Interview with Lord Mervyn King
Lord Mervyn King is a member of the House of Lords and former Governor of the Bank of England. He is a professor emeritus of economics at the London School of Economics and a member of the Most Noble Order of the Garter.
Making Money
Contents
Colonel Max Raskin: So before anything, I have to ask you, who are those four busts behind you?
Lord Mervyn King: At the back you've got Alexander Hamilton and Cicero, and at the front you've got Adam Smith and Matthew Boulton.
MR: Like Boulton and Watt?
MK: Yes — there is actually a pub restaurant in New York called Boulton and Watt named after them. They have a blown-up version of the 50 pound note inside the restaurant. I went there and asked them about it and I explained that I was the person who decided to put Boulton and Watt on the 50 pound note.
MR: Is there anyone you wanted to put on a note that was a non-starter with your staff?
MK: Not really, because it was my decision. So if people had been concerned, I could overrule them. A few people expressed concern about Winston Churchill, but frankly, his importance to the survival of Britain in the Second World War was so great that it seemed to me a complete non-starter to complain about it. So we put him on the five pound note, and I put Adam Smith on the 20 pound note.
MR: You’re a bit of an American-phile — is that right?
MK: Yes. Yes, I am. I still remember vividly what I was doing when I heard the news of Kennedy's assassination. Only eight years later, I came to the States for the first ever time as a Kennedy scholar to Harvard. That really did change my life.
MR: Where were you when Kennedy was shot?
MK: I was at home doing homework in the evening when the news came through and I had the radio on, to some obscure pop station while I was doing my homework.
MR: Were you a fan of his?
MK: I think everyone at that age was because he was so young and fresh and dynamic — people were very much taken up with the image. What we saw was this fascinating contrast between the statesman Harold Macmillan, the elder Prime Minister and the young Kennedy.
Then, of course, we were deeply shocked by the assassination.
MR: What were your politics back then?
MK: I wasn't terribly involved. But I think that Martin Luther King was someone who appealed to many young people in the UK, followed by Kennedy. The whole debate about Vietnam was complicated. The UK under Harold Wilson had decided not to send any troops to Vietnam, which as it turned out was an extraordinarily wise decision. Probably one of his greatest achievements was to resist pressure from President Johnson to send troops while at the same time retaining a close relationship with the US.
First Pizza and Beer
MR: So how did you make it to the US?
MK: I started to think about graduate work, and I was encouraged to apply for the major scholarships from the UK to the US. Fortunately, I was awarded a Kennedy scholarship, and we all flew from Heathrow to Boston together. I think it may have been one of the last occasions when every single one of the 10 or so scholars were going to the US for the very first time. None of us had set foot in the US before. Today everyone has been to the US at least once when they apply.
MR: What were your first impressions of the United States?
MK: We went from the airport in a taxi to our respective residences — I was sharing a house with four American graduate students. I arrived at the house, and to my shock, it was made of wood. The last wooden house I'd seen had been something that had survived from the Shakespearean era. My room was on the top floor, and it seemed to me self-evident that I would be completely trapped had a fire started in the house.
Then I couldn't sleep that first night because of two things — first, the noise of the cicadas. I've never heard cicadas that loud before, except in a film, The African Queen. Secondly, the noise of the fire engines racing up Broadway in Cambridge. Britain didn't have emergency vehicles that made that kind of noise.
Then my roommates took me out for my very first pizza and beer. Again, I was a bit overwhelmed by all this.
I was extraordinarily impressed by the range of courses that one could take as a graduate student at Harvard.
MR: Were there any professors you were particularly close to?
MK: That's when I got to know Martin Feldstein very well — he was my advisor. He became not only a mentor, but also a very close personal friend. Sadly, Marty passed away three years ago, but I still keep in touch with his widow.
I learned a lot of things from Martin Feldstein, one of which was extraordinary intellectual curiosity. There was almost no subject in which he wasn't interested and about which he would start to think about the economic implications — including, in his later years, the economics of defense. He created a very interesting network of people interested in the economics of defense. Marty was a very important influence on me.
After Harvard, I went back to take up a teaching appointment in Cambridge at St. John's College.
Between Two Cambridges
MR: When someone says “Cambridge” to you, do you think England or Boston?
