been negligent in its supervisory capacity. In early April, barely a month after the spectacular collapse, George faced aggressive interrogation from the Treasury Committee’s Brian Sedgemore about how subsidiaries of Barings had lent £330 million of Barings’ own funds to Baring Futures in Singapore:

Am I not right in thinking that if you transfer the whole of a company’s shareholders’ capital, the Bank of England has to be notified?—The Bank of England has to be notified as a matter of law if a company wishes to advance more than 25 per cent of its capital to a single counterparty.

My question, Mr George, is this: were you notified?—We did not know as of 27 February that [£330 million] was advanced this way.

So effectively you are saying to the Committee quite honestly that you have a supervisory system which is incapable of informing the Bank of England that a sum in excess of the whole of the shareholders’ capital has been transferred out of the country. Is there not something wrong with the supervisory system?—We do not know day by day the details of every exposure taken.

We are talking about rather a lot of money, Mr George, in relation to the size of the bank.—Of course we are, but how can we be certain to know about the large amount of money unless we are monitoring every day the small amounts of money? It is a criminal offence –

Or unless the internal or external auditors tell you. It is a criminal offence …?—It is a criminal offence not to inform us; to advance this money without notifying us.

Three months later, in July 1995, the Board of Banking Supervision – of which the majority of members were independent of the Bank – issued a report acquitting the Bank of culpability over its ignorance of the transfer of substantial funds from London to Singapore in the early weeks of the year and asserting that the Bank had ‘reasonably placed reliance on local regulators of the overseas operations’, as well as having been ‘entitled to place reliance on the explanations given by management as to the profitability of these operations and on the other information provided by Barings’. The Bank, in short, could not have prevented the collapse. The report did offer some constructive criticism – recommending that the Bank should ‘go further in its role as consolidated supervisor’ and ‘should seek to obtain a more comprehensive understanding of the non-banking businesses in a group’ – but broadly was viewed as being something of a whitewash; or, as the Financial Times put it, of being ‘woefully soft’ on the Bank.

The day after the report’s publication, George and Quinn gave evidence to the Treasury Committee. Chris Thompson, the senior manager in charge of merchant banking supervision, had resigned ahead of the report, but the two men were adamant that the Bank, whether by commission or omission, had done little or nothing seriously wrong, while George did not hesitate to raise the emotional temperature. After conceding that such was ‘the intrusive British press’ that he now found ‘extremely tempting’ the proposition that ‘if your reputation in the monetary policy area is damaged by every failure in banking supervision, you would be better off without it’, he turned to the fundamentals of the supervisory role itself:

George: I am sure I have said to this Committee before that if you wanted us to guarantee no banking failures, frankly I think we could have a shot at that and we could give you a guarantee. It would mean that everybody’s deposit had to be matched by a government liability of precisely the same maturity. Of course the bank could not make any money on that basis and of course it would not do the economy much good, but you have to understand and I am very anxious to really persuade you of this point that there is a trade off, there is a balance that has to be struck between the extent of regulation and the cost of regulation in a direct sense but also in terms of the effect it has on the ability of the financial system to support the wider economy. So you cannot say to me, ‘You shouldn’t care about that at all. All you should care about is stopping banks going bust’. If you meant that, you would not have provided deposit protection in the Banking Act. You clearly recognise that there has to be some kind of balance. We do not have any clear guideline on whether it is acceptable for one bank to go bust every 20 years and whether it is a bank of £5 million or £5 billion. These are judgements which are actually intrinsic. You can say to us that we must do better. You can say to us we must spend more money. You can say to us we must introduce more restrictions. All I say to you is that you look on the other side and say, ‘What is going to be the effect?’ I am in full flood now so if I may just make one other point because it is absolutely tremendously important to us as well as to you, and that is that actually getting able people to do this job is becoming damn difficult. Mr [Nicholas] Budgen was asking whether or not we should be getting new people into the Bank to do this kind of thing. How on earth do you think we are going to get people in to come and do this kind of lose-lose job when we go through this kind of procedure every time there is a problem? I do not resent it. I understand precisely that this is the way –

Radice: What kind of procedure?

George: Where every time there is a problem, there is a great investigation, you want blood –

Abbott: You are accountable to Parliament.

George: I have just said I do not object to this procedure. All I am trying to say is do understand –

Sedgemore: You said that sarcastically.

George: I did not say that sarcastically. I am not a sarcastic chap.

Sedgemore: You did not mean it.

George: I did mean it. I accept this kind of procedure and I accept that it has to apply a 100 per cent standard, but I tell you this, if you want better regulation you have got to take account of the fact that this kind of witch hunt every time something goes wrong is going to make it very difficult to get people to do it.

The following week, back in the calm of EC2, George observed to Quinn that ‘the real substance of the criticism of the Bank related to its understanding of – and supervision of – securities business’; while in early September, meeting with Quinn and Foot, he noted that ‘it was clearly important that the Bank should have expertise in new products as, for example, in the traded markets/models area’ and said that he was ‘very conscious’ of ‘the criticism that the Bank knew all about banking but not securities markets’. At the same meeting, Foot pointed out that ‘typically experts had backgrounds in accountancy, maths or economics’ and that ‘the difficulty was in recruiting people with direct Treasury or capital markets experience who were generally too expensive’. Undoubtedly, the Bank was under some pressure. ‘Trying times on Threadneedle Street’ was the title of a major piece in the September issue of Institutional Investor, concluding unenthusiastically that, in the absence of a radical redefinition of the Bank’s role, ‘the Old Lady will likely continue to muddle through in her traditional manner’.⁴⁸

