Like prime ministers, archbishops of Canterbury and popes, governors of the Bank of England can be split into two types: strong and weak.
Last week Mervyn King proved he is clearly on the stronger end of the spectrum, with his full-frontal assault on the Government's failure to reform the banks. No governor of the Bank in living memory has launched such an outspoken public attack on the Government of the day as King did on Tuesday evening. Flaming rows in private have been more common than you might think, but sounding off in front of the media – and King's speech was carried live by Sky and the BBC News channel – is unprecedented.
King made his intervention, tellingly, in Edinburgh, home to what had been two of the world's most respected banks and which have now been ignominiously semi-nationalised: the Royal Bank of Scotland and Bank of Scotland, today part of Lloyds. Edinburgh is also the political base of the Chancellor, Alistair Darling. King chose his location, and his words, carefully. "Never in the field of financial endeavour has so much money been owed by so few to so many," King declared, a typically clever turn of phrase. Never in the field of relations between the Bank of England and the Government has so big a public row been caused by one individual. But that was King's unmistakeable intent.
It wasn't only the Governor's use of language that was striking. For seasoned observers of the Bank, the speech could be seen for what it was: strong, even shocking, stuff. Usually you can almost write these sorts of efforts in advance: on the one hand, on the other hand; risks to the downside, risks to the upside; there's a case for this or that. Economics journalists call it "central bankese", a peculiarly opaque set of phrases that can be bolted together in almost any combination to yield very little, the verbal equivalent of the curtained stone walls that encircle the Bank's headquarters. This was different. It was released in unusually good time for it to be properly covered in the press, and it was given the prominence it deserved. King called the system of banking regulation designed by Gordon Brown in 1997 as "inadequate". He ridiculed the Government's proposals for reforming the banks as a "delusion". King threw back the criticism that he lives in an ivory tower by saying that it was the Government's policies which will leave the big banks in indefinite receipt of government support and guarantees, and were thus "unworldly". King, you got the impression, had had enough.
Conspiracy theories abound about what has led to the nadir in relations between the Governor and ministers. Politicians and central bankers – especially those of a high-minded and intellectual bent such as King – do not mix well in any case. The Brown-King relationship has been notoriously bad, and the King-Darling one not much better.
Yet this spat is about more than personalities. The Governor is in a position that many would recognise: of knowing that they are cleverer, understand more and can do a better job than the person they nominally answer to. In this case it is the supremely important matter of policy involving billions, if not trillions, of public funds, and of King being ignored or stymied in making and winning his case. A weaker governor might walk away from the controversy, content that he had done his best.
Not King. Just like the economics professor he once was, he went through each point in the argument about how best to reform the banks and forensically examined it, with unrelenting logic. He could not help but sound rude about ministers' failure to secure meaningful reform of the banks – an historic failure to "get" the financial crisis and use it as an opportunity for radical change. The strength of King's position on this is not simply that he heads an important institution that has become the informal economic conscience of the nation, nor his formidable intellect and facility, rare in economists, for words. It is rather his overwhelming case that taxpayers should not offer a cheque to the banks to pursue profit and bonus with little regard to risk. It is King, almost alone in the establishment, who seems to recognise how dangerous those bankers are to the wider economy.
It is not the first time King has clashed publicly with ministers, though not all of them simultaneously. Sometimes he has been on the side of the Chancellor against the Prime Minister. In the spring, just before Brown hosted the G20 summit in London, King warned against "significant fiscal expansion", undermining Brown in front of his international counterparts and effectively vetoing another fiscal boost in the Budget, an attitude shared by Darling (some weeks later Brown wanted to replace Darling with Ed Balls, who might have been more of an intellectual match for King).
A few weeks later, though, he used his Mansion House speech to tell Darling that the Bank had not been given the powers to fulfil its statutory role of ensuring financial stability. Again, there was the memorable language: "The Bank finds itself in a position rather like that of a church whose congregation attends weddings and funerals, but ignores the sermons in between." On that occasion Darling was photographed sitting next to King, looking more serious than usual. No wonder, perhaps, that a few weeks later King astonished the Treasury Select Committee when he told them that he had not been consulted by the Treasury on their reforms to the banking system. It was at this point that the poor state of relations between the two men charged with running the economy became most cruelly exposed.