MK: It depends on who's saying it. If it's an American, I know it must be the American Cambridge. If it's an English person, then I know it must be the British Cambridge. But the two Cambridges obviously were the bedrock of my education and background in terms of economics.
MR: If you write an autobiography, I think it should be called, Between Two Cambridges.
MK: I'm sure somebody else has already done it, but I think I also have to fit in the Bank of England. Anyway, I’m too young to write an autobiography.
MR: Let me ask you about other intellectual influences. I feel all economists have either a single book or economist or school of thought that they gave them the economics bug and that still influences their worldview. Do you know who that is for you?
MK: No, I don’t because I think my roots have been rather different. At school, I really wanted to study cosmology when I went to university, but I was very bad at all practical experiments. I couldn't heat chemicals and identify them. You had to tie a thread around glass stoppers, and I could never manage to do that. Every time I tried to put a burette into a clamp, somehow the clamp opened, and the burette fell onto the floor.
So I inquired about cosmology, and basically I was told that if I went to Cambridge, I'd have to do either natural sciences for three years, which involved a lot of experiments or do nothing but mathematics for three years and then do cosmology as a sort of special subject in the fourth and fifth year. I realized that I could not do the experiments, and I wasn't sure whether I wanted to do pure maths for three years. So although I entered Cambridge on mathematics, I actually switched to economics as soon as I got there. I think that's because I had read some fascinating articles in the press about a Cambridge professor called Richard Stone, who was building one of the very first computer models of the British economy.
It seemed to me that combination of maths and computers together with understanding how the country worked was irresistible. I studied economics at Cambridge then for three years, and there were a wide variety of influences — what became known as the Neo-Ricardian School of Economics under people like Luigi Pasinetti and Mario Nuti. Mario Nuti, who was my first-year tutor, was someone who had a very catholic sense of what one should read in economics ranging not just from the usual Keynesian suspects, but also the American Economic Association readings in price theory. From Mario, I learned to have a sort of wide view of the different kinds of economics one should look at.
MR: In the first chapter of your most recent book, you're citing Knight, Keynes, and Hayek.
MK: Yes, amid a wide range of influences. Then of course at Harvard, it was the other Cambridge's view — more straight neoclassical economics, econometrics…very good technical training. So I had a wide background in many different areas of economics.
MR: What about your Austrian influences?
MK: That really came from when I went to be a professor of economics at the University of Birmingham, when I think I was then the youngest person appointed to a chair in the UK. I went to Birmingham and people like Stephen Littlechild were promoting the Austrian School of Economics. So I had colleagues there in that area.
I think that all of these things meant that I was interested in all things economic and didn't want to just focus on just one small, narrow area. There are people who produce a PhD and then go on working on exactly the same problem for the next 40 years. I could never do that and didn't. When I graduated from Cambridge, I had intended to go to Warwick University to do a Master's degree. I had applied to and been accepted by Warwick, together with Oliver Hart. We were basically roommates.
MR: That's pretty cool.
MK: We applied to go to Warwick together. At the last minute, because I got the top first in economics in Cambridge, I was offered a job to stay in Cambridge and work in the Department of Applied Economics with Richard Stone, the man with a computer model of the UK. So I stayed in Cambridge. Who knows whether that was a wise decision or not.
Oliver went to Warwick and then to the States. Obviously, the rest is history.
I had an academic career for the first half of my working life. Then in March 1991, the age of 42, I went to the Bank of England to be chief economist and then moved up to be deputy governor and then governor. Now I'm back writing and teaching again.
MR: Do you enjoy writing again or do you miss politics and government?
MK: Well, no. I enjoy the writing. I used to enjoy writing my own speeches at the bank, and that's always been a part of what I am. I think in that sense, teaching came naturally. I enjoyed teaching when I was at different universities in my academic career. I enjoyed teaching again at NYU after I left the Bank.
Risky Business
MR: You’ve just written a book about risk — what piece of advice would you give to young people as they think about how to invest their money?
MK: I'd recommend several books by John Kay, but I think Other People's Money is the one that I would recommend. In terms of generally more about life and careers, I'm not sure. I think reading biography in general is a good thing to do, but I wouldn't focus on any one person's biography. I would choose a range of different people.
MR: What are you reading right now?
