This article is taken from the March 2021 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering three issue for just £5.

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The Governor’s eyebrows, so I used to be told, were the Bank of England’s own nuclear threat. When he raised them, the City trembled and obeyed. Then, one day, the reigning Governor — this was the affable Robin Leigh-Pemberton — told me that they had appeared in his dreams. More precisely, they had disappeared: he dreamt that his eyebrows had fallen out. I could only take this as an omen, and so indeed it proved. Now, in the latest instalment of the Bank’s long and voluminous history, Harold James tells us what followed.

It is, to his mind, a story with a happy ending. The Bank became modern. It forfeited much of its empire, and instead was required to keep inflation low and stable, regaining control of its traditional weapon: Bank rate. This, after all, was what modern central banks did. It was not all that they needed to do, as events have gone on to show.

He takes up the Bank’s history at the end of a dire decade, when inflation went through the roof and the pound through the floor, and when banks, like dominos, tottered. An imperious Governor rallied the City, but his eyebrows were tested to the limit. The Bank’s authority was now seen to require the force of law, and the first of a series of Banking Acts followed. The results were unforeseen.

Proverbially, the Bank and the Treasury are the best of enemies, and were never more so than in the decade when his story opens

James concurs with the verdicts that blamed the Bank for some spectacular failures, notably BCCI — the two Cs were said to stand for cocaine and Colombia. As that case showed, a legalised rulebook had or could have loopholes of its own. The Bank was entangled in litigation that lasted for a decade. In the old days, its authority had been more securely based on its central place as the City’s arbiter of credit. The Bank, said an earlier Governor, is a bank and not a study group.

“Doing good by stealth” was its preferred approach and its catchphrase. Some of its secrets were well kept and long remained so. When Barings, the senior merchant bank, collapsed, there were other traditional merchant banks whose credit was put at risk of contamination. In total secrecy, the Bank arranged to stand by them. No reference to this exercise can be found in James’s history.

When the Midland became the shakiest of the High Street’s “big four”, the Governor feared for its credit and lined up a new chairman and chief executive. Once again in deep secrecy, he called in the senior partners of Cazenove, brokers to Midland and wise in the ways of the market. How, he asked them, might these changes be taken? Would the shares rise or fall? They would rise, he was told — and they did, and all was well. James, who calls Caz a merchant bank, does not quite follow what happened.

Proverbially, the Bank and the Treasury are the best of enemies, and were never more so than in the decade when his story opens. Nigel Lawson, first as financial secretary and then as chancellor, did not mind making that clear. Over one mismanaged rescue, he publicly accused the Bank of falling down on the job. Interest rates, he proclaimed, were his creature: “When I say they go up, they go up, and when I say they go down, they go down.”

They were there to control the supply of money. In the war against inflation, this at first was the lodestar of strategy. The prime minister, who was a true believer, found herself at odds with the Bank. She had never got on with the Governor — “He’s feline”, it was said, “and she’s canine” — and she rightly believed that his deputy was a heretic. Charles Goodhart, the Bank’s economic sage, had found a flaw in the strategy. Lawson, as time went on, was showing less faith in it.

He came to believe that sterling — the rate of exchange — would be a better lodestar, or stabiliser. For this reason he wanted to put the pound into the system that bound Europe’s currencies together. She would not hear of it. This, in the end, brought his resignation, but he had a surprise in reserve. In his resignation speech, he called for the Bank to be given its independence. Cromwell, so I thought, might as well have offered Dominion status to Connaught.

Years later, before the referendum on Brexit, a new-style Governor came out for remaining, and Lawson savaged him

Independence, of a sort, came eight years later, under a new government. By then the pound had been tied to Europe’s system and come untied. Costly and humiliating, its forced exit on “Black Wednesday” left a scar that never healed. Years later, before the referendum on Brexit, a new-style Governor came out for remaining, and Lawson savaged him.

Back in the 1990s, Tony Blair as New Labour’s prime minister was all for joining Europe’s brand new currency, but Gordon Brown, his chancellor, was not. No more was Eddie George, the Bank’s Governor: “If this thing is supposed to be for ever”, he told me, “I can’t see what the hurry is.”

Brown put up a target for inflation, and left the Bank to set its rate of interest so as to hit it. The price of this independence was stiff. The Bank would no longer manage the government’s debt, nor would it be the banking system’s regulator. A new authority, based deep in Docklands, would take that task over. George thought of resigning, but, being a practical man, stayed on to make the new deal work.

For a while it was seen to work well. All eyes were on the Monetary Policy Committee, where the City’s birdwatchers liked to spot the hawks and doves. (George was classed as an owl.) Others were supposed to look after financial stability, but less was heard of them. In theory, the Treasury, the Bank, and the new Financial Services Authority formed the three points of a triangle. The time came when banks started to fall through a hole in the middle.

The Bank would no longer manage the government’s debt, nor would it be the banking system’s regulator

Northern Rock was one of the first. An unreformed Bank of England would have done good to it by stealth. A suitable bank would have been called in and asked to take over. “There’s something”, the Governor would have said, “that we want you to do for us.” This could not now happen. In the end, Northern Rock’s plight became known and its customers queued in the streets to get their money out.

The great banking crisis that followed falls outside the scope of James’s history, but it found Andrew Bailey — then the Bank’s chief cashier, and now its Governor — writing colossal cheques. In the years that have followed, Bank rate, once the great prize of the Bank’s independence, has scarcely been touched. James allows himself to scroll forward to 2013 and the arrival of Mark Carney as Governor.

He proposed to give the markets forward guidance. Alas, the guidance proved so unreliable as to become a contrarian byword — but this episode must await the next volume of the Bank of England’s long history.