The period which Forrest Capie’s new history of the Bank of England describes, from the 1950s to 1979, the first year of the Thatcher administration, was a turbulent one. It began in the long aftermath of the Second World War and the associated overhang of government debt, and was marked by the return of current account convertibility, the Radcliffe Report, the devaluation of sterling, the breakdown of the international monetary system, the end of credit controls, a banking crisis, rampant and uncontrolled inflation, two unsettling encounters with the IMF, and a seemingly endless sequence of sterling crises, among other things.

Professor Capie has produced a coherent and comprehensible account of what happened. The book is easy to read and, even for someone who was (like me) slightly involved in some of the events described, contains interesting new information. This new history will be an essential source of information on British monetary history.

During the 1950s, when the narrative begins, the annual rate of inflation averaged 4.3% and never exceeded 9.2%. In the 1970s, when the narrative ends, it averaged 12.6% and reached 24.2% in 1975. These facts pose an obvious question about the performance of the Bank of England. Was it really as bad as the bald numbers suggest? Professor Capie’s answer is, essentially, yes it was, though he expresses it in the nicest possible way: “In a paraphrase of the Book of Common Prayer: the Old Lady left undone those things she ought to have done and did those things she ought not to have done.”

There can be no dispute that inflation was a major and destructive economic problem, particularly in the 1970s, that it was worse in the UK than in most other countries, and that the monetary authorities failed to deal with it. Anyone wishing to defend the Bank of England against Professor Capie’s charge would have to assert that the Bank did the best it could, but was unable to prevail.

There are some grounds for such a defence. The Bank of England was in no sense independent or autonomous in those days. It was only in 1976 that the Treasury macroeconomic model finally acknowledged that there was no long-run trade off between inflation and unemployment (at about the time that Prime Minister James Callaghan made the same point in a famous speech).

Could the Bank have mounted a full-scale intellectual challenge to the Keynesian orthodoxy? Needless to say, it did not, for a number of reasons. First, such a challenge would have required whole-hearted commitment from the Governor of the Bank; but none of the Governors during the period were trained economists with the requisite views. If one of them had been such a person, it is a fair bet that his successor, chosen by the government, would have been quite different. It should be acknowledged that the IMF enforced necessary changes in British official thinking about monetary policy in the late 1960s. It was not until the Richardson era (1973-83) that the Bank saw any need for a serious dialogue with other critics.

Second, while the then-dominant Keynesian school really had no explanation for inflation (other than bad luck), and no cure (other than ineffective incomes policies), the opposing monetarist position had its weaknesses, too. How should money be defined, exactly? What about the awkward fact that, after Competition and Credit Control (1971), the demand for money, on any definition, turned out to be unstable? When the Bank did begin to express a view on monetary policy strategy, Gordon Richardson was careful to make it clear that he was embracing ‘practical’ monetarism (borrowing Paul Volcker’s phrase), and not an ideology. His caution made him, and the Bank, deeply unpopular with the newly-elected Thatcher administration, but it was well-justified, as was demonstrated in 1980-81 by the coincidence of rapid growth in broad money and deep recession in the economy.

Nevertheless it is clear from Professor Capie’s book that, throughout the period, opinion in the Bank was generally concerned that there was something wrong with government policies, especially fiscal policy. So the Bank’s strategy could be described as ‘collaborate and complain’. The Bank collaborated by doing its best to smooth the government’s path in financial markets, for example by organising seemingly-endless programmes of external support for sterling. It could hardly do otherwise. At the same time, it complained that not enough was being done to eliminate the need for such expedients.

This was not a particularly glorious strategy, and the Bank did not always pursue it as effectively as it might have done. The Bank gradually supplemented ‘collaborate and complain’ by accumulating sufficient economic expertise to enable it to take a leading role in designing monetary policy as the inadequacy of naïve Keynesianism became more and more apparent during the 1970s. This meant that when governments realised that they would have to pay a price to overcome inflation, and that the price was worth paying, the intellectual groundwork necessary for a new strategy had been done. This is surely the Bank’s main monetary policy achievement of the 1970s. It enabled the Bank to help manage a successful anti-inflationary monetary policy in the early to mid-1980s.

Professor Capie also thinks that the Bank was too timid in its market operations, for example being too ready to support the gilt-edged market by making purchases when prices were falling. He is probably right. However, the main thing that the Old Lady did that Professor Capie thinks she ought not to have done is the Lifeboat operation, and associated bank rescues, after the secondary banking crisis in the 1970s. Professor Capie thinks that it was a bad idea, though well-executed, and that “the same result might have been achieved at much lower cost and without the danger of generating moral hazard.” Such judgments are notoriously hard to make, particularly in the heat of the moment. In this case, Gordon Richardson clearly thought that the crisis threatened to have systemic consequences and that the operation was justified in order to contain them, and in the light of the prevailing financial and economic chaos of the time, it seems to me likely that he was right.

All history, and any review of history books, including this one, is written with the benefit of hindsight. The recent financial crisis exposed a gulf between thinking about monetary policy and thinking about bank supervision, which has been always perceived by its practitioners as a mainly micro-economic activity. Communication between supervisors and those responsible for monetary policy in the Bank of England was, in my recollection, not close. One reason is that it was hampered by the confidentiality provisions of the Banking Act, and probably also by the fact that the supervisors were preoccupied above all with the institutions for which they were regarded as responsible. The latter was not entirely surprising, since if any bank got into difficulties which became public knowledge, the public reaction was (and still largely is) invariably to put all the blame on the supervisors. More fundamentally, the objectives of supervision were never, to my mind, adequately defined or codified, so that it was impossible to relate them to the other functions of the Bank.

Professor Capie illuminates all these issues with an impressive exposition, both of the facts and of the debates that preceded important decisions. Recent events have been a reminder of the importance of understanding economic history as well as economic theory, and anyone interested either in the history of the period or in current monetary policy is recommended to read his book.