PART THREE
10
‘As I was passing the Bank of England, I met Hendy and a friend of his and they were just going to be shown over the Bank, so asked me to go with them,’ recorded a young Australian on the last Friday of August 1914:
We went into the weighing room, where every sovereign that has been in circulation is put through a machine & weighed, – the light coins dropping one side and the right weights on the other. These machines each weigh 60 coins per minute and all day there are over 100 machines working. Sovereigns & ½ sovs are scattered all over the floor and the men walk over them just as if they were dirt. We were shown a small scuttle-full of sovs and were told that we could have them if we could take them away, but one can hardly lift them, – they’re so heavy.
Next we visited the store-room where all the notes & gold are stored, the gold all being in canvas bags, each bag containing £1,000 sovs, & they are all stacked so that the money can be counted at a glance. The notes are all tied in small bundles of about 500 to 1000 notes in each. We saw the richest spot on the earth viz a little safe about 2 ft 6 in square where the £1,000 notes are kept, and were given two bundles of these, each bundle containing 500 notes, so that for ½ a minute of my life, I have been a millionaire.
After this novel experience we were very lucky and got special permission to go to the bullion room. Here, all the gold bars each weighing about 80 lbs odd & worth £1700 are stored when they arrive. They are pure gold (24 carat) and although very small are exceedingly heavy. It is only a very small room with thick walls and the bars are packed on trollies. The amount of gold bar at present there was worth over £4,000,000. I never expect to see so much money in such a small space again.
It all seemed timeless and reassuring, but of course in the world outside the war was almost a month old. And indeed, ten days before the diarist’s visit, the secretary had posted on 18 August a telling notice with regard to the Bank Picquet: ‘The Military Authorities think it necessary that, in place of the countersign now prevailing in the Bank, namely, two stamps with the foot, in future there should be a different password each night.’1
In that outside world, the great financial crisis of 1914 continued to be played out during the days and weeks after the declaration on war on 4 August. The key immediate development was Lloyd George’s decision to issue Treasury currency notes for £1 and 10 shillings – a decision that, in the words of Richard Roberts, not only ‘rendered redundant the need for the suspension of the Bank Act’, but ‘by staunching a possible internal gold drain, clinched the case for the retention of specie convertibility’. Why Treasury as opposed to Bank notes? Ultimately there was no alternative, given that the Bank’s Printing Department was already working flat out producing enough £5 notes for the reopening of the banks on Friday the 7th; but inevitably the Bank regretted the development, with the Court soon afterwards expressing its view that the Treasury’s note issue should in the fullness of time be issued by the Bank. The other significant initiative during those febrile early days of war, as the summit conference at the Treasury continued on Wednesday the 5th and Thursday the 6th, was the decision to broaden Sunday’s moratorium on bills of exchange into a more general one-month moratorium (eventually extended to three months), in effect offering protection to the commercial world against banks calling in loans. For their part, the concern of the banks was that major account holders might transfer deposits to the Bank; but Cunliffe reassured them, saying that he had rejected a £100,000 account because ‘I thought it was not cricket.’2
In due course the ‘Containment’ phase of the financial crisis moved into the ‘Revival’ phase, culminating in the reopening of the Stock Exchange in January 1915. Perhaps nothing was more important than the measures – in which the Bank was intimately involved in the planning stages, especially through the person of the former governor Alfred Cole – to restore to life the discount market and to save the accepting houses (that is, the merchant banks). The details were complicated, but the crux in relation to the former was the Bank’s willingness, under government guarantee against loss, to abandon its traditional practice of buying only the ‘finest’ commercial bills. Instead, as the veteran financial commentator W. R. Lawson put it soon afterwards, ‘practically the Bank lowered its standard from first-class to second, and even third-class bills’. As for the latter aspect, rescuing those accepting houses not in a position to pay once bills matured, the Bank was prepared to lend at 2 per cent above Bank rate, with the helpful promise that it would not seek repayment until a year after the war ended. The Bank during these early months also advanced substantial sums to government – some £83 million by the end of the year – as well as naturally playing a significant role in the first War Loan, issued in mid-November for £350 million at 3½ per cent. Cunliffe, overridden by the Treasury, would have preferred a more generous coupon; and he was proved right, as the issue flopped, despite fulsome political and journalistic propaganda about its high take-up. The reasons for the fiasco, amounting to a £113 million shortfall, have been closely analysed by Jeremy Wormell, who among other factors identifies errors in timing and structuring as well as pricing. In any case, Cunliffe at this point took the big view and acted decisively: with the Bank having already at the outset subscribed for £40 million, he now covertly came in for the remaining £113 million – typically without troubling to consult his colleagues.3
