Inside the Bank of England: Memoirs of Christopher Dow, Chief Economist 1973-84 PDF
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Inside the Bank of England Memoirs of Christopher Dow, Chief Economist, 1973–84 Edited with an Introduction by Graham Hacche and Christopher Taylor Inside the Bank of England Palgrave Studies in Economic History Series Palgrave Studies in Economic History are designed to illuminate and enrich our understanding of economies and economic phenomena of the past. The series covers a vast range of topics including financial history, labour history, develop- ment economics, the industrial revolution and world economic history. Titles Include: Graham Hacche and Christopher Taylor INSIDE THE BANK OF ENGLAND: Memoirs of Christopher Dow, Chief Economist 1973–84 Palgrave Studies in Economic History Series Standing Order ISBN 978–1–137–32436–8 Hardback You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England Inside the Bank of England Memoirs of Christopher Dow, Chief Economist, 1973–84 Edited with an Introduction by Graham Hacche and Christopher Taylor with a Foreword by Sir Kit McMahon © The Estate of Christopher Dow 2013 Editorial and Selection Matter © Graham Hacche and Christopher Taylor 2013 Foreword © Sir Kit McMahon 2013 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2013 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978–1–137–03230–0 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 22 21 20 19 18 17 16 15 14 13 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne Contents Figures and Table viii Foreword ix Editors’ Introduction 1 Who was Christopher Dow? 1 The Bank when Dow joined 3 The UK economy in the 1970s 9 The economy after 1979; monetarism and its consequences 11 Dow’s contribution to the policy debate 13 Relevance to p resent- day policy issues 16 Dow’s contribution to modernizing the Bank 19 Concluding matters 21 Acknowledgements 24 Statistical Annex 24 1 The Crisis Year 1976: Events to the Autumn, with a Brief Retrospect Back to 1973 34 My first three years at the Bank 34 Exchange rate policy 44 Events of March to early September 1976 47 Supporting the pound 54 Bank–Treasury relations 56 The sterling crisis deepens 59 2 Autumn 1976 to Summer 1977 65 September to December 1976 65 Negotiations leading to the IMF agreement 65 The three months to Easter 1977 73 A stronger pound 73 Relations with the Bank’s department heads and the Governor 78 Easter to August 1977 79 A new phase of incomes policy 80 Changes at the Treasury 82 A visit to the United States 83 Old and new policy dilemmas 85 A more powerful Bank? 88 v vi Contents 3 Autumn 1977 to Summer 1978 90 Uncapping the exchange rate 92 ‘Practical monetarism’ in the Bank 96 From an expansionary Budget to contractionary measures 98 A call to reconsider methods of monetary control 100 Thoughts on independence, and personalities and aspirations at the top of the Bank 102 Bank–Treasury relations and the seignorage issue 105 Beginnings of change at the Bank, and auguries for the future 107 Social life, and some observations on the Governor 108 The Iron Lady 110 4 Autumn 1978 to Summer 1979 114 Formation of the European Monetary System 115 The ‘winter of discontent’ 118 Attitudes and conflicts at the top of the Bank, and preparations for reorganization 122 Adjusting to the change of government 128 Impending recession, and policy dilemmas 134 5 Autumn 1979 to Summer 1980 138 Growing worries about the economy 138 Reorganization of the Bank 145 As recession hits, a different style of government 153 Violent incidents reflect rising social tensions 163 6 Autumn 1980 to Summer 1981 165 Recession deepens, though monetary growth exceeds targets 166 Mrs Thatcher attacks the Bank 167 Other participants in the policy debate 173 Further tightening in the 1981 Budget 176 The battle over monetary base control 178 Bank–Treasury relations 182 Policy drifts and lacks substance 184 7 Autumn 1981 to Summer 1982 188 The economy in 1981–82: bumping along the bottom 188 The Prime Minister dictates policy 193 The Falklands war 197 The overfunding debate 198 Changes in the Bank’s senior staff 200 Looking to the future of the Bank, and of policy 202 Contents vii 8 Autumn 1982 to Summer 1983 208 A year of marking time, in the economy and personally 208 The Latin American debt crisis 211 Mrs Thatcher’s ambivalence on monetary policy 215 Announcement of the new Governor, and other changes 221 Governor Richardson retires 230 Thinking about my retirement 234 Appendix: Main Problems Ahead for Economic Policy 235 9 Conclusion: Summer 1984 246 Notes 253 Notes on Names 259 Calendar of Main Developments 271 Index 295 Figures and Table Figures Charts based on annual data, 1971–2013: A1 Growth of real GDP, UK and G7 25 A2 Output gap, UK and G7 25 A3 Unemployment, UK and G7 26 A4 Consumer price inflation, UK and G7 26 A5 World commodity prices 27 A6 Current balance of payments, UK and G7 27 A7 Dollar/sterling exchange rate 28 A8 UK nominal and real effective exchange rates 28 A9 U K government net lending/borrowing, actual and cyclically adjusted 29 A10 UK s hort- term and l ong- term interest rates 30 Charts based on quarterly data: A11 Profiles of UK recessions since the 1970s 30 A12 U K official reserves and foreign currency borrowing, 1973Q4–1983Q4 31 A13 G rowth of UK narrow and broad money, 1973–84 31 A14 U K velocity of circulation of narrow money, 1973–84 32 A15 U K velocity of circulation of broad money, 1973–84 32 Table A1 U K monetary targets and outturns, April 1976–April 1985 33 viii Foreword At different times and in different capacities I worked with or for Christopher Dow for thirty years, culminating in the eleven years described in these memoirs when I was his close colleague at the Bank of England. I have always regarded him as one of the most outstanding British economists of the post-war era and was therefore very pleased when he joined the Bank. Whether in retrospect he was pleased to have made the move must, however, be open to question. It was his misfor- tune to occupy a top position in the British economic establishment when his experience and ability to provide objective, evidence-based advice on how best to manage the economy became less wanted – indeed, in his later years at the Bank, disdained by a government largely in sway to a dogma often only half-understood and subject to violent mood-swings in its application. As a result much of these memoirs have a melancholy, even despair- ing tone. Reading them myself, I am reminded vividly of what it was like while paradoxically at the same time being unable to believe that it could have been so. Christopher Dow believed strongly that to manage the economy it is necessary to observe, forecast and operate on real variables rather than financial flows, the ex-post figures for which he saw as merely systems of identities inherently without causal significance. This not only put him at odds with the monetarists of his day, now happily a distant memory, but also would have set him against today’s big battalions fighting public sector deficits. At one point he says, ‘The Bank will never give sound advice until, despite its history and natural bias, it learns to think straight about the PSBR. If I could bring that about, that would be something.’ Twenty-seven years after leaving the Bank, I am not in a position to say with confidence how far that aim has been achieved. But my impression is – not very far. Christopher’s vision for the Bank, linked with these views, was that it should be a source of advice for government genuinely alternative to Whitehall; and that it should have an independent right and respon- sibility to implement policy. Its remit, however, would cover, much as does that of the US Federal Reserve, the maintenance of high employ- ment and activity as well as the control of inflation. One can be confi- dent that he would not think much of our present position where the ix
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