The Prudence of Mr Gordon Brown 
by William Keegan.
Wiley, 356 pp., £18.99, October 2003, 0 470 84697 6
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It’s an odd job with an odd title. When the G7 meet there is only one chancellor of the exchequer in the room – other countries make do somehow with a finance minister or a secretary of the treasury – so a nod towards history is plainly needed by way of explanation. It seems that the present definition of the office was established through a process long characterised by ambiguity as well as ambition, with a premium on stealth as well as wealth.

When Nigel, nephew of Roger, bishop of Salisbury, took on the job in 1126 (or thereabouts) he was simply called ‘the treasurer’. He resigned when made bishop of Ely in 1133 – not the sort of career progression to be expected these days. But the bishop of Salisbury, versatile in his nepotism, happily had another nephew, Adelelm. Well-connected but over-promoted, Adelelm was in office if not in power for three years before being dismissed (which is pretty much Norman Lamont’s career in a nutshell). Later in the century, Richard FitzNeal, first as dean of Lincoln and latterly as bishop of London, continued in his day job in the church while moonlighting as treasurer ” for an apparently unbroken forty years. It’s as though Jim Callaghan were now preparing to leave 11 Downing Street after serving continuously since his appointment in 1964, while doubling up all the while as general secretary of the TUC. At any rate, it shows that there was already a mindset that deplored ‘short-termism’ at the 12th-century exchequer.

Next, after four centuries of inflation – job-title inflation anyway – we find the post of treasurer ennobled as lord treasurer or puffed up as far as lord high treasurer. In the 17th century, the office was put into commission, first in an ad hoc way and then permanently. Thus heroic social-climbing was succeeded by backstairs bureaucratisation, and a charismatic man of power replaced by a committee of bean-counters. Admittedly, it was quite a classy committee, chaired by a commissioner now known as the first lord of the treasury.

It was this title that made a gradual migration, by the time of Walpole, to its modern meaning as synonymous with first or ‘prime’ minister. But what about the exchequer meanwhile? There had, since 1558, been a continuous line of chancellors of the exchequer, some of them doing nothing in particular and doing it very well, but by the 18th century they were emerging as, in effect, finance ministers. This development was signalled by the fact that, if the first lord of the treasury was in the House of Commons, he held both posts. True, if he was in the Lords, he had to find someone else to serve as chancellor in the Commons; but Walpole, Pelham and Pitt the Younger – whom we think of as prime ministers – between them served simultaneously as chancellor for more than half the century. Only after the death of Canning in 1827 were the two posts to become clearly separated (and, even so, Gladstone later filled both for a time). In the 18th century, then, given that the prime minister was usually in the Commons, they had a robust answer to the personal and institutional rivalry besetting many subsequent cabinets. There was no problem if the chancellor nourished a not ignoble ambition to serve as prime minister himself – because he was prime minister already.

The literature on these matters has a distinctive flavour. The origins of the exchequer is one of those ripe topics on which generations of medieval historians, as famous in their day as J.H. Round, R.L. Poole and T.F. Tout, lavished their scholarship. They were able to build on such earlier works as Madox’s History of the Exchequer (1712), which, the standard authorities assure us, ‘still retains its value’, just as it earlier helped inspire Palgrave’s three volumes, The Antient Kalendars and Inventories of the Treasury of His Majesty’s Exchequer (1836), not forgetting Hall’s Antiquities and Curiosities of the Exchequer (1891). Standing in such a tradition, the title chosen by William Keegan, The Prudence of Mr Gordon Brown, is entitled to its whimsical flourish, and he duly begins with a monitory epigraph from Titian’s Allegory of Prudence: ‘The Present does well to profit from the Past, lest Future conduct go astray.’ A respected financial journalist with excellent contacts, Keegan not only does a professional job in surveying Brown’s chancellorship, he gives us a witty and humane analysis which untangles many knots. Round, Poole and Tout have found a more accessible but not less perceptive successor.