Over the next year and a half, the Bank tried hard to raise its supervisory game and quieten the critics. In July 1996, following input from Arthur Andersen, it announced risk-assessment models that would ‘bring the line supervisors into direct contact, on site, with a wider range of management’; that it would ‘promulgate a clear summary of standards it expects to apply’; and that from September its Supervision and Surveillance Divisions would be restructured, enabling the Bank to, among other things, ‘improve and harmonise the assessment of risks to which banks are subject’, ‘recruit more specialists and experienced bankers from the market’, and ‘develop further co-operation with other regulators at home and abroad’. Later that autumn, Davies launched the Bank’s own publication, Financial Stability Review, seeking to stake the intellectual high ground (not least in an article by Christopher Huhne on rating sovereign risk); in mid-November, the governor again gave evidence to the Treasury Committee, continuing to insist that, though the Bank was steadily improving in its supervisory capacity, expectations of supervision needed to be realistic; early in December, the deputy governor gave a lecture at the Chartered Institute of Management Accountants, setting out in some detail the Bank’s approach (‘as far as possible, a light touch … an approach based on the principle that market participants can do what they want unless we say that they can’t, rather than that they can only do what we say they can’); and a fortnight before Christmas, the Treasury Committee published its own rather belated report on the Barings disaster and its implications. Criticism of the Bank was plentiful. As ‘a cheerleader for the City’, it remained exposed to the danger of ‘regulatory capture’; it was not yet ‘apparent that the banking sector has earned the soft touch provided by the Bank’; and the post-BCCI supervisory culture of relying less on trust ‘did not apply in the case of Barings’. ‘The Bank needs to demonstrate,’ concluded the report, ‘that it is able to separate its supervisory activities from its other functions and avoid any possible weakening of its regulatory effectiveness due to its proximity to the day to day banking market. Otherwise it may be that in order to bring about the necessary cultural change banking supervision will have to be taken away from the Bank of England.’⁴⁹

Earlier in 1996, in the last of the LSE lectures, George had spoken about the Bank’s ‘three core purposes’. The first, obviously, was ‘maintaining the integrity and value of the currency’, aka monetary stability; the second, indeed, was ‘maintaining the stability of the financial system, both domestic and international’; while the third was ‘seeking to ensure the effectiveness of the United Kingdom’s financial services’, which in practice largely meant seeking to protect and enhance the competitiveness of London as an international financial centre. On this last aspect, George’s strictly unsentimental approach – almost unreservedly accepting the forces of free-market globalisation – had been exemplified the previous year by the Bank’s policy towards the merchant banks, once so umbilically attached to the Bank itself. Not only did he let Barings go, but soon afterwards he did not seek to intervene as Warburgs, Smith New Court and Kleinwort Benson all passed into foreign ownership. The crux was Warburgs, so long the leader – the national champion – in the field. ‘The most important factor was that any deal was commercially realistic,’ he told Warburgs’ David Scholey in April 1995 after Scholey had asked if the Bank had any preference between the two front-runners – NatWest and Swiss Bank Corporation – to take over his beleaguered firm. ‘If both parties believed it to be so he could see the argument in favour of establishing two strong British houses, other things being equal. But he would not wish a deal to be undertaken for emotional reasons. Sir David asked whether the Bank’s experience of Morgan Grenfell [the merchant bank acquired by Deutsche Bank in 1989] suggested that life was more complicated where there was an overseas parent. The Governor said that this was not his impression …’

Elsewhere, a similar lack of sentiment informed the Bank’s money market reforms, aimed at enabling the Bank to trade debt through a much broader spectrum of institutions, while at the same time enhancing the liquidity and depth of the gilt market. ‘The [discount] houses were fairly depressed because our proposals went further than they had expected in cutting off their access to late lending after the transition period, and by the open access rather than club approach to OMO [open-market operations] counterparties,’ reported Plenderleith to the governor in December 1996. ‘They saw the prospect of diminished privileges as threatening their credit standing …’ George was unmoved, and in March 1997 the Bank duly ended the privileged position of the discount houses by switching its daily open-market operations to a gilt repos system open to all-comers; Union (the former Union Discount) announced that it was winding down its positions prior to putting itself up for sale; and the following year the last discount house returned its licence to the Bank.

What about the impending euro? As early as September 1996, more than two years ahead of the eventual launch, George insisted that whether Britain was in or out of a single currency, the City would thrive. ‘The euro is just a bigger Deutschmark,’ he declared. ‘We have seemed to do perfectly satisfactorily handling the mark, just as we have the dollar and yen. I am sure that the City will cope.’ Few observers believed that George himself was an enthusiast for British participation in economic and monetary union – the prospect of the Bank of England becoming a branch office of the European Central Bank was hardly likely to enchant a Threadneedle Street man. But it was becoming clear that the new currency was going to happen, and the Bank devoted considerable time and resources to ensuring that, irrespective of the question of British membership, the City was fully prepared. ‘We aim to identify any initiatives where we at the central bank need to take the lead to provide system-wise facilities, and these we have in hand,’ Plenderleith in November 1996 assured participants at the City of London Central Banking Conference. ‘Interlinking the individual RTGS [real-time gross settlement] payment systems in TARGET [the euro payment system] is one. Discussion with market participants of the appropriate legal framework for the euro, and of bond market trading conventions, are two other areas. This exercise to prepare wholesale market activity for the euro is now proceeding on a broad front in the UK and we are pleased with the concrete progress being made. We will continue to be active as a catalyst …’⁵⁰

