David Kynaston’s Till Time’s Last Sand reveals how the Bank’s relationship with government—from the gold standard to the Crash—have shaped the nation’s economy since 1694
David Kynaston is a wonderful social historian, with three massive volumes on post-war Britain and many others to his name. He has been a leading practitioner of “history from below,” reflecting the experiences of ordinary people. He has now turned to telling the story of one of Britain’s most powerful and mysterious institutions—the Bank of England, from its founding in 1694 up to 2013.
He faced a number of challenges. Anyone writing an official history is bound to pull his punches. Though far from uncritical, Kynaston has succumbed somewhat to the Old Lady’s mystique. Then there is the question of audience. Kynaston was commissioned to write the book for “the general reader.” This is almost impossible because banking is highly specialised. Explaining all the technical terms would have slowed down the narrative, but not explaining them often leaves the general reader floundering. Kynaston is a masterly storyteller and has made the material as accessible as it could possibly be to the non-specialist. Still, a glossary of technical terms would have been helpful.
While the history of the Bank as an institution plays to the author’s strengths as a social historian, the task also demands an ability to relate institutional practice to debates in monetary theory, which Kynaston does not command. He compensates effectively by allowing bankers and finance ministers to explain in their own words what they thought they were doing. But what is missing is an independent judgment on the unfolding events. “There was much to ponder” is not enough.
These caveats apart, Kynaston has done a great job. Even the general reader can enjoy the 800-page ride, even if he or she is not left with an exact knowledge of how the engine works.
This is the story of how a consortium of merchants, formed to lend money to a cash-strapped state to pursue its foreign wars, came to dominate the monetary conditions of the kingdom. Its three conflicting obligations—to raise loans for the sovereign, defend the convertibility of its notes into gold (the Gold Standard), and maximise the profits of its shareholders—gave rise to continuous friction between the Bank and government, and the Bank and its competitor joint-stock banks. Such friction was seemingly resolved by the nationalisation of the Bank in 1946, when it became an instrument of government policy. However, after the inflationary 1970s, opinion swung back to the need for an independent institution to limit the government’s ability to print money.
A new era began after Labour won the 1997 general election. The Bank remained a public corporation, but was set an inflation target and given “operational independence” to set interest rates. The crisis of 2007-8—on which Kynaston offers a revealing postscript—has in turn challenged these arrangements, so a new monetary or, more precisely, macro-economic constitution needs to be built from the existing fragments. But it has always been thus: big institutional reforms have always followed big crises.
Economic institutions have motives and logics of their own that elude the grasp of generalising theoreticians. It is through allowing the actors, great and small, to have their say, that Kynaston conveys the complex culture of the Bank.
Several aspects stand out. The first was the Bank’s strongly hierarchical structure with the Governor at its apex. It also had a strong sense of public duty, which overrode profit maximisation. Then there was the reliance on mystique, “native shrewdness… natural instinct… almost a sensory touch” in the place of economic analysis and transparency. “Never explain, never apologise” was the motto. “You are not here to tell us what to do, but to explain to us why we have done it,” Governor Montagu Norman told Henry Clay, the Bank’s first professional economist, in 1933. The Bank was to be a bank, not a study group.
There was also a “degree of anti-semitism”—it was not until 1868 that Jews broke into the magic circle, with the appointment of Alfred de Rothschild as a director. And don’t forget the subordination of women: it was eventually the typewriter that got them in on the lowest rung.
The Bank’s architecture expressed the institution’s view of itself. When Herbert Baker, appointed in the 1920s to reconstruct John Soane’s Victorian edifice, asked what the Bank stood for, he was told: “Not the amassing of money… but rather that invisible thing, Trust, Confidence, which breeds Credit.”