Indeed, the governor in wartime seems to have been on his own turf even more bullying in manner than in peacetime, to judge by the letter that a leading banker, Robert Martin Holland of Martins, sent to him as early as 19 August. Martin Holland that morning had gone to the Bank to consult Nairne about the terms of a forthcoming issue of Treasury bills. ‘He referred it to you,’ wrote the banker, ‘and you requested me to come and see you, and then proceeded in the presence of Sir Gordon Nairne to address me in a way that would have been unjustifiable if between a master and his servant.’ Subsequent correspondence revealed that Cunliffe had believed that Martin Holland was seeking to induce him ‘to enter into some ring of the Bankers to force the price of Treasury Bills against the Government’. But for the government itself, and the chancellor in particular, Cunliffe during these early stages of the war was their indispensable go-to man in the City, especially valued for his ability to bang together the heads of the squabbling bankers. ‘His sense of humour, which he concealed under a dour almost surly countenance, was an encouragement in those trying days,’ affectionately recalled Lloyd George:
He was fond of little practical jokes to lighten the dismal anxieties of our common burden. He affected a deep resentment at our issuing the £1 notes as Treasury and not Bank of England Notes. He scoffed at the inferiority of our issue in the quality of its paper and its artistry as compared with the crisp £5 note of the Great Bank over which he presided. I can see his impressive figure with its rolling gait, coming one morning through the door of the Treasury Board Room. He had a scornful look on his face. He came up to my desk with a mumbled greeting, solemnly opened the portfolio he always carried, and pulled out a bedraggled £1 Treasury Note, dirty and barely legible. He said: ‘Look at that. It came into the Bank yesterday in that condition. I told you the paper was no good – far better to have left it to us.’ He had scrubbed the note in order to reduce it to this condition of defacement for the pleasure of ragging me. I told him so and he laughed. His manner was not propitiatory to strangers, but when you got to know him he was a genial, kindly man, and I liked him. I relied on his shrewdness, his common sense and instinct.
‘The best way to avoid a panic is to meet the situation like lions,’ Cunliffe himself had assured the Treasury’s Bradbury on the first day of hostilities, and some three months later he received an honour that few of his predecessors had known, let alone while still in office. ‘I like the Governor – a regular John Bull of the farmer type, but wonderfully shrewd & level-headed,’ Asquith at No 10 confided to an intimate in early November following a meeting about the imminent issue of the War Loan. ‘When the others had gone, I told him (he is called Cunliffe) that the King had agreed to give him a peerage, and that I proposed to announce it at the Guildhall on Monday. He was not the least émotionné & simply said – “Well, I obey orders”.’4
The war was not on the whole a happy or comfortable time at the Bank. A nagging worry throughout was the retention of adequate numbers of qualified men. In October 1914 permission was given to staff to join the National Volunteer Reserve, but only ‘on condition that they are not required to sign any enrolment form which will render them liable to be called up for service by the Military Authorities without the Bank’s consent having first been obtained’; and the following May a governor’s order stated that ‘so many Members of the Staff have gallantly volunteered that, with the increased National duties which the Bank have had to undertake, it is quite impossible to spare any more’. Volunteering gave way of course to conscription, and as the war dragged on more and more pensioners returned, more and more temporary appointments were made – and more and more women were recruited, with their numbers rising to well over a thousand as the men went to the Front. Before the war there had been complete physical segregation of the sexes, but now just a wood-and-glass screen kept them apart; and Cunliffe was so disconcerted by some of the colourful dresses he encountered that a new rule confined permissible colours to navy, black and very dark grey. More generally, the wartime spirit seems by 1918 to have been flagging quite badly. In April a notice inveighed against the ‘disgraceful practice’ of ‘thefts of Toilet paper and Soap in certain of the lavatories’; in October another notice urged economy in the use of electric lights (‘At irregular intervals all lights will be switched off-and-on twice, in rapid succession, as a reminder that any lights burning unnecessarily must be extinguished’); and between times, that summer, a ‘Committee of Delegates’ not only laid before the governor its specific complaints about pay failing to keep up with wartime inflation, but warned that the larger mood in the Bank was one of ‘a great unrest’. It is clear enough that the failure was one of an inadequate human touch. ‘All through these dark years there was a grim silence on the part of the authorities,’ recalled Wilfred Bryant, a senior clerk, soon after the end of hostilities. ‘I shall always regret the fact that on the anniversaries of the opening of the War, when we met and sang together en masse the National Anthem in the Lothbury Courtyard, no words from official lips were ever uttered of sympathy, appreciation, and encouragement … But, alas! the authorities seem to have looked upon us as mere machines.’ And he went on: ‘We always lived from hand to mouth. Our domestic interests at home were never thought of. Sunday duty was often not officially announced till the last thing on Saturday night … Such pin-pricks pierced into our very marrows.’5
