Central banking in the bad old days

The Bank of England: 1950s to 1979
By Forrest Capie
Cambridge University Press (£95)

Mervyn King is a keen cricketer, as is Charlie Bean, his monetary policy deputy at the Bank of England. Bean is an opener with a correct technique. King bowls slow, wobbly what-nots, and is reportedly hard to get away. But it is unlikely that he could have emulated the feat of Jack Davies, a Bank director in the late 1960s, who bowled the great Don Bradman for a duck in the 1934 game between Cambridge University and the victorious touring Australians. What a falling off is there.

But in other respects the Bank is a far stronger institution today than during the turbulent and difficult decades described by Forrest Capie in this latest volume of the official history, which takes us from nationalisation in 1946 through to the election of Margaret Thatcher in 1979. It is not a cheerful tale. To borrow a phrase, happy institutions are all alike – they have a clear sense of purpose and skills and powers to match; every unhappy institution, of course, is unhappy in its own way. In Capie’s view, that was the fate of the postwar Bank of England. Cribbed and confined by the 1946 Act, and lacking a consensus view of its role in financial markets and in economic policy, it struggled from crisis to crisis.

Capie’s conclusion, on page 833 of his exhaustive but never dull study, is that “the Old Lady left undone those things she ought to have done and did those things she ought not to have done”. This might be considered an ungenerous verdict, not wholly justified by what has gone before, but one can understand why that is his final thought, after wrestling with three decades’ worth of depressing files.

The economic background was generally unfavourable. Of course, in absolute terms, the British people were far more prosperous at the end of the period than they had been at the end of the war. But the UK’s relative performance was undistinguished, and the years were marked by repeated sterling crises, episodes that sorely taxed the Bank’s capacity in the markets. Some were negotiated with great technical skill, which was little appreciated by politicians and commentators at the time (or indeed since), but the overwhelming impression is one of retreat, of fingers held bravely in dykes as the flood waters came rushing over the top.

These were not “nice” (non-inflationary, consistently expansionary) decades in the Mervyn King sense. Inflation gradually joined sterling weakness as a pressing concern, yet the Bank lacked a clear intellectual framework within which to understand it. Capie tracks the internal debates on the efficacy of prices and incomes policies and describes the early stirrings in the monetary undergrowth as money supply targets slouched towards Westminster to be born. They were formally adopted in 1979 in Geoffrey Howe and Nigel Lawson’s medium-term financial strategy.

He portrays an institution without a settled view. Charles Goodhart brought economic rigour to the Bank’s analysis, but his attempts to push thinking forward were sometimes thwarted. Both Christopher Dow and John Fforde had interesting minds, but Fforde’s thoughts were often obscured in elaborate, metaphor-laden memoranda (frequently involving analogies drawn from his RAF experience), and as for Dow, “frequently it is not easy to be clear what he was saying”.

Capie also catalogues the development of banking supervision, a relevant account as the Bank prepares to take up that heavy burden once again after a 14-year furlough. The secondary banking crisis of 1973-75 (well recounted here) led to a significant increase in the staff and resources devoted to the activity, but the Bank was always a reluctant supervisor and for years resisted European attempts to formalise the process. The Banking Co-ordination Directive, finally adopted in 1977, was a decisive influence on the development of closer supervision in London.

In that, and many other areas, the latest volume is a treasure trove for economic historians. There may be a few too many charts and graphs on the evolution of the sterling balances, and one can get a little lost in the battles of memos between wordy grandees on subjects whose import seems less than evident today. But Capie has done a fine job, and is particularly strong on what one might call the science of inter-institutional dynamics. He understands that Treasuries and central banks, like cats and dogs, are put on earth to bark and hiss at each other. Each woof and each psss are lovingly logged. It’s great fun, if you like that sort of thing.

The writer is director of the London School of Economics and a former FSA chairman. He was deputy governor of the Bank of England from 1995 to 1997

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