By the mid-1990s it was the Bank’s first core purpose that had become most core of all. ‘Do inflation targets work?’ was the title of King’s September 1995 address to the Centre for Economic Policy Research, and his conclusion was that they had led over the past three years to ‘a more systematic and focused discussion of the monthly decisions on monetary policy, both inside and outside government’; while in March 1997, profiling King, the economic journalist David Smith declared ‘without hesitation’ that ‘Britain’s inflation performance in the 1990s has been better than for 25 years’ and argued that inflation targeting had played its part – not only by forming ‘the basis for all the monetary policy discussions between Chancellor and Governor’, but also by helping to create ‘a climate in which low inflation is seen as the norm’. It was not, at the Bank end of the process, necessarily painless. ‘You discussed at some length the preparation of the Bank’s forecast and the press briefing for the Inflation Report,’ began a note to King from the governor’s office in November 1994 after his recent meeting with George:

The Governor said that he had not realised that he and you feel differently about the immediate outlook. He felt that the Inflation Report had been too sanguine. You thought that there were significant and asymmetric risks on the upside but nevertheless that the central forecast was plausible. There was no point doing careful analysis if it was ignored and the published forecast drawn on the basis of a hunch. The Governor said that the forecasters could not expect to dictate the Bank’s policy stance but, of course, their analysis was a very important input into the process. It was agreed that the Governor should be involved in the preparation of the forecast at an earlier stage …

King himself had a clear vision of how the formation of monetary advice-cum-policy should operate, and some two years later, in a presentation to senior colleagues, reiterated his ‘determination for the Bank to retain the intellectual leadership in the debate on monetary policy’. Turning to ongoing activity, he then gave some specifics. ‘Work in the group of small models had largely been completed, and major progress had been made in the work on the accountability and credibility framework of monetary policy’; as for forecasting, he asserted that one of the Bank’s ‘major achievements’ was its ‘relative openness in describing the uncertainty and balance of risks surrounding our forecast’.

Soon afterwards, in his November 1996 lecture at Loughborough University, George carefully set out all the various elements involved in the post-ERM monetary policy framework. On the Inflation Report side, these included transparency (‘the Bank’s professional reputation is on the line as never before’), its forecast of inflation two years ahead (‘we now illustrate the extent of our uncertainty by displaying the forecast as a probability distribution, a sort of open fan on its side – with the uncertainty typically increasing though not necessarily symmetrically’), and intense discussions ahead of the forecast (including about ‘the behavioural assumptions in the light of past relationships and the news in the current data’). On the regular chancellor/governor meetings side, he emphasised that for all their relative brevity, they had been preceded by a sustained, multi-element process – including in the Bank an internal ‘Monthly Economic and Financial Report’; followed by a Monetary Review Committee chaired by the deputy governor and attended by some fifty officials; followed by a meeting of the Monetary Policy Committee (MPC, not to be confused with the post-independence MPC), recently established to determine the Bank’s line each month, chaired by the governor and attended by about a dozen; followed by the Bank’s assessment being sent to Burns at the Treasury; followed by a Bank team of seven or eight led by the deputy governor meeting their Treasury counterparts; followed by preparation of the draft speaking note for the governor; followed by a further meeting of the MPC to agree the text of the speaking note; and then at last the more or less monthly chancellor/governor summit, with the latter accompanied by his deputy and the two directors (King and Plenderleith) of the Monetary Stability Wing. ‘This meeting is sometimes represented as a rather casual affair lasting no more than an hour at which we might almost toss a coin,’ observed George. ‘The reality is not quite like that.’⁵¹

In truth, the ‘Ken and Eddie show’ – Clarke’s ironic coinage, in reference to their regular press conferences – was a source of some vexation to George, and not only because its very existence confirmed that the Bank had not yet achieved independence. Ostensibly the two men got on well, but ultimately the governor, as a deeply engaged technician, was frustrated by the politician’s almost entire lack of comparable depth. ‘I don’t know why I bother,’ he even remarked on one occasion as he was driven back to the Bank. In general the pair were seldom radically opposed in terms of what they wanted – ‘Eddie and I never got more than twenty-five basis points [0.25 per cent] apart,’ Clarke would recall – but their instincts and approach throughout remained essentially different.

The key episode, graphically revealing how far the Bank was from genuine autonomy, came in May 1995, against the background of appalling election results (both local and European) for the Major government. On the late afternoon of Thursday the 4th, polling day itself and the eve of the monthly meeting, George was on the phone with the permanent secretary:

Sir Terry told the Governor that the Chancellor, having slept on it, was inclined not to increase interest rates the following day. He was aware of the importance of the decision and felt that he could not win either way, but in his heart of hearts he was not persuaded of the case for an increase [from 6.75 per cent to 7.25 per cent] now … This was not the Chancellor’s final decision, but it was ‘pretty final’ …

The Governor asked whether the Chancellor understood the full extent of the risk he would be taking. There was a real chance that even before he appeared at the press conference [to explain the no-change], the exchange rate would have fallen very sharply. There was no doubt that an increase in rates had already been factored in to the current exchange rate. The Governor said of course he could not know for certain what would happen, but he had a duty to say that there was a significant possibility (which he put at least at a 1 in 3 chance). The Governor stressed that it was by no means a black and white decision, but the point was that the Chancellor would be overriding almost everyone’s advice and the risks were asymmetric. This could be deeply damaging to the policy-making framework.

