The day Gordon set the Bank free - and brought it under his control
As a confidant of Gordon Brown over two decades, William Keegan has had a unique insight into the Chancellor's career. In three extracts from his new book, he tells how Brown carved up the Labour leadership, gave the Bank its independence, and met his wife-to-be
politics.guardian.co.uk
Sunday September 28, 2003
The Observer
When the Treasury announced that Gordon Brown was holding a press conference on the Tuesday following the election, the financial and political commentators and City analysts assumed that this would be to reveal that he had decided to raise interest rates after the scheduled monthly meeting of Chancellor and Governor. It was; but that was not the only reason. The new Chancellor also announced that he was handing over operational responsibility for interest rate changes to the Bank of England.
The effect was electric, but not on everyone. One agency reporter asked him when he was going to change interest rates again. He was not. That was the whole point, except, as the details of the announcement indicated, in times of national emergency, when the new Monetary Policy Committee (MPC) might have to be overruled.
In many years of covering Treasury matters, I had never seen anything quite like it. After the press conference, Sir Terence Burns, then Permanent Secretary, came across the room to ask what I made of it. Frankly, I could hardly believe it, and told him so.
My generation had been influenced by the hard times Labour (and, for that matter, Conservative Chancellors such as Churchill in 1925) had had at the expense of an independent Bank of England. Some of my best friends were central bankers, but central bankers had a deflationist streak that went with the job.
James Meade, one of Britain's few Nobel Prize winners in economics, had once observed: 'We nationalised the Bank of England in 1946 to prevent another 1931-3' - by which he meant all the deflation that went with the return to the gold standard at an overvalued exchange rate in 1925, and the impalement of the Labour government on that hook in 1929-31.
That episode had ended with Ramsay MacDonald at the head of a national government, and was deeply embedded in Labour folklore. It was not, for example, an episode that endeared MacDonald to Gordon Brown's hero, James Maxton.
This was not something Gordon Brown felt he had to do in a hurry because of a manifesto commitment. On the contrary. Whereas the manifesto stated, 'to encourage work and reward effort, we are pledged not to raise the basic or top rates of income tax throughout the next Parliament' and 'for the next two years Labour will work within the departmental ceilings for spending already announced' (ie a two-year 'freeze'),the only commitments with regard to the Bank of England and monetary policy were 'we will match the current target for low and stable inflation of 2.5 per cent or less. We will 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'.
The phrase 'reform the Bank of England' did not immediately conjure up a vision of independence day. On the other hand, the more one reflected on the phrase 'free from short-term political manipulation', the more it could only mean taking up the suggestion of Ed Balls (via Larry Summers) in that 1992 Fabian pamphlet that the Bank should, indeed, be made independent.
But it has to be said that this was not a point commentators or analysts had latched on to after publication of the manifesto. If anything, the general feeling was that New Labour was annoyed with the Bank of England for its role in failures of banking supervision (the Johnson Matthey affair in 1984, and BCCI in 1991) as well as its association with the 'bust' that followed the Lawson Boom, not to mention the fiasco of Black Wednesday itself.
It was a measure of how important the influence of Ed Balls was in the policy decision that while Sir Terence Burns, the Permanent Secretary of the Treasury, was passing the time of day with me as the press conference broke up, most of the rest of the press and the news agencies' representatives were crowding around Balls for extra briefing, a number of them standing on chairs in order to see and hear what was going on.
At this stage Balls was nominally only a 'political adviser', and not even a fully fledged Treasury official. Still not being able to take it in, I repaired to a local coffee house with Robert Chote, then of the Financial Times, and Gary Duncan, then of the Scotsman, all three of us shaking our heads and wondering just what madness had got into New Labour - and so soon after the election!
Yet from the point of view of Brown and Balls, this was not some deranged return to the past, an open invitation for the latest Labour government to be subjected to a latter-day Montagu Norman attacking socialism on behalf of vested interests in the City.
If anything, the granting of power over monetary policy to the MPC was a stratagem to avoid such an outcome: a means by which a Labour government could, in the words of Balls, 'do the things a Labour government should do' without being brought down by some chance financial crisis.
It was in the course of the last weekend before the May 1997 election that Gordon Brown finally came round to the view that he would make the Bank of England independent, and do so as soon as possible. Reflecting at home in Scotland, he concluded: 'What a release an independent Bank of England would be from a "bankers' ramp".'
Certainly the new Chancellor enjoyed the element of coup de theatre in springing this announcement on a surprised world 10 days after that pre-election weekend. But he had given it long and serious thought.
Whereas Ed Balls had been urging it upon him from the time of that 1992 Fabian pamphlet, Brown had displayed characteristic prudence before eventually accepting what in effect became his alternative lodestar to the discredited exchange rate mechanism. The ERM could no longer be Labour's lodestar.
From the start of his association with Gordon Brown, Balls was preaching independence of the Bank instead. His advocacy became especially strong from 1995 onwards.
His message was: 'You should make the Bank independent. You should lose control in order to gain greater control.' |