The Bank of England was a creature of war. The Jacobean state was, in the words of Gladstone, “a fraudulent bankrupt,” which had to offer special inducements to get anyone with money to lend to it. These inducements were enshrined in the Bank’s first charter. The proprietors were given a monopoly of lending to the government, in return for 8 per cent interest, with the loans secured on earmarked revenues. The pivot of the arrangement and the source of all subsequent trouble was that the Bank’s subscription was in gold coin, but it lent the government paper. The “bills” or debts that financed both government spending and foreign and domestic trade were “accepted” because they could, if needed, be redeemed in gold at a fixed rate of exchange. Thus the Bank, as the government’s agent, had to have a large enough gold reserve to pay the bearer of its notes gold on demand. This was the guarantee both of its own, and the government’s, solvency.
The government wanted as much money as cheaply as possible; the Bank felt it needed to restrict its “advances” to protect what it called its “Establishment”—the capital (gold) subscribed by its shareholders. In 1797, in order to continue the Napoleonic war in the face of the shrinkage of the Bank’s gold reserves, the prime minister William Pitt decided to suspend the convertibility of bank notes into gold: his Loyalty Loan was raised solely on the credit of the government. A hundred years after its foundation, cartoonists depicted the virtuous Old Lady of Threadneedle Street being ravished by Pitt.
The blame game between government and Bank has continued ever since. In a financial crisis, government would blame the Bank for not having done enough to restrain credit expansion. The Bank would point the finger at loose government finance. Alternatively, the Bank would blame the commercial banks, claiming it had little power to restrain their lending. In the long slump that followed the resumption of gold payments in 1821, the government attacked the Bank’s high interest rate policy for neglecting the needs of trade. The Bank’s response was robust. If the government feared “mills being stopped, or riots in the country” for lack of credit, it was up to them either to curtail their own spending or to relieve the Bank of the duty to protect its gold.
The Bank Charter Act of 1844 was a compromise between these conflicting interests. It gave the Bank of England a legal monopoly on note-issue in England and Wales—until then private banks had issued notes, of varying creditworthiness, of their own. This made it much more difficult for the Bank to pass the buck to the commercial banks. At the same time the act imposed a gold reserve requirement of 100 per cent and froze the “fiduciary issue”—the part of the note issue which did not need to be backed by gold—at £14m, its 1844 level. This proclaimed the commitment to sound money. The Bank’s private business was to be “ring fenced” from its note-issuing business. The purpose of the Act, as stated by one of its backers, “was to make the currency, consisting of a certain proportion of paper and gold, fluctuate precisely as if the currency were entirely metallic”—that is, fluctuate very little.
It was in the second half of the 19th century that the Bank started to develop its modern function as “lender of last resort” to the banking system, a duty codified in Walter Bagehot’s 1873 classic, Lombard Street. Bagehot argued that it was the Bank’s duty to keep large enough reserves to be able, in a crisis, to lend freely to all solvent banks at a very high rate of interest. Widely resisted at the time on the high ground of “moral hazard,” it led to the Bank organising the rescue of Barings in 1890.
The Victorian monetary compromise had two elements. The Bank of England would use the Bank Rate and “moral suasion” to protect its gold reserve; and the government, outside war, would run balanced budgets. Bank and government were thus jointly responsible for making money serve the needs of the economy, but only the government was held accountable for the result. The advent of democracy unravelled this Victorian concordat.
In the 20th century, as governors become assertive chief executives, Kynaston’s story is increasingly shaped round their attempts to preserve the Bank’s independence against the encroachments of the state. On the Bank’s side, the memorable figures in the era of the two wars were the megalomaniac Walter Cunliffe and the secretive and unstable Montagu Norman. Lord Cromer was a thorn in Harold Wilson’s side in the 1960s. In our own time there was the articulate, strongly-opinionated Mervyn King, whose handling of the 2007-8 financial collapse remains controversial.
But a strong personality could not prevent the shift in power from Bank to Treasury. In the First World War, Cunliffe’s “near attempt” to block the government’s access to gold stored in Canada for safekeeping got him the sack in 1917. Against the background of the Great Depression of the 1930s, the Keynesian objective of full employment came to trump both the Gladstonian duty to balance the books and the Bank’s duty to maintain the gold standard.