George added that ‘taking such risks with inflation is precisely what had undermined UK economic policy-making so often in the past’; and he finished by asking Burns to tell Clarke that, in relation specifically to sterling, ‘he [George] was extremely nervous about the position’. Next day, ‘Ken and Eddie’ duly met – and the chancellor decisively rejected the case for an interest rate rise, a stance widely interpreted (especially after the publication of the minutes six weeks later) as an assertion of his authority over policy. George in public would utter some emollient words, for instance declaring in a speech in Manchester that their ‘disagreement about the inflationary outlook’ had been ‘well within the reasonable range of uncertainty’; but the reading by Anatole Kaletsky, that he had ‘clearly expected Clarke to blink’, and had subsequently been disconcerted by the lack of reaction from the markets to the chancellor’s metaphorical shrug of the shoulders, was probably not far off the mark.

Perhaps inevitably, tensions also featured during the run-up to the May 1997 general election, as at four consecutive monthly monetary meetings Clarke, fortified by sterling’s strength, rejected George’s advice for a 0.25 per cent rise and bluntly insisted that he saw no sign of inflation. He even, in January 1997, publicly criticised the Bank, telling the Financial Times that it ‘took too much notice of predictions in the financial futures markets that interest rates would have to rise’ and claiming that ‘it was usually wrong to assume that the markets had a feel for the real economy which the Treasury lacked’. By its last curtain call, it was a show that probably neither performer was much enjoying.⁵²

The Bank’s tercentenary virtually coincided with the creation of New Labour. Crucial to that project’s architects were a desire for economic credibility; a fear of the destructive power of the markets, as evidenced by Black Wednesday; and a historical awareness (especially on Gordon Brown’s part) that previous Labour governments had suffered from their troubled relationships with the City. With no possibility of Major changing his stance towards the Bank’s position, and presumably struck by the opposition’s handsome lead in the opinion polls, George and his colleagues spotted an opportunity. A starter of cream of chicken and sweetcorn soup, a main course of fillet of sole with scampi and lobster claws in white wine sauce, a dessert of lemon meringue pie – such was the fairly conservative menu, chosen by the governor, for a getting-to-know-you dinner at New Change in February 1995, to be attended by Tony Blair, John Prescott, Robin Cook, Alistair Darling and Andrew Smith as well as the shadow chancellor Brown. ‘EG said to TB the City was not worried about a Labour government provided it was TB’s government not Old Labour,’ noted Alastair Campbell next day on the basis of Blair’s account. ‘JP then proceeded to play up to his Old Labour label, e.g. when house prices were being discussed, why do you people talk about housing in terms of house prices not homelessness. TB said Robin C was not far behind. He laughed and said “I’m sure I heard Eddie say get me the BA emergency desk as we left.”’

Some appearances notwithstanding, things were about to move. ‘Ed Balls [Brown’s economic adviser] did a good presentation on Bank of England independence,’ recorded Campbell the following month, with Balls in essence rehearsing the credibility-enhancing theme of his 1992 pamphlet; and in early May, during the VE Day 50th-anniversary celebrations, George had a quiet word with Blair that led to ‘a private meeting’ being set up for the 15th between George, Brown and Balls. Blair himself told Campbell on the 12th that he was ‘sure’, in relation to the Bank, that ‘independence was the answer’; but three days later at the Bank, it was a rather cagier affair:

Brown asked the Governor about his objectives for independence and whether there were any further evolutionary steps that could be taken in that direction. The Governor thought that it was difficult now to take a small step without taking the fundamental step of statutory autonomy. He explained that he did not campaign for independence as such but for stability. He said that monetary policy decisions were seldom clearcut – they involved a balancing of risks, but independence would affect where that balance was struck.

Then, after Brown had asked whether the Bank had ‘sufficient sources of advice’ and ‘whether the Governor’s regional advice was adequate’:

Brown said that he wanted to run with the debate about the status of the Bank of England rather than trying to anticipate it. He wanted the Labour Party to accept the changes that had already been made in party policy, and the need for continued change, but he did not want to move faster than he could carry the party. The Bank should look at proposals affecting the Bank of England in the round rather than at specific rhetoric. Some of the proposals might, for example, be couched in terms of ‘reforming the Bank of England’ but the substance was likely to be broadly acceptable to the Bank.

The timing was significant, because two days later Brown was due to give a big-picture speech, ‘Labour’s Macroeconomic Framework’, to his party’s Finance and Industry Group. In it he talked of a ‘prudent’ fiscal strategy, unveiled ‘the golden rule of borrowing’ he would be following in government (‘over the economic cycle, government will only borrow to finance public investment and not to fund public consumption’), committed himself in monetary policy to inflation targeting and enhanced transparency, and declared that he was intending ‘to consider whether the operational role of the Bank of England should be extended beyond its current advisory role’. That tantalising hint came, however, with two riders. First, ‘we are not in the business of depoliticising interest rate decision-making only to personalise it in one independent Governor’; and second, ‘the Bank must demonstrate a successful track record in its advice’.⁵³

Regular contact between the Bank and New Labour continued, and in November 1996, with the election less than half a year away, George gave a positive update to the Governors’ Committee (GOVCO, comprising King, Kent, Plenderleith and Foot as well as Davies and himself):

He believed that the Bank was well plugged into the thinking of the Labour Party. On monetary policy, he interpreted Labour as being clearly committed to having an inflation target, and being prepared to move further towards independence. They had floated the idea of a Monetary Policy Council, although as yet their thinking on this was imprecise. He thought that their ideas were running along the lines of some form of delegation to the Bank which would not require legislation, but on the basis that the Bank would create a Monetary Policy Council. He had made it clear to Gordon Brown that it was not acceptable to have such a Council comprise representatives of interest groups who would be imposed on the Bank. We must have professional people on the Council, and this would mean primarily academics, plus some people with a financial and/or industrial background who did not have a conflict of interest. The Governor said that he thought the Labour Party understood this point. There was clearly a long way to go, but the basic proposition being put forward by Labour was not unreasonable, and it could lead to an outcome anywhere in a range from something along the lines of the current arrangements to at the other extreme a statutory change towards independence.