MK: I've just got a book on Robespierre, one day in the life of Robespierre — The Fall of Robespierre. I'm reading the memoirs of Cathy Ashton, who is a friend and who was the first, if you like, foreign secretary of the European Union. There was a different title for it, but she was the first person to be appointed to coordinate the role of the European Union in foreign affairs. She's written a rather nice little book about that.
I went last week to have lunch with the judges at the Old Bailey, which is the central criminal court in London where all the murder cases are tried. One of the recently retired judges, Wendy Joseph, has written a lovely little book called Unlawful Killings, which I read over the weekend. She doesn't discuss actual individual cases, but she's created six artificial cases made up of elements that were true in the cases that she was presiding over. There are extraordinary stories about the kind of people who appear in court accused of murder, how the cases proceed, the role of the jury, and how sometimes totally unexpected things occur in the middle of a trial. I found it very revealing about a side of society that most of us don't ever get involved in.
The other book I read, which I thought was extremely interesting and I recommend to American readers is the book by Max Hastings on the Cuban Missile Crisis. It’s called The Abyss.
MR: Do you either watch or read any junk?
MK: Yes, absolutely. I think it's quite important to have that when you're feeling exhausted at the end of the day or ill in bed. There’s a very good thriller writer called Mick Herron who's written a series of novels about renegades from MI5.
MR: What about TV?
MK: I will see some sport on television. That's what I would call, if you like, junk. I don't mean the sport is junk. No, it's too serious for that.
The Lord and the Colonel
MR: So I think my American audience is going to be interested in the fact that you are nobility. I’m actually a Kentucky Colonel, but you’re a Lord, so I think you probably outrank me?
MK: I'm sure I do. Being a member of the House of Lords is on a par — though it's not a very accurate comparison — but it's on a par with the Senate because we are the upper chamber of the Houses of Parliament. The House of Commons is the lower house and House of Lords is the upper house. We vote on amending legislation, and we can delay legislation. Governments have to get their legislation through the House of Lords.
MR: So this is a silly question, but what do you prefer people call you?
MK: Let's suppose we were doing a live Zoom event, then you would introduce me with my title, which is Lord King of Lothbury. You have to be Lord King of somewhere. If there's ever been a Lord King before, which there was (a chairman of British Airways), so Lord King of Lothbury. But then after that in the Zoom it would just be Mervyn. When people would refer to me formally, it would be Lord King.
MR: Does that do anything to your psychology? Is it cool?
MK: Well, it's a great honor to become a member of the House of Lords. I think an even greater honor is that I'm a Knight of the Garter. There are only 24 Knights of the Garter. This is the oldest order of chivalry in the whole of Europe. It goes back to the 14th century — 1348 — and it's the personal choice of the sovereign. Queen Elizabeth asked me to become a Knight of the Garter and it had nothing at all to do with government. Whereas the rest of the honors system in the UK is a decision by government.
When Winston Churchill was buried, he had said that he wanted the insignia of the Garter to be laid on his coffin. That was above all other awards he'd received.
MR: Do you remember where you were when you found out that she had chosen you?
MK: Yes, I was at home in London, and I got a phone call from her private secretary saying that The Queen had asked him to ask me whether I might possibly see my way to being able to accept her appointment as a Knight of the Garter.
Queen Elizabeth II
MR: What was your relationship like with The Queen?
MK: I had met her before, and I was the first governor of the Bank of England to be invited to have an audience with The Queen. I did that one lunchtime.
MR: What's that like?
MK: Well, the thing about Queen Elizabeth, is that she was extraordinarily well briefed on a whole range of subjects. The person who went in before me was someone who played bagpipes from the north of England. Now, I had no idea that bagpipes existed in the north of England. I had assumed they were Scottish, but there was a special branch of bagpipes from the north of England. She knew all about it and she was very well briefed about the economic and financial situation when I went to speak to her. She recalled visits that she'd made to various financial institutions and even trading floors. She had a remarkable memory, a truly remarkable memory.
Then she came to visit the Bank of England after the financial crisis to thank the staff for the work they'd done. I got young people in the bank to show her around.
Then of course I met her on Garter Day in 2014 when I was installed and sat next to her for the lunch after my installation. Then I’d see her every year until last year when she did come to Garter Day and presided over the installation ceremony of the new Knights. Then we all had our photograph taken. Indeed, my copy of that framed photograph, arrived this very morning that I am speaking to you.
MR: I hate to say it, but this reminds me of a joke about Arthur Miller.
