Bank And Government HAS THE BANK OF ENGLAND’S GOVERNOR GONE TOO FAR?

Press, Volume CIV, Issue 30682, 23 February 1965, Page 12

Bank And Government HAS THE BANK OF ENGLAND’S GOVERNOR GONE TOO FAR?

[By

NIGEL LAWSON

in the •'Financial Times.'' London!

(Reprinted from the ‘ Financial Times.'' by arrangement)

In a nation that loves anomalies, the position of the Bank of England is one of the most remarkable. Nationalised years ago. it has vigorously retained its independence. After more than two years of intensive investigation, the Radcliffe Committee on the Monetary System was driven to admit that “The existing relationship (between Government and Bank) is not easy to describe in formal language with any great precision.’’ And the former Governor of the Bank, Lord Cobbold, has referred to “this rather curious position of the Central Bank, outside politics, half in and half out of the Government.” The justification of “this curious position” is the pragmatic one: it works.

At a time when Britain's standing in the world has sadly slipped, the Bank of England enjoys undiminished prestige. And in the hardfaced world of central banking prestige is not gained by tradition alone: the Bank of England's world status is a measure of the professionalism and expertise it brings to all its activities.

Dramatic Manner This was demonstrated in the most dramatic manner possible last November, when Lord Cromer, the Governor of the Bank, in one hectic day of international telephone calls organised 3.000 million dollars of credit from his fellow central bankers abroad to stauncli the biggest ever run on sterling. To be sure, the stories in the Press the next dav of how Lord Cromer single-handed saved the £, rather as the late

Errol Flynn once invaded Burma, were somewhat exaggerated. The real reason that the £ was saved, and the credit secured, was that the Americans, terrified that if the £ went, the dollar would go too, decided to weigh in on sterling’s side, But the Governor played his part with speed, skill and diplomacy. As one of his colleagues put it at the time, he had a dual role: he was playing both for the England XI and for Basle United; borrowing on behalf of the Government but at the same time acting as a member of the club of central bankers, determined that club rules should be respected. But these are not the only rules that have to be respected. If the Bank of England is to maintain its present autonomy it must also respect two unwritten domestic rules.

The first is that, in Lord Cobbold's words it remains “outside politics”—and that does not simply mean outside party politics. The second is that it must accept that, if financial chaos is to be avoided there can be only one economic policy in operation at a time, and that must be the Government's. Whatever the Bank's views, it must do nothing to jeopardise that policy.

Rules Broken In his speech on February 15, Lord Cromer clearly broke those rules. Some of the paradoxes in his speech, certainly, are of little account. He urged us. for

example, to emulate the “good husbandry” of those who (for the time being) have bailed us out. when in fact the United States, who provided one-third of the 3000 million dollars, has an even bigger and more persistent payments deficit than we have. He warned us “to avoid the menace of hardship which could face every family in the land," when in fact, if we have been living beyond our means, we shall feel the same degree of family belttightening whether this is ended by the day of remedy or the alternative described by Lord Cromer as “the day of reckoning.” And having urged the need “to act early," he devoted most of his speech to a plea for cuts in Government spending, the form of economic regulation that has the most delayed effect of all.

But paradoxes are one thing. Far more important is the determined campaign the Governor has been waging against, the public expenditure in general, and the open attempt to influence the Budget judgment now being thrashed out in Whitehall.

It is one thing to warn about the level of total national expenditure. It is quite another to complain about the balance between public and private. The first is an economic matter. The second political. The previous Government, for example, felt that over the next five years public expenditure should grow faster than private, because people wanted schools, hospitals and so on more than the goods and services provided by the private sector. They may have been right or wrong; but the fact remains that this is a political issue which it is up to the Government, and not the Central Bank, to decide. This is even more obvious when it comes to defence expenditure. The Governor, in his speech, implied that we should cut back on “financially unremunerative expenditure overseas,” which means largely military spending. Now such spending may or may not be necessary for Britain’s security and defence or to achieve other national political objectives. But any decision to cut back is a political decision, based on economic (certainty) but also military and general political grounds. It can never be a purely financial mater, whatever the state of the balance of payments. And therefore it can never be a matter for the Bank of England to pronounce on in public. Second Breach But it is the Governor's second breach of the rules that is still more open to criticism. It is well known that a bitter battle is now being fought in Whitehall over the Budget between the Chancellor of the Exchequer, Mr Callaghan, and the Minister for Economic Affairs, Mr Brown. Both sides agree that the economy is at high pressure now, but that demand is likely to weaken by the end of the year. The Treasury emphasises the present high pressure, and concludes that for this reason, as well as to reassure foreign opinion, taxes should go up in the Budget. The Department of Economic Affairs emphasises the natural weakening expected at the end of the year, and concludes that it would be wrong to deflate in the Budget. The Treasury, too, feels that yotr cannot run an economy efficiently and keep prices in check when unemployment is as low as it is at present; while the Department of Economic Affairs believes that with George [Brown striking terror into

the hearts of anyone who dares to raise a price, you can.

In his speech the Governnor weighed in, publicly and unequivocally, on the I Treasury side. No doubt he was worried that, because of its greater political palatability to a Government with 'an exiguous majority, the [outer side might otherwise [win. Of course, it is not Lord Cromer’s fault that this open row between the two economic ministries exists. But each side has a perfectly respectable point of view. And by his speech the Governor has tried to limit the Government's freedom of choice by creating a situation in which, if the Treasury were to lose the battle, ster;ling would be damned by his jown public warning, and our .impending negotiations with the International Monetarx I Fund for a medium-term Joaii .made harder. Private Channels No-one would deny that the Bank of England has not merely a right but a duty to express a view, cogently and forcefully, on the state of the economy whenever it sees fit But there are regular private channels for this, which the Bank uses to the full. It is quite a different matter when the Governor of the Bank makes a public appeal to the Government, eight weeks or so before the Budget, and in language that rates a sixcolumn headline on the front page of the “Daily Express.” The Earl of Cromer is an urbane, charming, civilised and above all honourable man. The views he expressed are not simply his own: they are held by his fellowdirectors on the Court of the Bank of England, by the foreign bankers to whom Britain is in debt, and by many others. There is no doubt that he feels a sense of deep personal responsibility to the overseas central bankers with whom he personally negotiated the securing, and more recently the renewal, of the vital shortterm credits. There is no doubt, too, that he made the remarks he did only because he felt it to be in the urgent national interest to speak out.

But for all that, it was less than wise. Not just in the short term, but in the long term, too. For in the long run, the Bank of England will not be able to retain its present anomalous position of autonomy if it indulges in what, in effect, amounts to a public challenge to the elected Government . that no Government, of whatever political party, can be expected to tolerate. And that would be a pity.