By January the proposed advisory body was being called the Monetary Policy Committee (MPC), and King and his most senior colleagues were discussing possible external members. ‘Reputation and the absence of any controversy surrounding the name’ were King’s criteria, while in response to Davies wanting at least one woman he countered that ‘we should not compromise on quality, and we should put forward the best names irrespective of their sex’. For his part, Foot ‘wondered whether we could think of any high-quality former politicians, including people who would leave political life at the election’, but ‘admitted that he could not think of any, and GOVCO agreed with him’.

In early February they returned to the subject of the putative MPC. Their working assumption was that Labour envisaged ‘an initial phase of an advisory MPC’, prior to ‘operational autonomy’ for the Bank; but they wanted ‘as a minimum’ during that transitional advisory phase that ‘the Chancellor [that is, post-election Brown] should make a statement clarifying that the advisory phase, including a Monetary Policy Committee, was part of a process intended to lead to operational independence’ – and that ‘this should convey the message that the process involved altering the balance of power between the Bank and the Chancellor’. GOVCO also had a couple of further MPC wishes: not only ‘no voting’, on the grounds that ‘voting would foster division not cohesion, and the outcome of voting would be more likely to leak’, but also that its composition should be four Bank people and three externals. Next day, 6 February, George formally told Brown and Balls that the Bank welcomed the creation of an MPC, to which Brown responded by agreeing that ‘the advisory stage should be a stepping stone to operational independence’ and that ‘it was important to avoid interest group representatives’, while at the same time observing that ‘both sides should be in agreement on the appropriateness of appointees’. By the end of the month he had publicly committed himself to an advisory MPC, and in early March the governor met with King to fine-tune his thoughts:

The Governor said that he was very excited about the prospects for upgrading the presentation of data at the first round Monetary Policy Committee meeting. In fact, he wanted to think about the idea of creating an MPC room which would be fitted out with the necessary technology.

The Governor added that, as part of the presentation of data and analysis, he wanted to make more of the markets analysis than we do at the moment. He had been very interested by WAA’s [Bill Allen’s] material on the shape of the yield curve …⁵⁴

Soon afterwards, the date of the election was set – 1 May – and no one expected other than a change of government.

During all this, the main focus on both sides was on the monetary policy aspect – but what about the supervisory? ‘Darling confirmed that Labour was minded in due course to transfer supervision to a separate agency,’ reported Central Banking after interviewing the party’s spokesman on the City in early 1995 (probably before Barings), ‘but emphasised that there would be no “wholesale tearing up” of the regulatory system.’ Definitely post-Barings, Brown told George in May that year that ‘the Labour Party was leaving open for the present the question of the regulatory structure for financial services’; George ‘thought this was wise – there were many aspects to this question’; and the governor ‘explained the advantages for the central bank of having some involvement in supervision to pursue its financial stability objectives’. That sounded reassuring enough, while a year and a half later George still seemed reasonably sanguine. ‘We could see the case for Labour’s suggested consolidation of securities regulation,’ he observed in November 1996 to GOVCO, ‘but he thought that that would be quite enough for them to be going on with. We would resist absorbing banking regulation into securities regulation …’ Three months later, in his February 1997 meeting with Brown, the issue was very much the tailpiece of the dialogue. ‘Finally, Brown mentioned financial regulation,’ noted the governor’s private secretary, Andrew Bailey; and the shadow chancellor ‘stressed that Labour did not favour major change’.⁵⁵ There, to all intents and purposes, the matter apparently rested until the election.

Later that February, on the 20th, Brown was in New York and met, not for the first time, the by now renowned head of the Fed, Alan Greenspan. Brown was accompanied by Balls and Geoffrey Robinson, and the latter would record how all three of them had been struck by Greenspan’s remark that it was ‘unfair’ to expect politicians – as opposed to central bankers – to take unpopular interest rate decisions. The official policy position, however, did not change. Although Blair in January had remarked to Campbell that ‘the way to really fuck the Tories was to announce during the campaign that we would make the Bank of England independent’, Labour’s election manifesto went no further than affirming a commitment to ‘reform the Bank of England to ensure that decision-making on monetary policy is more effective, open, accountable and free from short-term political manipulation’. On 23 April, just over a week before polling day, Davies reported to colleagues what Deryck Maughan of Salomons had just told him: ‘He [Maughan] had recently talked to Brown … He [Maughan] had argued strongly that he [Brown] should move on Bank independence as quickly as possible. Brown said there was a problem with “public opinion”.’ In fact, perhaps influenced by that conversation, the plates were about to shift. The exact timings are not yet documented, but the probability is that it was on the 28th, the Monday of election week, that Brown in effect said to those around him, ‘Let’s go for independence’; and over the next couple of days, Balls was mainly responsible for drafting a letter to the governor setting out the new government’s plans not only to make the Bank independent, but also to move banking supervision to a new statutory regulator.⁵⁶ The Bank, meanwhile, continued to assume that what lay ahead, in the short term anyway, was a purely advisory MPC.

