The Bank of England under Mark Carney has a good reputation but does it have too much leeway?
On the morning of 24 June 2016, as Britain woke up to endless replays of David Dimbleby announcing: “We’re out”, all eyes were on Mark Carney, governor of the Bank of England. Suddenly, he seemed like the only grown-up left in the room as he calmly explained the measures he was taking to ensure economic stability in the potentially turbulent days ahead.
Last month, 200 chief financial officers were asked to score out of 10 who would produce the best Brexit deal. The results were revealing: an average of 3.5 for Theresa May, but 8.6 for Carney. Indeed, it is fair to say that the Bank, in its 323-year history, has seldom, if ever, enjoyed greater prestige – and power – than it does now. Strikingly, not even Labour in its newly radical phase is disposed to challenge its authority.
The shades of arguably our four most notable politicians would not be happy. In February 1797, amid fears of invasion and a flight of gold, William Pitt the Younger decided there was no alternative but to take Britain off the gold standard. (so that Bank of England notes were no longer backed by gold). The upshot was James Gillray’s immortal, nickname-coining cartoon, “POLITICAL RAVISHMENT, or The Old Lady of Threadneedle Street in danger!”, depicting the beanpole Pitt seeking to ravish a gaunt old lady dressed in banknotes and sitting on the Bank’s treasure.
Britain eventually won the war and in 1821 returned to the gold standard. Over the rest of the century, on the back of a globalising economy, the City of London became the most dominant international financial and commercial centre that the world had ever seen, while the Bank itself assumed an increasingly public role, albeit still in private ownership. Most Victorian politicians avoided ruffling the Old Lady’s feathers – one chancellor, Lord Randolph Churchill, being described by his son Winston as “hovering for half an hour outside in a panic of nervousness” before his first visit there – but the great exception was William Gladstone.
As chancellor in the 1850s and 1860s he waged a series of acrimonious battles over the Bank’s charges to government and established the Post Office savings banks as an alternative source of finance, while as four-times prime minister he continued to view the Bank as an unreformed vested interest (an exaggeration, but not a complete one). He was so unpopular there that, noted a Treasury diarist in 1888, “one Director said he intended to send Mr G [in his late seventies] a naïve advertisement of an enterprising undertaker who expressed surprise that people should go on living a life of trouble to themselves and others when they could be comfortably interred for £3…”
Generally, up to 1914, the Treasury left the Bank well alone, but the First World War changed everything, significantly increasing government power. Between the wars, the Bank’s celebrated long-serving governor Montagu Norman did his best to control bank rate changes, but ultimately accepted that the final decision lay at Number 11. Even so, especially given the vastly inflated size of the national debt, no interwar chancellor wanted to make an enemy of the Bank. Certainly not Winston Churchill, who in 1925 gave in to Norman’s urgings and reluctantly returned Britain to the gold standard (which it had gone off during the Great War) at the pre-conflict parity of $4.86 to the pound – untenable and vastly destructive of British industry. Churchill never forgave Norman, though many years later, just before leaving No 10 in 1955, did bring himself to attend a dinner at the Bank in his honour.
By then, following the left’s increasing demonisation of Norman through the 1930s, the Bank had been nationalised in 1946 by the postwar Labour government. The move was essentially symbolic, but importantly so, and through the 1950s and 1960s monetary policy became increasingly politicised, with opportunistic chancellors often having an eye on forthcoming byelections and suchlike.
By the 1970s, a decade of economic troubles and high inflation, some Conservatives were talking about giving the Bank more autonomy and thereby making it easier for it to raise interest rates if it deemed that necessary. They reckoned without their leader.
Even in opposition, Margaret Thatcher had an unfortunate first lunch at the Bank (“We did not take to her, because she spoke her mind in very broad and sweeping terms and gave little opening for anyone to tell her things which we could have told her,” noted one insider); in power from 1979, she was dismayed by the Bank’s entirely justified reluctance to sign up to zealously hardline monetarist dogma, at one point privately referring to the highly capable governor, Gordon Richardson as “that fool”, while towards the end, in 1988, she reacted dismissively to the suggestion of her chancellor, Nigel Lawson, that an independent Bank, taking its own interest rate decisions, would “enhance the credibility of our anti-inflationary stance”. Such an institutional change would instead, she riposted, “be seen as an abdication by the chancellor”; indeed, as “an admission of a failure of resolve on our part”. In short, though Thatcher may have privatised large chunks of the British economy and stopped government from trying to “pick winners”, she flatly disbelieved that elected and accountable politicians should contract out monetary policy.
Then came Black Wednesday on 16 September 1992, almost exactly a quarter of a century ago. Despite the Bank spending some £3.3 bn to try to prevent it happening, George Soros and other major operators in the foreign exchange markets simply blew sterling out of the exchange rate mechanism (ERM). The aftermath was epoch-making, with two crucial things happening in quickish succession: first, the Bank swiftly stepping into the vacuum that had suddenly opened at the heart of government economic policy-making and replacing that vacuum with the coherent, relentless pursuit of inflation targeting; second, as New Labour intellectually took shape in the mid-1990s, an increasing recognition by Gordon Brown and Ed Balls that indispensable to ensuring that a future Labour government was not as crucified by the markets as its predecessors had been was the granting of independence to an inflation-targeting Bank. In May 1997, within days of the election, Brown duly conferred that independence, claiming it would help to avoid “the shifting sands of boom and bust”.
“Labour,” claimed William Keegan in this paper, “has taken leave of its senses”. Generally, the press and City response at the time was positive. Even so, argued the Economist, “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.” Twenty years on, the jury perhaps remains out. Most commentators would agree that the Bank’s monetary policy committee has had a good, if not unflawed, record; some (including me) would argue that the broader trend towards government outsourcing its previous responsibilities has contributed to a damagingly widespread sense of ineffective, out-of-touch politicians.
Given that all economic decisions involve value judgments, given also that our current economic-cum-social model seems urgently in need of serious attention, Carney and his successors will continue to need those political skills that Pitt, Gladstone, Churchill and Thatcher had presumed to belong to parliamentary statesmen alone.