There have been smaller bones of contention. Some in the Treasury suspect that the Governor leaked details of last year's £37bn recapitalisation of the banks to the Conservatives. Again, it was the brainchild of King rather than the Treasury. The Governor was reappointed in January last year to a second five-year term – but with some delay; one day we may find out who Brown really wanted in that job. The PM's dithering did not help relations. He tried and failed to put the Goldman Sachs economist Gavyn Davies into the role of joint deputy governor after the 1997 election, from which pole position he might have eclipsed King's chances of succeeding Eddie George. Brown also tried to block the appointment of Bank economist Charlie Bean as deputy governor last year.
Other sources of acrimony are more serious, and still rankle. Did the Bank fail to see the financial crisis coming, and keep interest rates too high for too long? It's a view offered by a former member of the Monetary Policy Committee (MPC), David Blanchflower, who said a few weeks ago that "clever as Mervyn King may be, he missed the crash and the subsequent recession, and hence, so did the consensual MPC on which I sat."
Did the Bank, or the Treasury, bungle the Northern Rock crisis? (King's hapless deputy, John Gieve, was the fall guy for that one.) Should the Bank have put up rates to stem the housing bubble? Should the Government have listened to the Bank's warnings about stratospheric growth of credit and the increasing risks to the financial sector? Ought the Bank to have done more to warn the Government of the approaching storm? Would there have been any point?
In Mervyn King, Brown has created a Frankenstein's monster, though the chances are that the PM will get his way. It was Brown who gave the Bank its operational independence in 1997, enhancing its power and prestige, and a feat regarded as Brown's greatest economic achievement (perhaps his only one). He appointed King, and reappointed him. Yet he has foolishly ignored the Governor's advice, even though King's plan to save the banks has done so much to help shore up the Prime Minister's reputation for economic competence. One cannot help feeling that if Brown, and latterly Darling, took the trouble to listen to the Governor and treat him, and the case he makes, with more respect, things would not be in the sorry state they are now.
Will it be resolved by the next election? As it happens, David Cameron said he will give the Bank more power over the banks, so maybe it will be soon after. But Cameron also used his Tory conference speech to attack King's policy of quantitative easing, so-called "printing money". King, we can assume, will not have welcomed that breach of convention. The battle lines for the next conflict between Downing Street and Threadneedle Street are already being drawn.
When governments and governors go to war
Imagine if Gordon Brown threatened to call an election if Mervyn King didn't do as he was told? Or put a call through to the American President in front of a horrified governor, with a jet said to be on stand-by for Washington – just to prove that a Labour government didn't have to rely on the Bank alone for financial support?
That is indeed what happened during many flaming rows between a previous embattled Labour prime minister, Harold Wilson, and a past governor, Lord Cromer (a scion of the Barings banking family), in the 1960s. Wilson privately said, with some relish at the time, that he was sure no governor in the 20th century had been talked to like that.
In the 18th century it was William Pitt the Younger who incurred the ire of the Bank, when in 1797 he temporarily forbade it from paying out in gold and made it use bank notes instead. The row was immortalised, by the satirical cartoonist James Gillray.
In the early 1980s a strong governor, Gordon Richardson, argued with a stronger prime minister, Margaret Thatcher, over her monetarist experiment. Eddie George, governor from 1993 to 2003, famously got on well with Kenneth Clarke; but as deputy governor reputedly told the formidable Nigel Lawson that his policy of shadowing the Deutschmark was unwise, and he threatened to resign when Gordon Brown made the Bank lose banking supervision to the FSA in 1997. In each case the politicians won, if only temporarily, before their policies collapsed anyway. The most powerful governor the Bank has ever had was Montagu Norman, an autocrat who ruled from 1916 to 1944. Yet Norman was ultimately unable to prevent the defeat of the policy he had dedicated his career to, keeping sterling linked to the price of gold. When the policy was dropped in 1931, Norman was unaware of it, and on a liner in the middle of the Atlantic and misunderstood the Bank's coded telegram – "Old lady goes off on Monday"– as a reference to a change in his mother's holiday plans rather than a seminal event in British history.Reuse content