New Labour duly won its May Day landslide, and by the afternoon of Friday the 2nd Brown and his men were occupying the Treasury. The new chancellor’s preference was to go for the big-bang approach, announcing simultaneously the following week that the Bank would be gaining independence over monetary policy but losing banking supervision. In many ways regrettably, given what transpired, he was persuaded by his permanent secretary, Burns, to split the draft letter into two, with the supervisory aspect of the announcement to be delayed. Another Treasury official exercising influence over Brown was Gus O’Donnell, who apparently persuaded him to add to the monetary policy part of the original letter the stipulation that debt management would be moved from the Bank to the Treasury – a turf desire deeply entrenched in the latter’s institutional wish-list, while also playing to Brown’s and Balls’s concern that the new Bank did not become an overmighty subject. Meanwhile, the governor was invited to come to the Treasury early on Monday the 5th, a helpfully timed bank holiday; and Brown on the Sunday afternoon checked with the new prime minister that he was content with the proposed arrangements and that there was no need to consult the Cabinet – in both cases, no problem.

On that historic Monday morning, Brown handed over two letters to a much surprised George (expecting to be discussing the composition of the advisory MPC), one that would be for public consumption the following day and the other very much not. The first letter – headed ‘The New Monetary Policy Framework’ and stating that ‘the Government intends to give the Bank of England operational responsibility for setting interest rates’, in order ‘to achieve an inflation target which the Government will determine’ – noted that the governor would be supported by two deputy governors; that ‘operational decisions on interest rate policy will be made by a new Monetary Policy Committee’ (five internals and four externals), meeting monthly; that the Court would be reformed in order to broaden its representativeness; and that ‘the Bank’s role as the Government’s agent for debt management, the sale of gilts, oversight of the gilts market and cash management will be transferred to the Treasury’. The governor apparently took that last aspect wholly on the chin and was delighted by the larger sudden development: for him, control over monetary policy, as the best means of checking inflation and providing stability, had long been the prize.

The second letter – headed ‘Banking Supervision’, dated 6 May (like the first letter), and signed by Brown in red Biro – took rather a lot for granted:

As you know, our Business Manifesto commits us to restructuring the regulation of financial services. It is the Government’s intention to introduce the necessary legislation at an early date. I stated that it was the Government’s intention to consider transferring part of the Bank of England’s responsibility for banking supervision to another statutory body.

I am pleased that you agreed that consultation will now start on this basis.

A brief exchange between governor and chancellor about the implications of the second letter then apparently ensued. What we know for certain is that George left the meeting not only jubilant that the supreme prize had been secured, but believing that the Bank would be fully consulted about the issue of its supervisory role – a belief arguably at some variance, surprising in such a realist, with the letter itself, but perhaps at less variance with Brown’s oral assurance, unless of course that assurance was actually more ambiguous (‘shifty’, according to one unsympathetic observer) than George heard it to be. Given his presumably heightened emotional state, that may well have been what happened. In any event, later that day senior colleagues were summoned to the Bank to be told the great but still confidential news, while on the supervisory side George assured them that the Bank would have a proper opportunity to make its case before a final decision was reached.⁵⁷

Remarkably, there were no leaks. ‘The effect was electric,’ recalled the Observer’s William Keegan about the impact of Brown’s announcement of Bank independence at the press conference on the Tuesday morning. ‘I want British economic success,’ declared Brown himself before turning to the specific Bank aspect, ‘to be built on the solid rock of prudent and consistent economic management, not the shifting sands of boom and bust’; after spelling out the changes, he characterised them as ‘British solutions, designed to meet British domestic needs for long-term stability’. During the questions that followed, he was asked, ‘Can we assume that the Bank’s supervisory role will now be hived off to a new organisation?’ To which Brown replied: ‘There will be further discussion, as we said in our manifesto, about regulatory responsibilities generally and the conclusions of these discussions will be reported at the appropriate time.’ That exchange received little attention, but the granting of monetary policy independence received a great deal – most of it positive. ‘GB,’ recorded Campbell next day, ‘got a terrific press re Bank of England independence, deservedly, though there was too much “it was Ed Balls’ idea” around.’ The Independent set the tone (‘Welcome to the modern world’), while from opposing flanks came obliging noises from the Daily Telegraph (‘a cautious welcome’) and the Guardian’s Will Hutton (looking ahead optimistically to ‘a Bank of England that is more distant from the “gentlemanly capitalist” culture of the financial system than any we have so far experienced’). Critics included Keegan (‘I believe, with only modest reservations, that Labour has taken leave of its senses’) and The Times’s Anatole Kaletsky (claiming that Brown was ‘locking the pound in a golden casket and throwing away the key’). Perhaps the weightiest of the early verdicts was the Economist’s. ‘The move is welcome and long overdue,’ reflected its editorial about what it called ‘an astonishingly bold start for the chancellor’. But in practice, it warned, ‘the Bank will be engaged in the highly political task of choosing how many jobs to sacrifice in order to hit the inflation target quickly rather than slowly’; and accordingly, ‘the true case for independence is not that there is no democratic loss, but that the loss is more than matched by the economic gain’.⁵⁸

In the Bank itself during the week and a half after Brown’s bombshell, some very mixed feelings were almost certainly in the air. As early as that Tuesday afternoon, when George chaired a meeting of senior officials to discuss the way forward, one participant was struck by the depressed body language of quite a few of those present, especially among ‘the generalists’. Nor is it psychologically impossible that the governor himself, with his beloved Bank on the cusp of fundamental change, was coming down from his high. When he heard the following week that the Monetary Analysis Division ‘wished to host an academic conference associated with the work on openness and growth (which was going very well)’, and that ‘as a part of this they wished to hold a dinner in the Court Room’, it was perhaps telling that his reaction was that ‘this was inappropriate’ and that indeed ‘he was not sure that a dinner was necessary at all’. Unsurprisingly, given his own particular background in the Bank, his main focus was on debt management and related activities, where it seems that his initial acceptance of what Brown and the Treasury were proposing soon became quite heavily qualified. At a meeting with Burns on 9 May – which included the nugget that ‘Burns had mentioned to the Chancellor the possibility of changing the Bank’s name, but the Chancellor’s initial response had been that Bank of England was a good brand name’ – he observed that he ‘could not think of another central bank that did not act as government banker’; while at GOVCO a week later he took a forceful line: ‘It was important that we began by considering which functions and activities we thought were the key to preserving the Bank’s status as an institution. A key element was a presence in the markets. And there were links between debt management and monetary policy which we should not ignore …’

