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Introduction and Summary PART I HOW the MONETARISTS CAME to POWER Chapter 1 Early Monetarism in the UK

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Introduction and Summary PART I HOW the MONETARISTS CAME to POWER Chapter 1 Early Monetarism in the UK Notes Introduction and Summary 1. The Centre for Economic Forecasting at LBS was founded by Jim Ball (now Sir James) and Terry Bums (now Sir Terence). The latter became director of the Centre in 1976. He was determined to make correct forecasts and inves­ tigated any that were better than his own. Monetarism soon came to his notice. He used to return to his office in the evening and play with the LBS model. In the morning his colleagues would not know what they would find. The author suspected that Bums had a simple monetary model in his mind, that he used it to predict the behaviour of GDP in money terms, and that he then tuned the main model to give the same answer and to fill in the details, paying particular attention to the international transmission mechanism of monetary policy (as explained in Chapter 5). Whatever his method, the results were most successful. In 1980 Bums became Chief Economic Adviser to the Treasury at the age of only 35. His forecasting record contin­ ued at first to be excellent. The most brilliant forecast of which the author is aware was the one Bums made in a speech to the Economic Club of New York in November 1980 when he predicted that the recession would bottom in about the spring. He subsequently lost his touch as a forecaster because, in the author's opinion, he had stayed too long in the public sector. He in effect changed jobs in 1991 when he succeeded Peter Middleton as Permanent Secretary of the Treasury, that is, head of the Treasury. He was in tum succeeded by Alan Budd who had earlier succeeded him has Director of the Centre for Economic Forecasting at LBS. PART I HOW THE MONETARISTS CAME TO POWER Chapter 1 Early Monetarism in the UK 1. In 1959-60 there were no statistics of the quantity of money in the UK and Alan Walters applied for a Houblon Norman grant from the Bank of England to develop monetary statistics similar to those of the US. He was turned down on the grounds that the Radcliffe Committee had considered that the money stock was not important! 2. The author was the editor of Greenwell's Monetary Bulletin until well into the 1980s. As 1982 progressed he found that, having been appointed joint senior partner of W. Greenwell & Co., there was less and less time available to originate a Bulletin; they were discussed with him but he was not the primary editor. In 1983 the frequent absence of his initials at the end of a 195 196 Notes Bulletin signified that there had not even been time to discuss the contents before circulation and the character of the Bulletin subsequently altered. Some of the author's speeches were, however, circulated under the Bulletin banner. In the mid-1980s W. Greenwell & Co. was taken over by Samuel Montagu & Co. as part of the upheaval in the UK securities industry (the 'Big Bang') and the firm became part of Midland Group. The author gave up executive responsibility and started to write a second series of the Bulletin in June 1987 (they were circulated under the name of Midland Montagu, the investment banking and securities arm of the Group, to distin­ guish them from the Gilt Edged Market Background circulated by Greenwell Montagu Gilt-Edged). The last in the second series was circu­ lated in October 1989. 3. The surveys were started by the Continental Illinois International Corporation. These were published annually and remained the most authori­ tati ve until well into the 1980s. 4. Another of the original 'teenage scribblers' was Dr Paul Nield of Philips and Drew, who was rated the best analyst of the economy. Chapter 2 Greenwell's Monetary Bulletin 1. The author was influenced by and would like to pay tribute to Robert Nield who was his supervisor during his last year at Trinity College. Robert had had a spell in the Treasury and been the first editor of the National Institute Quarterly Review. He subsequently joined the Department of Economic Affairs under George Brown (the late Lord George-Brown). Robert eventually returned to Cambridge and became a close associate of Wynne Godley. 2. The author's postgraduate training in economics came in effect from Harold Rose, to whom he would like to pay tribute. Harold was Greenwell's economic adviser. He had founded the Prudential Assurance Co.'s economics department, before going to LSE and then LBS; he was also the author of Economic Background to Investment (Rose 1960) which at the time was the standard text book on the subject. (Later on Harold was too busy to become consultant to the Bulletin.) 