One of Keegan’s themes is the importance of history, albeit recent history, in understanding the present state of affairs. If Brown, no less than Blair, has shown himself intent on proving that this is a new sort of Labour government, it is because both of them dwelt so long in the shadow of reproaches from the past. Both were determined to live down Labour’s reputation for financial irresponsibility, which was the reason prudence had to be established instead as the watchword of policy and the passport to power.

There is a lot of myth-making in such a reading of history. This Keegan recognises, though even he occasionally stumbles. He is right to draw attention to the fact that Labour was in power during epic financial crises which have entered the popular consciousness as political disasters, even though the economic response in each case had pragmatic merits and beneficial results: in 1949, when Cripps chose to devalue the pound; in 1967, when Callaghan was forced to do likewise; and in 1976, when Healey had to propitiate the IMF with a mixture of budget cuts and monetarist incantations. He goes too far, however, when he repeatedly tells us that ‘Labour was in office when Britain was forced off the gold standard in 1931.’ The fact is that it was the National Government, formed in August 1931 to avoid devaluation at all costs, which found itself nonetheless forced off gold in the following month – again, with consequent benefits to the economy. The broader point remains that 1931 was blamed on Labour and that its label as ‘the party of devaluation’ remained a handicap into the 1990s.

Hence some of Labour’s apparent enthusiasm, under Kinnock’s leadership, for putting sterling into the Exchange Rate Mechanism in the late 1980s. A complementary reason was that the ERM was currently splintering the Thatcher government, so a Labour commitment to join looked bold and convincing by contrast. Both reasons, it’s worth noting, were essentially political; they did not address the economic reality that, when Britain did belatedly sign up to the ERM in 1990, it was at an exchange rate of DM2.95 which, within two years, was inflicting great damage on the economy. Yet politically, the Major government was bound hand and foot to its existing policy – and Labour’s only criticism was that the policy did not go far enough.

That was the position at the time of the general election in April 1992, at which Major squeaked home for another term. When Black Wednesday came in September, the forcible ejection of sterling from the ERM was, by rights, as much a refutation of Labour’s official policy as of the government’s; but this time it was the Conservatives who suffered as the party of devaluation. Had Labour won the 1992 election, as had been widely expected, a Kinnock government, Keegan suggests, would have devalued sterling within the ERM as its first step. The main source here is Kinnock himself, who affirms that he would have been ready, if necessary, to appoint Gordon Brown rather than John Smith as his chancellor in order to achieve this end.

It is an intriguing thought that Brown might have become chancellor five years earlier than he actually did. First reactions must be that, as chancellor, it would not have done him much good. He would have inherited from Norman Lamont an economy groaning under an overvalued pound and the high interest rates that went with it, and budget deficits unparalleled in British history. As it turned out, when Brown took over from Kenneth Clarke in 1997, the economy was on the mend, having shed the ERM, and the public accounts were already heading towards surplus.

Further reflection, however, prompts the thought that, as a potential prime minister, Brown might have been better placed for the succession had he become chancellor in 1992. He would certainly have been better placed than the significantly less experienced and less well-known colleague with whom he had recently shared an office in the Commons. ‘He is my Lloyd George,’ Blair has said of Brown, evidently ready to brave the irony that this is to cast himself as Asquith, whose ultimate nemesis was displacement by his long-serving subordinate.

The task of any chancellor is simple: to get the economics right and to get the politics right. The difficult bit is doing both at once, and in each case on a short-term or long-term basis, when some trade-off between these objectives is inevitable. A giveaway election-winning budget is an example of a short-term economic loss for a short-term political gain. Brown’s background and upbringing as a child of the manse scorns such methods, redolent of the typical Tory budgets of his youth. He has shown himself quite ready to incur short-term political losses for long-term economic gains, which is why he persisted with the hairshirt public expenditure policies of the government’s first term, largely ignoring the claims of education, health and transport, despite a generation of neglect. Keegan is surely right to attribute this to a strategic vision, where prudence could be justified only on a longer perspective: initial abstinence would safeguard the deferred economic harvest, allowing it ultimately to be applied to meeting the priorities dictated by social justice.