At a more haute finance level, there were for the Bank perhaps two overarching wartime facts. The first, amid the comprehensive breakdown of the international gold standard, was that although sterling continued in principle to be convertible, in practice the gold standard was more or less suspended, not least because of intensely difficult shipping conditions. The other cardinal fact was the shifting balance of power between Bank and Treasury. ‘I remember Lord Cunliffe saying to me during the first few days of the war that while the war lasted the Bank would have to regard itself as a department of the Treasury,’ was Bradbury’s recollection; and in all sorts of ways – including approval of new issues, the power to requisition securities, and Treasury bills effectively replacing Bank rate as the arbiter of short-term interest rates – it proved an accurate prediction of the westerly drift. So too with war loans, where the Bank had some success (notably with the huge £2,000 million 5 per cent loan of January 1917) in skilfully preparing the market but was generally overshadowed by the Treasury; to a significant degree that was even the case in the almost continuously problematic area of the dollar exchange – absolutely vital to the war effort, given that (in Victor Morgan’s subsequent words) ‘upon the maintenance of an adequate supply of dollars at a reasonable price depended the whole vast purchasing programme of food, materials and munitions for ourselves and our Allies’. All that said, the Bank did have one unique if highly secret contribution to make. So secret indeed that Cunliffe’s successor, Brien Cokayne, did not even know of its existence until shortly after becoming governor, despite three years as deputy governor. His informant was Admiral Sir Robert Hall, in charge of Naval Intelligence, who told him (recorded Cokayne) that ‘for a long time past’ the Bank’s Printing Department had been undertaking ‘very secret & important work for the Admiralty’. Hall declined to disclose the exact nature of the work, but the new governor agreed that it should continue, ‘from the stand point of the Nation & the Bank’. Some four decades later, Herbert de Fraine, who had become principal of the Department three years before the war, spilled the beans: in essence, the work was the printing of forgeries of German documents, done under high-security conditions and delivered by taxi each Sunday morning to Hall himself. ‘In due course,’ noted de Fraine, ‘he told us gratifying news of the success of our product – which, however, had needed a little attention at other hands to make it less “fresh from the printer.”’6
For Cunliffe personally, wartime was good so long as his close ally stayed at 11 Downing Street. In February 1915 they enjoyed a harmonious week together in Paris, at a major conference on Allied finance. ‘When a question arose as to a transhipment of gold the Governor of the Bank of France expressed himself with great fluency,’ recalled Lloyd George. ‘I then said: “The Governor of the Bank of England will state the British view on the subject”. [Cunliffe] rose slowly, and after a few preliminary puffs he said: “We do not mean to part with our gold”, and then subsided into his seat.’ The chancellor would also remember the governor’s reluctance to accompany him on a visit to Béthune, under occasional bombardment: ‘He said: “A predecessor of mine was killed visiting the trenches at Namur. But he was there on business with the King, and the City said, ‘Poor fellow!’ but if I were hit in the stomach at Béthune they would all say, ‘D—d fool – what business has he to go there?’”’ The great blow to Cunliffe was the government reshuffle in May 1915, causing Lloyd George one morning to be interrupted in his shaving by his maid, who told him that the governor was downstairs wanting to see him. ‘I went down. The old boy blundered out, “I hear they want you to leave the Treasury. We cannot let you go!” and then he quite broke down, and the tears trickled down his cheeks.’ To Asquith soon afterwards, Cunliffe was equally – and unavailingly – beseeching. ‘I couldn’t,’ related the prime minister, ‘get anything out of him, except “We don’t want to lose our man! Don’t take our man away from us!”’
The new chancellor was Reginald McKenna, very sure of his own abilities, unwilling to accept advice and soon at loggerheads with the governor. Against a background of Cunliffe threatening to resign, Asquith tried during the summer to mediate, telling McKenna that Cunliffe had ‘rendered us invaluable service during the past year’ and that, for all his ‘limitations of outlook and faults of temper’, his ‘deliberate judgement’ was ‘always well worth taking into account’ and that he was ‘perfectly straight’. The governor stayed in post, but the relationship was permanently damaged. McKenna, according to the retrospective account of Lord Beaverbrook, would ‘frequently urge upon Cunliffe the necessity of providing more bank balances for the government in the United States’; to which Cunliffe ‘would reply invariably, “Mr Chancellor, this is a matter of exchange, and the responsibility here lies with me.”’ Indeed, that autumn, the governor secured a significant victory when he successfully insisted that the newly formed London Exchange Committee – a consortium of bankers charged with securing as favourable an exchange as possible and empowered to take under its control all available gold as well as foreign currency – not only have himself as chairman but be run out of the Bank. The governor by this time had a new deputy, Cokayne, unexciting but appreciably more efficient than his port-wine predecessor; while Cokayne in turn employed from January 1916 one of the Bank’s directors for day-to-day ‘devilling’, a director who had just made a clean break from his own firm. ‘There goes that queer-looking fish with the ginger beard again,’ Cunliffe was soon heard to say, loudly, on passing Montagu Norman in a corridor. ‘Do you know who he is? I keep seeing him creeping about this place like a lost soul with nothing better to do.’
