Published by EH.Net (October 2023).

Harold James. *Making a Modern Central Bank: The Bank of England 1979-2003*.
Cambridge: Cambridge University Press (Studies in Macroeconomic History),
2020. xxiii + 543 pp. £31.99 (paperback), ISBN 978-1108799492.

Reviewed for EH.Net by John Singleton, Sheffield Hallam University.



Harold James’s *Making a Modern Central Bank* is the latest in a series of
authoritative commissioned histories of the Bank of England (hereafter
BoE). Apart from a weighty volume on 1941-1958, written by a retired BoE
official, each is from the pen of a distinguished economic historian. James
is a professor of history at Princeton whose previous works include
histories of the IMF and of European monetary integration. *Making a Modern
Central Bank* is a lively and relatively fast-paced account of a tumultuous
period in British monetary and economic history.

Three episodes stand out in this period: the aggressive disinflation of the
early 1980s, the events leading up to Black Friday in 1992 when sterling
was forced out of the European Exchange Rate Mechanism (ERM), and the dash
in 1997 to give the BoE operational independence in the conduct of monetary
policy. The BoE’s role in supervising individual banks and the banking
system also receives considerable attention, but no events or accidents in
the supervisory arena matched the scale of those in the monetary arena.

James’s account of monetary policy formulation and implementation in the
early 1980s creates an impression of organized chaos and almost breathless
activity. In its campaign to squash inflation, the first Thatcher
government differed from its predecessors in having the fortitude to press
on regardless of any collateral damage. The BoE had a say in monetary
policy implementation, as did Treasury officials, but macroeconomic policy
was driven by Margaret Thatcher, the Prime Minister, and to a lesser extent
by Geoffrey Howe, the Chancellor of the Exchequer. Although trained as a
chemist and lawyer, Thatcher was an enthusiast for monetarist economics.
She commissioned and attended macroeconomic policy seminars and sought
congenial advisers beyond the walls of the BoE and Treasury. The
politicians were hands on, and there were frequent and sometimes confusing
arguments over when, and by how much, to tweak policy instruments. Monetary
targets, interest rates, and fiscal targets all played parts in a regime
that sat at the eclectic end of monetarism, yet it worked. The intervention
of the BoE in policy debates was rarely decisive; as James demonstrates,
the central bank was but one source of advice on monetary policy.

Nigel Lawson, Howe’s successor as Chancellor, was rather more independently
minded, though no less overawed by Thatcher. Lawson put greater emphasis on
the exchange rate as a tool for ensuring monetary discipline and presided
over the UK’s accession to the ERM system of pegged exchange rates which
proved short-lived. The BoE failed again to exert a powerful influence over
policy. Indeed, the BoE was itself divided, with some senior staff members
favouring closer alignment with the German and other European currencies
and others remaining sceptical. James, correctly in my view, regards the
UK’s departure from the ERM as a turning point that permanently shattered
policy makers’ fascination with pegged exchange rates, paved the way for
new approaches to monetary policy and central bank–government relations,
and led to a fundamental divergence from the European Union (pp. 307-309).

After the ERM mishap, the government endorsed a new regime of inflation
targeting, albeit one without operational independence for the BoE. James
shows how political control over interest rate decisions became even more
obvious to the public in the mid-1990s, courtesy of the so-called Ken and
Eddie shows. Ken Clarke, the Chancellor, and Eddie George, the Governor of
the Bank of England, held regular and well-publicised meetings to discuss
monetary policy. It became apparent that Ken and Eddie did not always agree
and that when they differed it was Ken who had the final say over the
policy interest rate, possibly after some horse-trading with Eddie. This
embarrassing muddle ended when Labour won the election in 1997 and, in
order to convince the public and the markets of its economic conservatism,
passed a law to make the BoE operationally independent with respect to the
implementation of monetary policy, the government retaining the power to
specify the inflation target. This reform, in line with international best
practice in the 1990s, was welcomed by the BoE, and not least by Mervyn
King, the incoming Deputy Governor, by profession an academic economist.
James concludes his discussion of monetary policy by examining the early
years of the Monetary Policy Committee (MPC), the body within the BoE that
was tasked with setting the policy interest rate.

