Jeremy Warner's Outlook: Eddie George - a wise old bird remembered
Tuesday 21 April 2009
Few central bank governors get more than a footnote in the history books. Lord George's role in presiding over the first four years of independence for the Bank of England ensures more generous coverage. On a personal level, Lord George, who died at the weekend, will also be fondly remembered by all who knew him.
Any account of Eddie George's tenure as Governor of the Bank of England has to begin with Britain's ignominious exit from the European exchange rate mechanism in 1992. This humbling event dramatically altered the balance of power between the Treasury and the Bank of England.
In a doomed attempt to rescue the pound, a reluctant Bank of England had been ordered by the Government both to jack up interest rates and intervene massively in foreign exchange markets. Failure reflected badly on the Treasury, which had made British membership of the ERM a key element of economic policy. The Bank's star was suddenly in the ascendancy.
With the introduction of a formal inflation target, the Bank almost immediately assumed a much bigger role in the determination of economic policy. Yet the decision on interest rates still lay with the Chancellor, soon to become the Rt Hon Kenneth Clarke. To give credibility to monetary policy, Mr Clarke agreed to publish the minutes of his meetings with Eddie George, albeit six weeks after the event. These meetings soon became known as the "Ken and Eddie Show".
The jousting was good-humoured, but inevitably there were disagreements, particularly towards the tail end of the Major government, when the Chancellor settled on a rather looser approach to policy than the Bank thought wise. Yet the road to independence had begun.
To the surprise of all, Labour immediately went the whole hog on reaching government in 1997. The policy had been deliberately kept under wraps for fear it would tar Labour with a pro-euro stance (an independent central bank was one of the preconditions for joining the euro). The purpose was rather to win credibility for the new Labour government in the City. It worked a treat.
Yet no sooner had the Bank received the object of its desires than its powers were brutally assaulted with removal of responsibility for banking supervision to the new Financial Services Authority. George was so furious at the lack of consultation that he famously considered resigning over the issue.
It is only possible to speculate on how different history might have been had the Bank retained responsibility for regulating the credit boom that subsequently unfolded. To George and many others, it looked like having only half the toolkit. Subsequent events have proved them right.
When George's tenure came up for renewal in 1998, Gordon Brown was tempted to appoint a crony in his place, but was eventually dissuaded by the self-evident respect with which George was held in the City. The new Chancellor didn't want to rock the boat. It proved a wise choice. There followed a golden era of macroeconomic stability, what Mervyn King, George's successor, was later to call the NICE decade, standing for non-inflationary, constant expansion. George was lucky to have been Governor during such a benign period. Yet his wisdom and experience also greatly contributed to its stability.
Down the ages, there have been strong governors and weak governors, petulant and dogmatic governors. George was not really any of these things. He was just a wise old bird who could be trusted with the implementation of policy. With him in the chair, everyone felt comfortable.
Would he have handled the epic banking and economic crisis of the past two years differently or better? Characteristically, he kept his counsel to the last, but perhaps his authority would have made a difference. Failure to realise the seriousness of the crisis, or get a grip on it at an early enough stage, turned out to be a pretty fundamental error in policy.
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