In common with Sir John Major, Denis Healey, the Bank of England’s historian David Kynaston, and former governor (1983-93) Robin Leigh-Pemberton, I had great reservations about the granting of independence to the Bank.
By independence – more precisely “operational independence” – was meant control of monetary policy: giving the Bank the power to change interest rates, as opposed to merely offering advice to chancellors and prime ministers that could be ignored.
We doubters were mindful of the excessively deflationary bent of the Bank during the interwar years. When the Bank was nationalised by the Attlee government in 1946 – a reaction to Labour’s problems with the economy and the Bank’s influence in the 1920s – the Labour peer Lord Passfield said, recalling those troubled interwar years: “Nobody told us we could do that.”
It was with this history in mind that I was so shocked when Gordon Brown, encouraged, indeed ably assisted, by Ed Balls, granted the Bank independence in a first dramatic act after the 1997 general election.
This year sees the 20th anniversary of the granting of independence and, given the depth of the economic problems facing this country, it was a good moment recently for the Bank to hold a public conference, at which Brown, Balls and others were able to reflect on the record of their creation.
It is also good timing that Kynaston’s magnificent Till Time’s Last Sand: A History of The Bank of England 1694-2013 has recently been published.
At the conference, most of the media coverage concentrated on a speech by Theresa May that had little to do with the Bank, but was billed as a defence of capitalism at the end of a week when most of the press had done its best to pillory Jeremy Corbyn and John McDonnell for their leftwing programme.
But the high spot of the conference was a brilliant presentation by Brown, in which he acknowledged what had gone wrong with the original concept.
Few were in doubt that the monetary policy committee had done a pretty good job. The problem had been with the independent Bank’s approach to financial stability, or the lack of it. Inflation has hardly been a problem these past 20 years. It is an open question to what extent this has been due to the central Bank, as opposed to the impact of globalisation and competitive forces emanating from China. Nevertheless, operational independence in monetary policy has worked better than some of us feared; the point was made at the conference that knowledge of the inflation target has probably had a beneficent influence on wage bargainers who, in the past, would assume the worst of the prospect for inflation, and bargain everyone into the kind of wage-price spiral that only ends in disaster.
But back to financial stability. It was a theme of the 20th anniversary conference that the newly independent Bank had been asleep at the wheel, both in the run-up to the onset of the financial crisis in 2007 and the immediate aftermath. In particular, the blame fell on the then governor Mervyn, now Lord, King, for allegedly having placed all the emphasis on monetary policy, at the expense of the Bank’s overall responsibility for the financial system; for the Bank still possessed this function, even though day-to-day supervision had been hived off to the Financial Services Authority.
Brown was scathing about the behaviour of the governor he had appointed, not only for going on about “moral hazard” – ie being reluctant at first to bail out banks for fear it would set a bad example, but also for publicly offering advice on fiscal policy. The deal was supposed to be that the chancellor would not intervene in monetary matters, nor the Bank in matters of public expenditure and taxation– which King did, negatively, when the economy was nowhere near enjoying sustained recovery from the crisis.
All in all, the independent Bank did not emerge well from the crisis, as Kynaston underlines in his book, although he goes out of his way to be fair, noting that some senior officials were not unaware of mounting problems at Northern Rock and elsewhere. Anyway, both Brown and Balls have concluded that lessons have to be learned, and that there needs to be more cooperation between Bank and government in future.
One of the ironies they concede is that, by removing decisions on interest rates, which used to take up a lot of ministerial and Treasury time, the hope was that the Treasury would be able to concentrate more on wider economic policy.
Well, to judge from the state of the economy now, there is a lot left to be desired when it comes to the achievement of a successful economic policy. This was all too apparent last Monday when, at that bizarre Conservative party conference in Manchester, chancellor Philip Hammond devoted his main thrust to attacking Labour, in the face of whose success with the younger generation the Tories are running scared.
But the problems of the economy now are nothing compared with what is to come if our leaders, and the people they are supposed to lead, do not come to their senses and recognise that Brexit has to be stopped. The present Bank governor Mark Carney is well aware of the absurdity of Brexit, but his powers are reduced to damage limitation. Which makes me wonder why a manifest slowdown in the economy now is being met by threats of a rise in interest rates.
This Brexit business is an unmitigated disaster. As a senior European politician recently observed of the British: “It was heroic of you in 1940 to stand on your own against your enemies; it is ridiculous in 2017 to stand on your own against your friends.”
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