Yet what was seen by ministers and Treasury civil servants as a desirable development in the late 1960s was stultified for a time by the extraordinary circumstances of the inflationary boom and its collapse at the end of 1973.
That O'Brien, a quiet reserved man in public, was a professional central banker with 40 years' experience ranging from secretary to Montagu Norman to Deputy Governor in 1964, via the overseas and foreign exchange departments, and seven years' service as Chief Cashier, ensured his appointment by Harold Wilson in 1966.
The ill-concealed friction between his predecessor, the Earl of Cromer, and the Prime Minister, as well as the meritocratic turn of that Labour government, disqualified other, more patrician contenders from the merchant banks.
But if Wilson and the Treasury mandarins expected bureaucratic docility, they were disappointed. O'Brien had seen how Norman had shaped the Bank to state requirements during the Second World War and, though he had deplored Cromer's methods, he shared his two predecessors' mistrust about the way the Keynesian prescriptions had been misused as a cure-all during the post-war period. Wholly loyal once government decisions had been made, O'Brien remained robustly unafraid of ministers and Chancellors of the Exchequer so long as discussions continued.
The July 1966 crisis brought deflation and grievously damaged Labour's national plan. Dependent on American help, Britain could no longer act autonomously, while sterling had been reduced to the status of an adjunct to the dollar. Foreign competitors, led by American banks, threatened the City's own market predominance, while the British government was largely excluded from OECD countries' attempts to stabilise the international financial system.
In these conditions, O'Brien had to advise on four main policy areas: how to stabilise sterling and Britain's remaining sterling debts; how to manage the economy more efficiently in a rapidly changing environment; how to renew the flow of investment to domestic industry; and how to modernise City markets and financial institutions before they lost market share. At least until 1968, he also suffered the handicaps of subordination to the Treasury and deprecation by the Labour Party Left for his advocacy of monetary and fiscal prudence.
The sterling balances were stabilised, partly thanks to O'Brien's skilful diplomacy in Basle in 1968, but sterling remained at risk: after the 1967 devaluation (against which O'Brien struggled without effect) he and Harold Lever, Wilson's financial emissary, helped to avert a second devaluation in March 1968, negotiating with the US authorities. But the Governor's arguments about failure to control state borrowing and money supply had an increasing effect under the new Chancellor, Roy Jenkins, not least because of the more explicit tone taken by the Bank's own publication the Quarterly Bulletin.
It was clear by 1969 that O'Brien supported a permanent but flexible monetary policy and a market-driven element in bank rate. But substantial differences existed between Bank and Treasury as O'Brien and his team (now better integrated than in the past) evolved what became Competition and Credit Control. CCC's main aim was partial deregulation, to allow bank rate to be determined more by market demand for credit - especially from industry - and less by political requirements. At the same time, it was hoped that British banks would be freed from controls on lending, to compete more effectively with unrestricted foreign institutions and fringe banks at home operating under less stringent Board of Trade supervision, in an interbank market which saw deposits rise tenfold in the decade after 1962.
As by-products, O'Brien hoped that the fringe banks and the parallel markets in local authority and corporate loans could be brought under bank supervision, and industry encouraged to rely less on overdraft finance, more on the medium-term loans he expected would lead to innovation and structural adjustment. At the same time, long overdue but cautious reforms began in the City, after the shocks of Anthony Crosland's probing into banks' real profits, and revival of the 1959 Mergers and Takeover Panel. To counter what he saw as a threat to the City ethos of self-regulation and to the Bank's traditional role, O'Brien sought to modernise the Bank's own services, in particular through what became the Institutional Investors Working Party, which aimed to improve the flows and quality of investment.
Launched by the new Conservative Chancellor Anthony Barber in 1971, CCC differed in many ways from O'Brien's plan and had to be implemented at a uniquely unfavourable time: the Treasury even felt compelled to reinvent bank rate under the title Minimum Lending Rate in 1972, and a year later asked O'Brien to suspend CCC altogether. By then O'Brien's optimism, based on admiration for Edward Heath's long vision of EEC entry and industrial transformation, had altered. For him, Iain Macleod's unexpected death had been a tragedy, for it left the less experienced Barber in thrall to a prime minister determined to achieve his main objects at all costs and hence predisposed to ignore O'Brien's warnings against monetary laxity.
To his dismay, sterling was floated in June 1972. O'Brien regarded a fixed rate as the basis of sound discipline, but he was not even called back from holiday to advise; nor was he included in the discussions which preceded the 1972 Industry Act. He shared Heath's bafflement that industrial management failed to take advantage of the new credit regime, but disagreed on how to deal with the malign combination of wage inflation and the pyramid of lending, mainly on speculative property, that led to CCC's being called "all competition and no control".
By early 1973 credit was expanding at an unprecedented rate accompanied by a 25.6 per cent increase in money supply, the beneficiaries from a real interest rate of 1.2 per cent being primarily financial and property- sector, together with private individuals, rather than industry.
O'Brien found himself a Cassandra, unable to affect this wildly inflationary process. His remedy was to raise MLF to check the boom but, fearing the knock-on effect on the cost of living, and hence trade-union wage claims, Heath and Barber would not permit it. In its only real success, the Bank pushed the rate to 9 per cent in June 1973 by manipulating the Treasury Bill rate with Treasury officials' consent. Thereafter, loyalty to the state prevented O'Brien from resigning, with all the public consequences that were to follow. But on his 65th birthday he retired, only halfway through his second term of office.
In retirement, active on many boards, O'Brien reflected that the boom might have been brought under control rather than induced to crash with cataclysmic results; but not against the will of a Cabinet whose eyes focused on a wages pact and reduction of unemployment from its post-war peak of one million. His own legacy, the special deposits scheme, and the so-called "corset" developed by the next Governor, Gordon Richardson, were applied months too late and may even have intensified the collapse.
At issue had been a struggle between an increasingly global financial set of realities and a domestically oriented defence of the post-war social settlement. As Governor, O'Brien had helped the Bank to establish its claim to be a guardian of the nation's long-term financial interest, through a new level of expertise and argument, for the first time since the 1930s. Political circumstances denied him the influence that Richardson was later to achieve. Yet O'Brien's important speech to the Belgian Societe Royale, in October 1977, can be seen in retrospect as a marker, linking the independence of central banks to control of money supply and success in the perennial struggle against inflation.
Keith Middlemas
Leslie Kenneth O'Brien, banker: born 8 February 1908; staff, Bank of England 1927-73, Deputy Chief Cashier 1951-55, Chief Cashier 1955-62, Executive Director 1962-64, Deputy Governor 1964-66, Governor 1966-73; GBE 1967; PC 1970; created 1973 Baron O'Brien of Lothbury; President, British Bankers' Association 1973-80; married 1932 Isabelle Pickett (died 1987; one son), 1989 Mrs Marjorie Taylor; died 24 November 1995.
Comments