A significant portion of James’s volume is devoted to crises affecting
individual banks including Johnson Matthey, the Bank of Credit and Commerce
International (BCCI), and Barings. A formal regime of banking supervision
was not adopted by the BoE until 1979. Prior to the scandals of the mid
1970s, it was assumed that British banks were run by good chaps, and that
supervision could be confined to polite chiding over tea and scones. The
deregulation and internationalisation of financial markets and institutions
created new and bigger risks. James demonstrates that the BoE did not keep
up with the proliferation of threats after 1979. Prudential supervision had
low status within the BoE, and perhaps did not attract the best staff.
Moreover, warnings from junior and middle-ranking staff sometimes failed to
reach senior levels within the institution. After further embarrassments,
prudential supervision was snatched away from the BoE by the Labour
government after 1997, somewhat marring, in the eyes of George and others,
the achievement of operational independence. Responsibility for oversight
of the financial system was retained by the BoE, but relatively little
attention was paid to this aspect of its portfolio, and the work of the MPC
was hindered by a shortage of intelligence on what we might term
macroprudential conditions.

A more detailed analysis of the crisis at the Midland Bank in the early
1990s would have been worthwhile. One of the UK’s largest commercial banks,
the Midland was unquestionably systemically important, and had been
mismanaged for some years. James (pp. 390-395) argues that the Midland
flirted with disaster in the early 1990s. In view of the collapse of
several large UK banks in 2007-2009, the earlier problems at the Midland
are passed over rather lightly.

The BoE as an institution evolved significantly between 1979 and 2003, and
James comments perceptively on changes in personnel and attitudes and
shifts in the relative importance of different departments and functions.
The BoE certainly became increasingly academic in recruitment and style
over the period covered in *Making a Modern Central Bank*. Successful
careers could no longer be built on bureaucratic competence alone, or on
familiarity with the peculiarities of London’s financial markets. The BoE
was relieved of a weighty bureaucratic burden when exchange controls were
abolished in 1979; almost twenty years later it was forced to transfer
prudential supervision to the new Financial Services Authority (FSA). By
stages, the BoE also retreated from its role as advocate for the City of
London, a role that had involved conflicts of interest, and one that lost
its purpose as the City became increasingly controlled by foreign
institutions. Consequently, the BoE’s function as monetary policy authority
was unrivalled by 2000. It was quite a transformation.

At the end of *Making a Modern Central Bank*, it is not easy to assess just
how successful the BoE was between 1979 and 2003, not least because its
functions and objectives were subject to alteration. Until 1997, the BoE
was captive to the monetary policy preferences of elected politicians and
could claim that it was only following orders. Would an ‘independent’
central bank have done things differently between 1979 and 1997, and would
the results have been better or worse than control by Thatcherite
politicians? We cannot be sure. The BoE certainly made errors in the
prudential field, not least with respect to the criminal BCCI, and was
subsequently punished by Labour politicians who transferred the supervision
of banks to the FSA. James argues in the epilogue that by 2000 the Bank was
‘widely recognized as a best-practice central bank’ (p. 453) while noting
that within a few years the best practice of the 1990s would come under a
cloud.

*Making a Modern Central Bank* maintains the high standard set by Sir John
Clapham, R.S. Sayers, and Forrest Capie in previous official histories of
the Bank of England. Scholars of economic policy in late-twentieth century
Britain, and of the comparative history of central banks, must engage with
this book.



John Singleton is Emeritus Professor of Economic and Business History at
Sheffield Hallam University. His publications include* Central Banking in
the Twentieth Century* (Cambridge University Press, 2011) and, as co-editor
with Nicole Robertson and Avram Taylor, *20th Century Britain: Economic,
Cultural and Social Change*, 3rd edition (Routledge, 2023).

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