He’s he goes back to his high school, and he sees a guy pushing a hotdog cart and the guy says to him, "Arty, Arty, how's it going? It's me, Jimmy from high school. How's it going?" Arthur Miller says, "Well, it’s actually going great — I’m a playwright. I sit and write and share my ideas and art with the world and I get paid pretty good for it. And I travel the globe and I’m dating Marilyn Monroe.”
Jimmy looks at him and he says, "Playwright…I should’ve gone into that."
This Garter thing sounds great. I should go into that.
MK: It is a very special occasion. The chapel at Windsor St. George's Chapel, which is where Harry and Meghan got married, that chapel is the chapel of the Most Noble Order of the Garter.
“Ode to the Drachma”
MR: I have this sense of you that you have an irreverence or that there’s something American about you that isn’t all about the pomp. Do you think that that assessment of you is correct?
MK: Well, what is true is that people have always said that I have been able to explain complicated things in ways that people understand. Now, whether that's American or not, I don't know. I think talking to Marty Feldstein over the years meant that I learned and practiced talking about quite difficult economic ideas in terms of pure language and words, rather than relying solely on mathematics, which is the usual language of economists.
MR: Do you think that translates into your worldview?
MK: Yes, I think that being very clear about what one is saying is very important and it has to be done in a way that is accessible. I like using analogies, sometimes sporting analogies in order to get the point across. If you're speaking to a group, you want to get their attention fairly early on. To do that, you need to be able to think through what arguments or anecdotes or questions they would listen to and would grab their attention. I think that is quite important. I'm quite often struck when I hear academics give presentations at how bad they are.
Now you can go to the opposite extreme and listen to politicians who can be very glib, but often completely fail to answer the question. You don't want to be at either extreme of those two.
When I left the Bank of England, I took nine months off and traveled and at the end of it, asked myself the question, “What do I want to do now?” I realized that I did not want to go to another meeting ever again. So I've stayed off boards. I'm on one advisory board, but that's because of the intellectual caliber of the other people on it. I chair an orchestra in London, but that's because I want to have one active interest in the arts. I used to be on the board of the National Gallery, now I'm on the board of the Philharmonia Orchestra. But that's the limit to any meetings I would want to go to. I'd much rather stay at home and read a good book or try to write one.
MR: What's the last full song that you listened to?
MK: Well, it would probably be a lieder, I think.
MR: Do you listen to jazz or rock?
MK: When I was in New York, I used to go to the Blue Note and listen to jazz. But I wouldn't say I'm a regular listener to pop music.
If you are to ask me, who was my favorite band, I'm afraid it would go way back to ABBA.
MR: I think I remember you telling me this at the wedding. Your wife is Scandinavian, correct?
MK: She's from Finland, yes.
MR: That's where ABBA is from?
MK: No, ABBA is from Sweden, but she is a Swedish-speaking Finn.
The thing about the ABBA song “Mamma Mia” is that I used to use this in teaching in NYU. The words of “Mamma Mia,” I gave it a new title. I said, it's not “Mamma Mia”, it's “Ode to the Drachma” because it's all about the attitude of Greek people towards being cheated by the Drachma, giving it up, going to the Euro, and then regretting it.
MR: What do you think is the best book on money?
MK: Well, I think I'm probably going to be shameless here and promote my own book, The End of Alchemy, which I wrote in 2016. When I reread bits now, I actually think, "Yes, this is well written and it's gone down well." So that's the book I would recommend.
MR: What do you read for your news in the morning?
MK: I rely on two things really. One is the BBC website for general news, foreign news, political news. I also read on screen the Financial Times. If I see references to interesting articles in other newspapers, then I'll go on the House of Lords’ website to get access to that.
I will glance at Politico both in the US and in the UK. That's political gossip really. But otherwise, I'll wait until I see a reference or a recommendation to something.
MR: Do you remember Allan Bloom?
MK: Yes.
MR: Saul Bellow had him saying, “When we do it, it's not gossip, it's called social history.”
MK: Okay, right. Well, it's active social history.
Digital Pound: A Solution in Search of a Problem
MR: Do you have any thoughts on bitcoin or crypto?
MK: Yes.
