“At the end of the 1970s, the Bank of England was a microcosm of the United Kingdom. It was steeped in history, but at the same time deeply confused about its identity and quite inconstant in its performance.”
So begins Harold James’ new book, Making a Modern Central Bank: The Bank of England 1979–2003. James discussed the book in a virtual event on Tuesday, March 2nd. Following an introduction by Stephen Redding, a professor in economics and public affairs, James offered a brief but thorough history of the Bank of England from the early part of the 20th century, focusing on its transformation and modernization after 1970 and its evolving role in the aftermath of the financial crisis of 2008-2009. James’ talk centered on the internationalization of central banking and how key players in Britain and around the world shaped the role of the Bank of England as an inflation-targeting central bank.
After decades of writing memoranda to advise economic governance and the British Treasury, the Bank changed course in the 1980s, setting up its transformation and modernization. James highlighted the “superb” verbal communication styles of Bank of England officials Sir Eddie George and Sir David Walker as critical in the Bank’s evolution, noting especially how George’s unique abilities to “talk the language of markets” led to a working relationship with Prime Minister Margaret Thatcher on shaping Britain’s monetary policy.
By the 1990s, the Bank had become an inflation-targeting regime, gaining credibility in its mission after a financial crisis in September 1992 after a brief period in which the British currency was linked to the European monetary system. The 1990s also produced the Bank’s internal “Statement of Purpose,” which solidified its evolution as a Bank with threefold goals: “stabilization of the value of the currency, maintenance of stability in the financial system, and promotion of efficiency and effectiveness of the UK financial services sector.”
In addition to its evolution on monetary policy, the Bank has also evolved over the past 50 years in its supervisory role–what James calls “the more dramatic part of the story.” The Banking Acts of 1979 and 1987 mandated that the Bank play a financial regulatory role, leading to some “humiliating failures of banking supervision” in the 1980s and 1990s that led to the Bank having its supervisory mandate revoked, becoming an institution focused almost exclusively on monetary policy by the late 1990s. This move, while seeming “spectacularly successful” in the early 2000s, made Britain more vulnerable to the financial crisis, said James.
Today, the Bank’s role is still evolving. “The link between fiscal and monetary policy became much blurrier” after the 2008-2009 financial crisis, said James. After highlighting recent comments made by the chief economist and the Executive Director of Monetary Analysis and Statistics at the Bank of England, Andy Haldane, who has said that the biggest risk faced by the bank is letting the “inflationary big cat out of the bag,” James noted historical parallels between the 1970s and today.
James closed by noting two main takeaways from recent developments. First, how the “narrowly defined monetary mandate has been diluted after the global financial crisis.” And second, how the “old inflation debate is coming back again.” “History does have some uses,” he said. “It’s interesting, and also scary, to think of some of these cyclical developments.”