A Very British Coup – How the Bank of England brought us Austerity

Alistair Darling explains a crucial moment in the fall of Gordon Brown in his book Back from the Brink. He explains how as Chancellor he decided to keep Mervyn King on as governor of the Bank of England in 2008.

‘I told Gordon my view, that Mervyn should stay, and with some reluctance he aquiesced. I don’t think that he and Mervyn ever got on. Certainly the next two and a half years saw a growing antipathy between them. This really came to a head during the Treasury select committee hearings in 2009, when Mervyn appeared unilaterally to announce that there was no more money available for fiscal stimulus. Gordon quite rightly felt that this was crossing a line, that he was addressing fiscal policy, which was the remit of government. Certainly Mervyn would have been furious if Gordon or I had expressed an opinion on what the Bank ought to to be doing over monetary policy. Gordon was very angry and tried to phone me during the committee session, which I was watching from the Treasury. He asked me what I was going to do about it and suggested that I should go in and stop him there and then. It was tempting, but not practical.'(p.69)

Brown loses control of his own cabinet

Up until then the Tories had been supporting Labour’s plans to maintain public spending. Very soon after they changed tack to argue that the deficit needed to be addressed. Within the year Alistair Darling was then himself bringing forth a deficit reduction plan. The Labour Cabinet swung then behind Darling and spending cuts, despite the resistance of Gordon Brown and Ed Balls. In the end it was only Ed Balls who resisted.

As it became more and more clear that the outcome of the 2010 General Election would be a hung parliament, the Governor of the Bank of England and the Cabinet Secretary Gus O’Donnell began to work closely together to put together a coalition with a coalition agreement organised around the principle of deficit reduction.

Preparing a new government

For Mervyn King at least this would be a suicide pact of a programme. The measures required to shore up the country’s finances would be so unpopular that the next government would be out of power for a generation.  This is what he said to a American visiting  economist whom he had known for years, who then apparently blurted it out on Australian television. The story got picked up in the British press just hours before the final episode in the series of leaders’ debates that became central to the 2010 British election.

In his book  22 Days in May – The Birth of the Lib Dem-Conservative Coalition David Laws, who was the Lib-Dems  lead negotiator tells us how on the Sunday after the elections that resulted in the hung Parliament the negotiators met.

‘Gus O’Donnell welcomed us and made some comments about the state of the markets and the importance of our work. He said that the Civil Service could offer advice on constitutional issues, budgetary and other matters. He then offered a have us briefed by the Governor of the Bank of England and a representative from the Joint Intelligence Committee, so that we could understand the ‘seriousness of the economic environment’ and other matters.’

Laws goes on …

‘Both sides declined this opportunity. We Liberal Democrats suspected that we knew what both were likely to say, and we did not think it appropriate to have such a briefing at this stage in the negotiations. I suspect the Governor of the Bank of England’s intervention would be perceived to have been aimed more at us than at the Conservatives, and we didn’t want to feel manoeuvred into policy positions that we weren’t confortable with by outside advice.

Later in the day, concerned that our rejection might be misinterpreted, we suggested that Vince Cable, our Treasury spokesman, might speak to the Governor instead.’ (P. 95)

Despite the caution Laws professes about his party being manoeuvred, is it really credible that they really remained masters of their fate ?

Not even in Greece

Conaghan I have assembled these little known snippets from the already published recent history, in order to help get the change in government and policy  into perspective.

Many governments around the world have fallen since the crash of 2008, but nowhere else has the central banker played such a role in putting a government and its priorities together as they did in London in 2010.

Although in Greece a government was put together around a former central banker as prime minister, it was but a stop-gap government with a deliberately restricted lifespan put together by a president.

Andrew Lydon   – LWM Bank of Britain Project