In this struggle, the Bank’s last victory was the restoration of the gold standard in 1925. Winston Churchill, Chancellor of the Exchequer in 1925, never forgave Montagu Norman for having pulled a fast one on him. The collapse of the gold standard in 1931 spelled the end of the Bank’s claim to autonomy. In the financial crisis of 1931, Norman, as Kynaston rightly says, was a “bit player,” unable to mobilise the foreign loans necessary to “save the pound.” When Britain “went off gold” for the last time on 21st September 1931, the deputy governor noted that “in every village [in Ireland, Egypt, India] a bill on London was looked upon as cash—and it would be cash no longer.” It was the end of a glorious era in the Bank’s history. During the Second World War, the Bank was essentially a department of the Treasury.
Montagu Norman, governor from 1920 to 1944, was not uncreative in the period of the Bank’s decline. His partnership with Benjamin Strong, chairman of the US Federal Reserve in New York, was a crucial part of the defence of the restored gold standard in the 1920s. But his attempt to build up a “freemasonry of disinterested central bankers as a necessary counterweight to grubby, vote-catching politicians” foundered on the Bank of France’s suspicion of Bank of England “imperialism.” Belatedly recognising the justice of the charge that the City had neglected the needs of industry, in 1930 he mobilised capital from the clearing Banks into a Bankers’ Industrial Development Company.
The Bank reluctantly accepted nationalisation in 1946. This gave the Treasury sweeping powers to direct bank policy on anything necessary in the public interest. The Radcliffe Report of 1959 spelt it out: “Bank Rate changes [to] be made at the explicit directive of the Chancellor of the day.” In the past, the Bank set interest rates after consulting the Treasury; now the Treasury would set interest rates after consulting the Bank. In return for ceding interest rate autonomy, the Bank got the power to supervise the clearing banks.
But the war rescued its power base in an unexpected way. Sterling debts accrued in wartime gave the Bank a new role. It was now the reserve bank of the sterling area: maintaining convertibility of sterling replaced convertibility into gold as its chief object. As long as sterling was viewed by the government as a key reserve currency, and devaluation was ruled out, the Bank retained a stranglehold on macro-economic policy. Confidence in the pound required confidence in government finance. Norman’s successor Cameron Cobbold put the matter cogently in 1949, just before the sterling devaluation of the same year: “the main thing necessary to restore confidence was evidence of action about government expenditure…” Nationalisation did not end the blame game.
In the expansionist 1950s, when the pound was often under pressure, the government accused the Bank of not doing enough to curtail credit; the Bank accused the Treasury of not doing enough to cut public spending and, later, curb the trade unions. The inconclusive battle between the two was fought out over a succession of sterling crises in the 1950s and 1960s, which ended in the second devaluation of the pound in 1967, and then the move to floating exchange rates.
Throughout the Keynesian ascendancy, the Bank had always insisted that it had to be given “operational independence” to prevent “democratic government” from being “pushed in directions which will tend to prejudice confidence in paper money, thereby risking inflation, exchange crises, and all the social troubles to which they give rise.” It was these social troubles that led to the repudiation of the Keynesian full employment commitment in the 1970s.
In the narrative popularised by Milton Friedman this commitment led inevitably to inflation. The Bank—and many others—saw the conquest of inflation as a moral issue: if forced, it would choose “honest” money and 10 per cent unemployment, rather than “dishonest” money and 2.5 per cent.
These days the Bank, like other central banks, is equipped with an inflation target and freedom to set interest rates. Government is notionally committed to balanced budgets to maintain the confidence of a de-regulated financial system. There has been a return to the Victorian constitution with its division of labour between Bank and Treasury, after the Keynesian detour. But an important lesson this history teaches is that there is no final resolution of the issues which have been debated since the Bank’s start in 1694—because people will continue to be divided about what the chief object of monetary policy should be.
Till Time’s Last Sand: A history of the Bank of England, 1694-2013 by David Kyanston is published by Bloomsbury (£35)