That evening, Davies had a ‘lengthy discussion’ with Burns, resulting in a note ‘about debt management, and all that’, that was for the governor’s eyes only:

The position remains rather unclear and in many ways unsatisfactory, though some of the worst possibilities do not seem to be on the agenda …

Terry has attempted to engage Gordon Brown in discussion on the details, but so far without success. He [Brown] has continued, however, to repeat his view that he wants strategy, tactics and operations to move from the Bank to the Treasury. That is what he said in his letter (as he interprets it) and that is what he thinks is going to happen. Terry has attempted to get him to focus on the implications of this and particularly the possible movement of CGO [Central Gilts Office] and Registrar’s which it would imply, but so far without much success.

Burns hoped, went on the deputy, that ministers would agree ‘to take out the “thinking” bits of the operation, but leaving at least CGO and Registration with the Bank, and possibly the management of primary auctions (roughly on the French model)’; as for cash management, the latest from Burns was that ministers ‘wished to separate the management of government cash from monetary policy operations’; and finally, ministers were showing ‘no desire to move the government’s account away from the Bank of England’.⁵⁹

What about supervision? ‘The fact that the Government is consulting on the future of banking supervision will soon become known,’ Davies wrote to George on 6 May, as part of his list of issues to resolve. ‘We need to decide how strongly we need to argue for retention of a function in the Bank, whether there are halfway houses which would appeal to us and how far we should properly seek to mobilise opinion elsewhere in support of our cause.’ Quite apart from the question of what Brown had or had not said on the 5th, unbeknown to the governor there would soon be a development at the other end of town. The lord chancellor, drawing up the Queen’s Speech with its list of bills through to autumn 1999, had left space for only one Bank of England bill; and unless the Treasury moved swiftly – it now realised rather late in the day – it would be in danger of missing the legislative bus for changing the overall regulatory and supervisory structure.

Brown accordingly asked George to come to see him on Monday the 19th, with the latter again expecting to be discussing the MPC’s composition. Instead, he learned that the Bank would be losing its role as banking supervisor, which would be given instead to a much expanded version of the Securities and Investments Board (SIB), to be headed – if he agreed – by Howard Davies. The governor said little in response, and was quiet in the car; but back in the Bank his mood was sulphurous, with only the occasional moment of black humour – ‘not even Leigh-Pemberton lost this lot,’ he said at one point. Several times he threatened to resign there and then, and it took a considerable effort by the Bank’s senior non-executive director, David Scholey, to persuade him not to. George’s anger was not because of the loss of supervision as such, but because he believed he had been misled by Brown into promising the staff that there would be full consultation ahead of a final decision. As for Davies, he was in Buenos Aires, addressing a banking conference; later that day, he received the offer by phone, responding to an initially mysterious message, ‘PLEASE CALL MR BRAUN’; and, after protracted discussion with George (the deputy running up a $2,000 phone bill), he accepted it. Next day, Tuesday the 20th, prior to Brown making his Commons statement about the proposed new structure, George wrote to the chancellor about how the Bank would be reacting to it:

I have discussed this with the members of Court who have asked me to express to you their dismay that the Bank was not consulted on the substance of your decision to remove responsibility for banking supervision from the Bank. Both they, and I, had clearly understood, both from our conversation on 5 May and the terms of your side letter to me on 6 May, that the Bank would be consulted.

But, after referring to ‘what will inevitably be seen as a precipitate decision’, the governor went on: ‘What is important now, however, is that we work together to make a success of the new arrangements.’ Brown duly made his statement that afternoon, noting that he intended to involve the Bank fully in drawing up the detailed proposals, as well as generally relying upon the expertise of the Bank’s staff. The following day, George’s tone to the chancellor was warmer: ‘I spoke to all the staff in the supervisory area yesterday [in a hastily convened meeting at the Guildhall soon after Brown’s statement], and I am confident that we will all do everything that we can to make the new arrangements work.’⁶⁰

Everyone of course was more or less in the dark as to precisely what those ‘new arrangements’ would be, not least what part the Bank would play. The central bank still needed, noted the Bank’s press notice on the 20th after Brown’s statement, to ‘be able to monitor, through the new regulatory body, the financial condition of individual institutions, as well as that of the system as a whole’. In the statement itself, Brown asserted that ‘the Bank will remain responsible for the overall stability of the financial system as a whole’, while at the same time ‘the enhanced Securities and Investments Board will be responsible for prudential supervision and, in due course, for conduct of business rules’. Relatively few tears were shed for the loser. ‘The Bank of England deserves to be shorn of responsibility for the prudential supervision of banks,’ declared the City editor of The Times. ‘The roll call of UK bank failures, although spectacular, is short. But the public lost faith in the central bank’s supervisory skills, because they were clearly the poor relation in the Old Lady’s family of priorities.’ And he added that ‘top Bank people’ had ‘long gravitated to the more glamorous world of macroeconomic policy and international currency affairs’. Naturally, views differed within the Bank itself. George had reached a point where he was relatively agnostic; King was frankly relieved, having consistently argued that a continuing supervisory role would represent a serious impediment if and when the Bank received statutory responsibility for monetary policy; and among the 425 supervisory staff, the mood was reported by the Sunday Times as ‘black’. As for the City at large, it was difficult to disagree with the view of an investment banker quoted by the same paper: ‘It will certainly diminish the role of the Bank as a spokesman for the whole of the London financial community. Its leadership role will be undermined …’ From the fourth estate, a last word at this stage went to the Economist: ‘Achieving the right balance of separation and co-operation between the Bank and the SIB will be difficult.’⁶¹

