Book review: Harold James on the Bank of England

“Making a Modern Central Bank:  The Bank of England 1979-2003”
Harold James, 2020.  Published by Cambridge University Press

 

The Bank of England is over 325 years old, and for much of its existence it has been at the forefront of central banking.  More than any other central bank it is known simply as “The Bank”, and for much of the period from the middle of the 19th century to the middle of the 20th, it bestrode the world of finance and defined what a central bank should do and say – indeed even what a central bank should physically look like.

It is not very surprising therefore that over the years it has attracted a large number of people to write about it.  Their books range from scholarly treatises on the evolution of central banking, to more straightforward histories of the Bank and its place in Britain’s financial system, to rather more accessible collections of stories, anecdotes and reminiscences, the last often by former members of staff.  A quick email to the Bank’s librarian asking what she might recommend for someone wanting to read about the Bank produced a reading list of no less than 60 books, and that is only those published since the Second World War.

The most recent additions to the list, David Kynaston’s meticulously detailed history “Till Time’s last sand” (2017) and Paul Tucker’s magisterial assessment “Unelected Power” (2018) were so comprehensive and so well received that it might be thought difficult for anyone to find very much more to say.  But in his latest book “Making a Modern Central Bank:  The Bank of England 1979-2003” [1], Professor Harold James of Princeton University has given us a very different and highly readable account of a period of great importance for the Bank, which deserves the attention of a wide readership.

James has chosen to concentrate on a period of just 24 years (personal note, the period 1979‑2003 almost exactly coincides with the time I was working at the Bank), and his thesis is that in this period the Bank was totally reformed, from being rather old-fashioned and ineffective into a modern, dynamic and much more highly respected institution.  And his underlying assessment is that this was a very human story, relying far more on personalities, both at the Bank itself and in Westminster, and their reactions to outside events than many people realise.

James is fortunate of course that many of the actors, especially those from the latter part of his chosen period, are still alive and very much active, and this gives the narrative a vibrancy and immediacy that longer perspective histories cannot have – albeit at the cost of the book becoming at times an exercise in self-justification after the event, with people setting out not what actually happened but more what they would like the record to be.  Even central bankers, it seems, care about their reputations, and few people whom James quotes in the book seem to have ever made – or rather confessed to – a false judgment or unwise decision.

If there were any doubts about this desire to “set the record straight”, then the book launch for the book last week, hosted by OMFIF and bringing together many of the leading dramatis personae, would certainly have dispelled them.  A fascinating 3 hours of reminiscences and debate, with more than a few reputations being burnished or defended with real vigour:  certainly the passage of time has not in any way diminished the strength of feelings arising from the events of the period[2].

James has also chosen the period for his analysis well.  Few of his readers would disagree that the 1970s was a fairly dismal decade economically for the UK, and the Bank’s reputation for competent management of the economy was at a low ebb by the end of it.  Equally, by choosing to end his study in 2003, at the end of both Eddie George’s governorship and what was later called the NICE decade (“Non-Inflationary Consistently Expansionary”) from the early 1990s, he avoids having to make much mention of the financial collapse of just 5 years later.  So having picked a clear low point to start from and high point to end with, it is not difficult for him to paint a picture of the Bank upping its game over the 24 years.

But I don’t think it is entirely fair to paint the Bank of 1979 as harshly as he has, and I would certainly take issue with his rather Panglossian picture of the Bank Reborn and Triumphant in 2003.  The seeds of the Global Financial Crisis were sown well before 2008, and it is not just the wisdom of hindsight that queries whether the total concentration on monetary stability (ie, low inflation) in the first years of the current century did not create the risk-taking excesses that led to the crisis.  Many were writing on this theme even before 2008, observing that while lower inflation brought many benefits, it did not of itself imply either better growth or macroeconomic stability, and suggesting that too single-minded an attention to price stability alone might not in the long run be optimal for the financial system or indeed the wider economy.  But central bankers – Mervyn King’s Bank of England among them – did not want to hear this at the time.

Equally, while someone writing in 2003 might justifiably have claimed that “A modern central bank has a much narrower and more limited set of tasks or functions than the often historical institution from which it developed”, as James does in his opening paragraphs, to read these words in 2020, when central banks across the world are undertaking a range of actions and financing operations without parallel in response to the pandemic, is just a little odd.  One hesitates to suggest that these words were written in 2019, say, and escaped revision for more recent events, but no‑one looking at central banks now would claim that they or their balance sheets are “much narrower” than in the past.

The book could for me have done with a more formal introduction, not least to provide the reader with a clear road map of the book, and would certainly have benefitted from a more forceful conclusion – as it is the last substantial chapter is more than 40 pages long and more a compendium of issues outstanding at the 2003 close date for his research than a summary statement of what the book has taught us.  And the proof reading might have caught the fact that Robin Leigh Pemberton always wrote in red ink on internal memos (comment, page 259) and certainly should have removed the reference to the Hong Kong Monetary Authority’s role in the 1989 discussions on the future of Midland Bank (page 201) – it was not formed until 1993.

Stylistically, the book is more of a succession of episodes rather than a coherent and connected analysis.  The section at pages 189-201 on Hong Kong for example, and the question of whether HSBC should be allowed to take over Midland, while both interesting and revealing stands somewhat alone;  one wonders if it would have been worth such a detailed mention were it not for the leading role played by Sir Kit McMahon, former Deputy Governor of the Bank and then chairman of Midland.  And at various points one really misses not hearing more of the Treasury’s side of matters:  James has drawn very heavily on Bank papers but less comprehensively it seems on Whitehall’s.

But this is I think to miss the point.  James has not set out so much to write a text-book on central banking, but an exposition of the role of individuals in the affairs of institutions, of history being made by the people in office at the time, with all their character traits, aspirations and failings, as much as by events.  It is an age-old question for historians:  do events shape people or do people shape events?  In this book, James shows that even in the seemingly dry and technical world of central banking, one can never escape the dominant role of the people involved.  And in doing so, not only has he made central banking interesting, but also – which is perhaps rather more difficult – central bankers.

 

[1]              https://www.cambridge.org/core/books/making-a-modern-central-bank/901C6C0969209C20D1962B698DA26874

[2]              For a full report of the book launch and conference that accompanied it, see here.