3. Geoffrey Wood became Professor of Economics at City University Business School alongside Brian Griffiths. 4. A little while after the start of the Bulletin we heard rumours that some people thought that the explanation of how we managed to circulate them so quickly was that the Bank was giving us advance information. The Bank subsequently changed the time of release of data for the money supply to 2.30 p.m. We guessed most of the contents of the first edition of Banking Statistics released at this time, wrote most of the Bulletin in advance and delivered it to our clients by 4.15 p.m.! 5. The Bulletin was utilised later on. The Bank used to have biennial training courses for its high flyers that were held at the London Business School. Eddie George, when he was in charge of the gilt-edged market, asked the author to give one of the lectures. The author asked George if he was sure, Notes 197 as he would be critical of the Bank. George's reply was that he wanted the high flye~s to hear both sides of arguments and to be made to think. The Bulletin in the safe was the basis for the lecture. (Peter Middleton (see Chapter 4, note 2) had suggested in 1974 that the author should get to know Eddie George after the latter had returned to the Bank after a spell with the IMF (latterly as assistant to the chairman of the Group of Twenty). George was described as an official's official. He became Deputy Chief Cashier in 1977, Assistant Director (Gilt-edged Division) in 1980, which was when the author came to know him better, Executive Director in charge of domestic monetary policy in 1982, Deputy Governor in 1990 and finally Governor in 1993. As Governor George is remarkable because he is a market-man rather than a banker. His predecessors have been afraid of disorderly markets and this has inter­ fered with the implementation of monetary policy. George is much more sanguine because of his better understanding of markets. This was illus­ trated at a meeting of the Society of Investment Analysts, now the Institute of Investment Management and Research, in the late 1970s. At the meeting George appeared to accept that the Bank had allowed 'the bears to get back in', as asserted in the Bulletin that was never circulated, but he went on to argue that the Bank had to do so because the PSBR was at the time extremely high. He stated that he would teach the bears a lesson as soon as he could. Many did not believe him but in due course he did exactly as he promised. This story is relevant because George is moti­ vated by 'love of the Bank'; he will do his utmost to enhance the credibil­ ity of the Bank and monetary policy. He dearly wishes that it was the same as the Bundesbank. Some may argue that he will not dare to issue a public warning if he thinks that there is a serious danger that inflation will rise because of the effect it would have on the gilt-edged market and on sterling. They are wrong.) 6. The perks were also better. According to TUmour, when officials of the Bank and the Treasury were abroad the former stayed at a better hotel and the Bank footed the bill for dinner together! 7. Later on mandatory deposits were lowered to one half per cent of eligible liabilities; they were extended to all banks; the financing of the Bank was made explicit; and any excess endowment element in its profits was passed by the Bank to the Treasury. Chapter 3 Fly on the Wall during the Thatcher Revolution 1. Charles Goodhart once promised the author that he would show him the precis of the Bulletins after sufficient time had elapsed but he never did. 2. Peter Lilley subsequently became MP for St Albans, Nigel Lawson's PPS, Financial Secretary to the Treasury, Minister of State for Industry and, at the time of writing, Secretary of State for Social Security. 3. See references to money managers, monetarist theories and 'teenage scrib­ blers' in Healey (1989: 412-13, 434). 4. The same does not apply to currency boards. Dominions and ex-colonies that have become independent tend to have central banks. Colonies that 198 Notes are not independent, for example Hong Kong, tend to have currency boards. 5. After the Conservatives had won the election in May 1979 the author was approached to see if he would be willing to do the same job for the leader of the Labour Party, Mr Callaghan (now Lord Callaghan), as he had for Mrs Thatcher. Under the UK's political system the party in opposi­ tion has no civil servants nor does it have a well-endowed major institution on which it can rely, such as the Brookings Institute in the US.
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