The virtuous circle is one in which long-term economic and political gains are self-sustaining, because confidence on both fronts becomes mutually reinforcing. The problem all along was how to get there from here, when here meant that Labour was so distrusted that it would never be allowed the economic latitude to fulfil its political aspirations. It was all very well for Blair, with his special access to the tongues of angels, to keep telling everyone that New Labour was different; what Brown brought to this problem was an institutional rather than a rhetorical remedy. Just as he had been involved in planning the devaluation dodge in case Labour won the 1992 election, so he was instrumental in preparing another coup in the even stronger expectation of a Labour victory in 1997. His indispensable accomplice in all this plotting was Ed Balls, only 25 when he left the Financial Times in 1992 to hitch his star to the Brown bandwagon. His input was soon evident, not least in manufacturing a monetary firecracker, to be ignited after an election victory. Within days of becoming chancellor, Brown announced that he would relinquish one of his main powers, that of setting interest rates, which would instead be set by the Bank of England.

Was this justifiable either as an economic or as a political decision? It was, on the face of it, a curious thing for a Labour chancellor to do. The Bank hardly had the reputation of being a friend to Labour governments. The ghost of Montagu Norman, its famously deflationary governor at the time of the 1931 crisis, still stalked Labour mythology. Little wonder that Denis Healey, battle-scarred as a Labour chancellor himself, had testified that transferring responsibility for monetary policy to the Bank was a gimmick since its record did not inspire confidence that it would be ‘better’ than a good chancellor. As though to prove the point, Kenneth Clarke had turned out to be a pretty good judge of what monetary policy was appropriate, even when – or especially when – he stood out for lower interest rates against the advice of the governor, Eddie George. But Clarke was a Conservative, and thus allowed by the markets to do ‘better’. Would a Labour chancellor who wanted lower rates be judged so indulgently? Conversely, was it not ‘unfair’ to expect a politician to take unpopular decisions to raise rates? That is how it struck Alan Greenspan, the chairman of the Federal Reserve Board, when his advice was sought by Brown and Balls. The uncomplaining Fed had long been given that job in the US, just as the Bank was now to be saddled with the dirty work here.

It should be noted that Healey’s argument, not to trust the Bank, was essentially economic, whereas the contrary arguments were essentially political. In 1997, the markets were still bound to be suspicious of the purported prudence of young Brown, let alone the infant Balls, and much readier to trust Steady Eddie. Here, it might be thought, Brown was going for a short-term political gain – buying confidence by hiding behind the Bank. But he was no more ready than Clarke to surrender his own judgment to Eddie George’s, as had been made clear to those listening carefully. ‘We are not in the business of depoliticising interest rate decision-making only to personalise it in one independent governor,’ Brown had warned in 1995. The Bank was to be made responsible through a new Monetary Policy Committee, on which the governor would be one influential voice, and a canny vote-counter, but no Montagu Norman.

The economic risk – that growth would be sacrificed to tight money – was thus limited. Just to be on the safe side, Brown made sure that he appointed the MPC and also set the rules by which it operated. Of course, it had to deliver on a target rate for controlling inflation. The target was set, however, not simply as an upper bound, which would encourage deflationary under-shooting in order to meet it, but either side of 2.5 per cent, consistent with sustaining economic growth. If inflation crept up to 3.5 per cent, the MPC would have to explain itself: but so it would if inflation headed down below 1.5 per cent.

The short-term political gain was undoubted. The Conservatives soon had to agree that the change was here to stay, while a Labour chancellor, for the first time in history, was free to concentrate on matters closer to his heart than worrying about the monetary indicators. Moreover, the room for manoeuvre was not bought at the price of economic loss since the MPC did its job well, steadily generating confidence in its policies, as shown by the combination of low interest rates with low inflation rates, which left the economy free to grow and unemployment to fall. Best of all, with long-term economic results like these, there was a positive feedback, via confidence, into political gains.

