The Old Lady Lifts Her Skirts

This is where I came in. Then as now, nations’ currencies were stuck together, but the glue was failing. Central banks and their governments would hurry to the creaking structure’s rescue until their efforts became more desperate and their success more problematic. Half a century ago, the euro’s troubles were foreshadowed when the pact that fixed the world’s exchange rates slowly came apart. For the pound and for the British economy, one crisis succeeded another, and after the pact dissolved the worst was still to come. 

The pound is and was the Bank of England’s promise to pay, and Forest Capie’s history can be read as an account of the attempts to keep that promise, in the two decades when its value collapsed. His predecessor, John Fforde, wrote of the Bank’s post-war years in elegant Bankese, the only Indo-European language not to be written on the lines but between them. Over 822 pages he allowed readers to work out that, when the Bank was formally taken into public ownership, nobody asked what it was now supposed to do. So it got on with its work and did not invite questions. “The Bank is a bank”, said Governor Cobbold, “and not a study group.”  

Capie picks up the story as the questions begin to be asked. Harold Macmillan, newly installed as prime minister, sets Lord Radcliffe to say how the economy ought to be managed. Soon enough Lord Justice Parker is set to investigate a sudden rise in Bank rate: did the news leak, who might have profited by it? His inquiry made the Bank’s directors look like a City coterie. As Bagehot would have said, he let daylight in on magic. Parker found no evidence of a leak, but Capie, on good authority, says that there was one: “Lord Kindersley was very lucky.”

Macmillan as a young radical (or Tory wet) had seen the Bank as a malign influence. Now he parts with all three of his Treasury ministers — later to be canonised as monetary martyrs — and sets course towards growth and full employment. Radcliffe’s prescriptions are nebulous but attach little weight to money. Inflation is to be held down, first by persuasion and then by controls. The banks are asked to ration credit. Keynes’s name is invoked, and sometimes taken in vain.  Every so often a sterling crisis comes along to blow these policies off course. They are then resumed, by successive governments, but more rigorously. When inflation finally hits 26 per cent and sterling goes into free fall, statutory controls set limits on pay, prices, dividends and, of course, foreign exchange.

The Bank never liked them. Exchange controls were a wartime necessity which carried over into peace, leaving a Home Guard poster to adorn the office: “Freedom is in peril. Defend it with your might.” When the Bank revived the idea of rationing money by price, Fforde — it was his project — told me: “Yes, we believe in markets here. It sometimes surprises us that people in markets don’t.” He was ahead of his time. 

In the end, and at the point of the International Monetary Fund’s pistol, the policymakers conceded that money mattered, and the Bank was set to monitor its supply. “Sterling M3”, or broad money, was now the key indicator. Even then, Charles Goodhart, the Bank’s resident sage, warned that if you hung the whole weight of policy on one peg, it would come out of the wall. So it did. When, decades later, policy was hung on a particular measure of inflation, it happened again.

The lean years saw the Bank at its best in practice rather than theory. It fought a professional rearguard action for sterling. Roy Bridge, in command, likened his tactics to sex: “Dissertations tend to stimulate unduly the imaginations of those less experienced in the subject.” (He meant the Treasury.) It welcomed foreign banks and restored London’s primacy as an international financial centre. It coped with a crisis which saw 50 banks or quasi-banks at risk. Gordon Richardson as Governor enlisted the chairmen of the High Street banks to crew his lifeboat: “Gentlemen, I am not appealing to altruism.”

That chilling injunction finds no place in Capie’s pages — 98 more than Fforde’s — which are stronger on paperwork than drama. The Bank’s archives are full of “notes for the file”, which are cited at length, but their authors, naturally tended to write in Bankese, and the habit is catching. So Capie’s readers can find themselves expected to puzzle the story out, as Fforde’s were. Perhaps, like the six-volume life of Disraeli, this work will come to be recognised as a quarry and a classic.

How will history judge today’s Bank? Shorn of many of its duties, set to focus on monetary policy and an index that bore out Goodhart’s Law, it suddenly needed to be more of a bank and less of a study group. Not that its historian will exactly say so.

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