Free the prisoner of Threadneedle Street

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The Independent Online
EARLY next year the name will be announced of the first Governor of an independent Bank of England. No one will admit in so many words that the Bank will become independent, but the reality is that over the new Governor's five-year term, the Bank's status will shift inexorably in that direction. As Howard Davies, director-general of the CBI, told the Independent's seminar on the economy last week, a much greater degree of independence is inevitable. If Britain moves towards joining some common European currency, an independent Bank will be part of the deal. If it does not, the Bank will have to become more independent to give sterling any credibility in the world.

Until now most discussion has been in terms of people for the job, with Ladbroke running a book (City people will bet on anything). The suitability of candidates, however, depends crucially on the nature of the job. And if the Bank moves towards independence, the job of Governor will change radically. At present all the really important decisions are taken by the Treasury. The post of Governor is one of many rather grand jobs in Britain in which the trappings have become a substitute for real power.

The really grand jobs, such as Lord Mayor of London, Archbishop of Canterbury, or indeed King or Queen, clothe the occupants insplendid robes, surround them with deeply deferential people and have them make speeches which other people have written. The really powerful jobs, such as Chief Whip, Permanent Secretaries in the Treasury, chief foreign exchange dealers at the big US banks, or editor of the Sun, offer few trappings of office and less deference. These people don't make speeches about what should be done; they actually do it.

As the Bank grows more independent the job will move out of the first category and into the second. The shift will be gradual, partly because that is the British way and partly because the distinction is not quite as stark as it may seem. A shift there will be, none the less, and the pace of change will depend largely on the quality of the person who gets the job.

This is what makes the choice interesting. Power will not be handed to the Bank on a plate. It will have to earn it, against the instincts of both civil servants and politicians. The new Governor will have to make two crucial changes. He (and, contrary to some speculation, it is not going to be a she) must change the structure of the Bank. He must also make it credible to the world outside.

The structural change will entail doing fewer things but doing them better. It is absurd that the Bank should run a printing works, producing banknotes. It has no comparative advantage in printing, and many other countries have their notes printed commercially - Britain, indeed, prints notes for other countries. More important, the Bank should withdraw as far as possible from banking regulation. It makes no sense for it to spend vast amounts of time and energy (and be made to look pretty silly) because a bank owned by a Middle East potentate happens to be bent. A wise Governor would see that it is not in the Bank's interest to have to cope with a BCCI.

Doing things better is harder. The chief task of a central bank is monetary control, and the Bank has advised Chancellors on this for more than a century. But because the Bank has never been directly responsible for monetary control, no one knows how good its record is. It faces the challenge: 'If these guys cannot even spot that BCCI was bent, how on earth can we trust them with something really important such as interest rates?' The only way of meeting that is to create a decision- making structure involving outsiders, which will be credible even when it gets things wrong, which it will.

Gaining credibility with the outside world will be hardest of all. People inside the Bank find it difficult to realise that their reputation is not very high until this is demonstrated, as it was last summer, in the most brutal of ways. It was only on Black Wednesday that people in the Bank understood the awful truth: the view of junior Bundesbank officials carried greater authority than that of the Governor of the Bank of England.

Their recognition of this represents the best hope for change. So who will do the job? The best person in the world (a novel, and rather un-British way of making appointments) would be Sir Dennis Weatherstone, who is head of the best commercial bank in the world, J P Morgan, in New York. He is a Briton, a foreign exchange dealer who rose to be head of the dealing room at Morgan in London, head of the whole London operation, and eventually head of the bank. It is an extraordinary achievement. The problem is that being Governor would be a step down from his present job.

The best person in Britain would be Sir David Scholey, who is head of our best investment bank, S G Warburg. The problem again is that it would be a step down, certainly in financial terms, although the lure of independence might be enough to compensate.

The best person already at the Bank is Eddie (never Edward) George, the deputy governor. He is competent, calm and wholly without side. He realises better than most within the Bank how much it must change. The downbeat, nice, suburban semi-detached style is absolutely appropriate for a late 20th-century Governor with real power. He might even accept the job.

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