The next few months were spent establishing the new settlement, not helped by a distinctly mistrustful Bank/Treasury relationship. As early as 27 May, the governor was expressing to Brown his ‘concern about the preparation of the Bank of England Bill’ and identifying ‘radical differences of approach’ between Bank and Treasury officials about ‘the extent of the Bank’s role outside the monetary policy area’. His letter tried to get the new chancellor to see the big picture from the Bank’s perspective:

In essence the Bank’s credibility and authority as a central bank depends upon its ability to act, with a degree of independence – accountable to and through Court – across a range of functions which give it the necessary overall critical mass. It is possible in relation to any individual issue to take a minimalist view, but the cumulative effect of doing so would then be to diminish the standing and reputation of the Bank, in the eyes of our counterpart central banks overseas, of the world’s financial markets, and of the British public, to the point where it would find it difficult to carry out its remaining functions effectively. I am sure this is not your intention because it would substantially undermine what is, and has the capacity to continue to be, an important national asset.

In the sphere of debt management and such, the Bank largely lost: soon after George’s missive, Brown made it clear that the Treasury was not going to relinquish its desire to have a considerably more hands-on role. Even so, the Bank still managed to keep a reasonable presence in the markets. ‘Our money market operations continued as before,’ a senior official told Keegan not long after the new settlement was in place, ‘and, although we have less of a role in gilts, we have quite a portfolio of gilts for our own customers, and we continue operating (for the Exchange Equalisation Account) in the foreign exchange market.’ Over the Bank’s day-to-day financial independence from the Treasury a keen, hard-fought tussle took place, eventually won by the Bank, while much time was spent on the issue of lender of last resort and the Bank’s general operational freedom as overall guardian of financial stability.

By the end of July – as the parties concerned moved somewhat acrimoniously towards agreeing a Memorandum of Understanding (MoU) that would embody the new supervisory tripartism (Treasury plus SIB, soon to be called the Financial Services Authority, plus Bank) – the governor was taking his case in person to No. 10, having initiated the meeting ‘to ensure that the Prime Minister was personally aware of the issues at stake and the seriousness with which he [George] viewed them’. The governor accordingly outlined to Blair how he had ‘envisaged a system where the SIB, as supervisor of individual institutions, would probably first pick up signs of a problem that might raise systemic issues, would bring it to the Bank so that the systemic aspects could be discussed, with the Bank having the primary responsibility for deciding how to act and on what terms’; and he added that ‘as he understood it the SIB had no problem with the Bank’s proposed model’. However, he went on, ‘the arrangements proposed by the Treasury … would split responsibility in an artificial way between the Bank and SIB’, so that ‘he feared that they would blur accountability dangerously, and by diminishing the Bank’s capacity to act as a central bank, could reduce its ability to respond effectively to a crisis’. Moreover, George further complained, the ceiling proposal (‘some £70 million’) by the Treasury on how much risk the Bank ‘could accept’ was ‘so low as to be almost useless in a crisis’, compounded by the fact that ‘the mandatory tripartite consultation requirement above this low ceiling could introduce dangerous delay’. In short: ‘It seemed perverse to choose now to put new limitations on the Bank’s ability to provide rapid and discreet support in future.’ Blair’s emollient response was to assure the governor that he would ‘make sure’ that the chancellor ‘was aware of the strength of the governor’s concerns’; and indeed, when the MoU was eventually published it contained nothing specific about limiting the Bank’s freedom of action to mount an operation ‘in exceptional circumstances’.⁶²

On the ground, meanwhile, the Bank’s supervisors either moved to the FSA in Canary Wharf or remained in Threadneedle Street as part of the Financial Stability Wing, with none made redundant. And of course the MPC, ultimately the rationale for all the upheaval, took shape – remarkably quickly – and got down to work. A crucial prior question was the exact definition of the inflation target it would be set. George’s concern, he told Brown in late May, was that ‘the surrounding language … accurately reflected the way in which we took account of the balance of risks’; and he noted that ‘the previous Chancellor had muddied the waters with his reference to inflation normally being in a zone of 1–4%’. In the event, Brown in his Mansion House speech in June announced that he was setting the Bank an inflation target of 2.5 per cent, with the requirement that the governor write an open letter to the chancellor if inflation strayed by more than 1 per cent either side of that target. As for the MPC’s preparations, orchestrated by King, there seems to have been relatively little blood spilled over the Treasury’s appointment of externals, but the harder task was getting George to agree to the principle of voting, which he eventually did. His deputy was now leaving the Bank, to head the FSA; and in late July it was announced that the two new deputy governors would in due course be King (heading monetary stability) and David Clementi (heading financial stability), the latter having made his name at Kleinwort Benson masterminding much of the government’s privatisation programme, though not personally known to an initially suspicious George.

Tuesday, 28 October saw simultaneously the Bank of England Bill – formally giving operational responsibility for interest rates to the new MPC – having its first reading in the Commons; the MoU being published; and the new super-regulator, the Financial Services Authority, being launched – and indeed christened – by the chancellor. ‘These reforms,’ declared Brown, ‘provide the platform for long-term monetary and financial stability’; while in Threadneedle Street, a couple of miles upstream from Canary Wharf, the 303-year-old Bank stood poised to play its part in this brave new world.⁶³