I'll divide it between cryptocurrencies, stablecoins, and central bank digital currencies. Cryptocurrencies I think are a speculative investment. I wouldn't ban people from using them and I'm not even sure I'd want to regulate them. I think I'd say to people, "Look, if you want to go into a betting shop and gamble on a horse, fine. If you want to go to a cryptocurrency and buy a cryptocurrency, fine. But you must remember that you may lose it all. It's entirely at your discretion.” It's caveat emptor. We are not going to regulate it because the risk of regulation is that you appear to be giving a seal of approval to a regulated cryptocurrency and it enables people to say, “Gosh, it all went wrong. The fault was the regulator not mine. I want to be compensated.” I don’t think there is any case for compensation.
If there is any case of regulation, it’s to stop false advertising. You don’t want celebrities to exploit their celebrity status to promote for a fee a particular cryptocurrency.
Stablecoins are different because they’re not currencies. They’re linked to an existing currency. Stablecoin can be linked to the Dollar or the Euro or Sterling and there, what matters, is that when they claim to be backed by high quality financial assets, they need to be backed by something that is essentially a bank account with a central bank. Of course, once you do that, then there is no financial gain to be had by issuing a stablecoin.
MR: Yes, exactly.
MK: So I would’ve thought they would wither on the vine for that reason. I think central banks will undoubtedly insist on their proper backing.
The third — central bank digital currency — our report from the House of Lords Economic Affairs Committee was entitled “Central Bank Digital Currencies: a solution in search of a problem.”
MR: I read the recent Bank of England report, but never that one.
MK: You should. I claim ownership of this phrase, “a solution in search of a problem.”
MR: That's amazing.
Banking Reform and Silicon Valley Bank
MR: I think your instincts are all very American. The big point is you're basically giving Leviathan the ability to look at every person's bank account. It’s the most dangerous political football devised. And this is not a new idea, it's just gussied up because people like having their names next to “central bank digital currency.” But it’s the Chicago Plan from the 1930s to disintermediate private banks.
MK: I think the Financial Crisis did bring back to the fore the arguments for not relying exclusively on commercial banks unless regulation of them was improved. I think my position now is that what we're still missing is a framework which insists that commercial banks have to have their assets, the loan book essentially, valued by the central bank, and the commercial banks can issue very short-term liabilities. But only up to the point that central banks are willing to take their assets as collateral after a haircut on the collateral.
Because if you had that situation, then the central bank and the commercial bank would know that they were not allowed to issue short-term liabilities like callable checking accounts without knowing that the central bank was prepared to lend, at the drop of a hat, cash to that bank if they had a run on their liquid liabilities. That framework is all you need really to regulate a commercial banking system. Once you've done that, you don't need the hundreds of thousands of pages of regulations.
My guess is that central banks will go down this road in one form or another. I set it out in The End of Alchemy. I think that central banks are beginning to create facilities which have this property. The key thing is that it should be done as an ex ante framework because I think the big mistake — and where I disagreed with some of the American officials in charge of the crisis facilities during the financial crisis — was that they were prepared to throw as much money as was needed at the problem. The danger with that is that if you don't have a clear ex ante framework which limits the scale of creation of short-term liabilities and link it to the value of the assets of the bank, then there's no limit on the amount of money you may have to print in order to throw at these people. That will create an enormous political backlash, which we did see to a large extent in the crisis. The next time it'll be even worse unless we create this ex ante framework.
MR: The ex ante program seems to be that they are going to solve it ex post.
MK: Yes. That's not good enough. You've got to have a framework which is spelled out.
MR: Do you have any thoughts on the Silicon Valley Bank situation?
MK: The ex ante framework I have suggested would have prevented SVB from expanding their deposit book so quickly because the regulators would have imposed haircuts on the value of the bank’s assets. And the uninsured depositors would have known that the bank had access to a contingent credit line from the Fed.
MR: If you could have a beer with any economist living or dead, who would you want to have a beer with?
MK: Well, that's a very difficult question. So it would be someone where you felt you would benefit through a conversation in words. Not someone you would necessarily want to just try and sell their latest paper, but somewhere you could really have a wide-ranging conversation with.
I think Maynard Keynes does stand out. Not just someone who worked on policy questions, worked in government, was an academic, but had a lot of interests outside the world of economics, the world of arts, particularly — he created the Arts Council in the UK. And he was in the House of Lords for a short time before he died. I think he would be an excellent person to have a beer with. But I'm sure there are many others.