It all seems too good to be true and may yet turn out to be so. Still, this is a timely moment to ponder these antiquities and curiosities of the exchequer and, remembering Titian, to profit from the Past, not only lest Future conduct go astray but also (let’s admit it) to license gossip and speculation about the extraordinary relationship at the heart of the present government. Keegan concludes his account of the move to central bank independence by saying that it left Brown ‘free to conduct, under the terms of the Granita agreement, his role as chief executive of a government run by the Blair/ Brown duumvirate, and delve into parts of other ministries that previous chancellors had never reached’. The restaurant may now have closed its doors but its dinner on 31 May 1994 for two intensely focused customers – three until Ed Balls left after the first course – is a tableau worthy of the attention of a new Titian. We know that they agreed that Blair would be the next leader of the Labour Party; we don’t know if they agreed for how long; but we do know that they agreed that meanwhile Brown would exercise power on a scale to make even the Treasury blench. Rather than call this unprecedented, perhaps we should put Brown in the same league as Walpole, Pitt and Gladstone.

Brown’s strategic grip on government policy is a mixed blessing. Just as he has been left free to delve at home, and belatedly to begin delivering on the social democratic agenda on which Labour was elected, so Blair has been left free to develop his own enthusiasms abroad. In the process the big issue that should dominate the attention of the government – Britain’s relationship with the European Union – has often been eclipsed by other tasks which virtually everyone other than the prime minister judges less vital to the national interest. Blair was seen by some admirers (and former admirers) as the man who would decisively lead Britain into full commitment to Europe by adopting the single currency and joining the Eurozone; but that was before he became distracted and instead used up his remaining political credit by leading Britain into full commitment to President Bush. What, then, is Brown’s policy on European monetary union?

‘It’s not Brown’s at all, it’s Balls,’ as Michael Heseltine put it ten years ago now. Keegan’s careful documentation has shown that Balls’s openly proclaimed but widely ignored thoughts about domestic monetary policy should have made the inception of the MPC rather less of a surprise than it actually was. Perhaps it is worth giving similar attention now to Balls’s sentiments on monetary union. He is, after all, on the record with a fairly consistent analysis. ‘The mistake is to let economic schemes run ahead of political realities,’ he wrote in 1992. The problem, as he saw it then, was that Labour’s commendable political commitment to Europe had entailed an economic commitment to joining the projected single currency that was in conflict with the aim of ‘a stable, growing, low unemployment community’. Those who saw the subsequent planning for the MPC as a preparatory step to joining the euro were to be disappointed: it was as much an alternative as anything, at least until the economic case was made. ‘Brown’s "euro” policy, labyrinthine at times,’ Keegan argues, ‘was effectively an each-way bet.’

It would have been politically much easier for Labour to join the euro in 1997, during its first year in power, than at any subsequent moment. But the cost of doing so, given that British interest rates were double those of the Eurozone, would have been heavy. If interest rates were to be halved, the only way that inflation could then have been offset would have been by fiscal restraint. The chancellor, in short, would have had to resort to exactly the sort of tax rises that he had pledged himself to avoid in Labour’s first term. If he chose to rely instead on the MPC to guarantee him the macro-economic stability he sought, it is hardly surprising.

And now? Brown often takes the opportunity to reaffirm his European credentials; but we should also pay attention to what Balls has consistently said, most recently in his Cairncross lecture at the end of 2002. There, he expatiated on the historical record, dwelling on the disastrous effects on the British economy of the decision to return to the gold standard in 1925, because ‘the government of 1925 did not ensure that economics, not politics, was the deciding factor on the timing and manner of the decision.’ After this, nobody should have been surprised that, in the summer of 2003, the Treasury decided that it would not yet be prudent to take the big step. This does not mean that Gordon Brown would never be in favour of the prime minister triumphantly leading Britain into the euro: just not this prime minister, and not just yet.

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