It was Norman who, that spring, made a particular friend of Benjamin Strong, governor of the recently established Federal Reserve Bank of New York, visiting London with a view to establishing closer Anglo-American financial relations. Strong’s diary of his trip recorded his first meeting with Norman’s chief: ‘Lord Cunliffe impressed me most favourably, relishes a joke, and likes to make one. He joshed me when I came in and … wanted to know why I had not let him know in advance of my coming over.’ The American then explained his scheme for more intimate co-operation in exchange matters; and he was careful to show – even though the war was seeing New York increasingly supplant London as the world’s leading international financial centre – that he was well aware of the appropriate pecking order:
We [at the Fed] realize, however, the extent to which present conditions imposed responsibilities on the Bank of England, and that they were, so to speak, headquarters, and that our plans should naturally be shaped with due regard to the local conditions here, in which the Bank of England control, not only as a matter of comity but in order that our transactions might be more effective in the future through being conducted harmoniously with headquarters.
Cunliffe in response made reasonably positive noises, leaving Strong to reflect that ‘on the whole, I am most favourably impressed with his attitude, which was most friendly’. So the governor was also when Strong called again shortly before heading home, with the Englishman himself just back from a trip to Paris. ‘He admitted that the Bank of England was a museum, but that after all they could change when necessity required whereas the Banque de France was much more a museum than the Bank of England and apparently did not have the capacity or courage to change.’ In practical terms, the eventual upshot was an agreement between the Bank and the Fed that embraced the opening of reciprocal accounts, the reciprocal buying of commercial bills, and the earmarking and shipment of gold – altogether a signal moment, owing much to Strong’s personal initiative, in the still barely nascent story of central banking co-operation.7
The rest of 1916 saw general relations between Bank and Treasury increasingly tense – ‘tho’ knowing jeopardy threatens us in N.Y. one might as well talk to an airball as to them,’ reflected in June a disenchanted Norman – just as the Cunliffe/McKenna relationship plumbed new depths, with the governor writing to Asquith in August to accuse the chancellor of having attempted to carry out policies which would ‘have seriously endangered the credit of the Country’. Cunliffe claimed to have the Committee of Treasury’s backing over this charge, but in truth several of his senior colleagues by this time were finding his governorship (so far renewed each year because of the war) increasingly trying. That autumn a coup was talked about, but failed to come off. ‘I feel we owe him a debt of gratitude for sticking to the job, and for the ability he has shown, in his arduous duties,’ the former governor Middleton Campbell wrote on 20 October to Cokayne, even though ‘he is not the man he was’, being ‘irritable, & does not like any one differing with him’; while ‘of course’, added Campbell, ‘we all regret the departure of the old Custom, of telling every thing to the Treasury Committee, but this has arisen through extra-ordinary Circumstances’. The immediate outcome was related by Norman four days later in a diary entry pregnant with meaning:
Most of Treas Com having agreed to G. [governor Cunliffe] for another year: he shd make a point of regular full disclosure of Bk affairs & of his advice qua Gov. This is due to them as Treas Com (by long custom) & essential now to begin preparation of united front, as Enquiry after war is certain – & it will be engineered with main object of substituting State Bank. Such a Bank seems to be in minds of C [chancellor McKenna] & whole Treasury as well as grumblers in City & busy bodies in Parl’ment.
Cunliffe for his part continued to insist over the next few weeks that he would continue only on an unconditional basis, and a state of almost open warfare existed between him and his predecessor Cole, but eventually Norman managed to thrash out with the governor some sort of concordat. Reluctantly, Cunliffe agreed that henceforth a female shorthand writer would attend Committee of Treasury meetings and provide a full précis; that those meetings would be more frequent; that all current business would be considered; that there would be a ‘gradual bringing in of younger directors’ into the Committee; and that in due course there would ‘perhaps’ be, on the Court as a whole, ‘new directors drawn from Bankers &c’. Norman also recorded how the peacemaker’s reward came on 22 November: ‘T. Com … Hatchet formally buried by G [Cunliffe] & ACC [Cole]’.
Soon afterwards, as Lloyd George succeeded Asquith at the head of the wartime coalition, the Conservative leader Andrew Bonar Law replaced McKenna at No 11. ‘Friction between Bank & Treasury has wonderfully lessened since Bonar Law became C,’ noted Norman in January 1917.8Yet some six months later there unfolded an extraordinary episode of high-level rancour – unique in Bank/Treasury annals.9
Beginning as a fierce campaign by Cunliffe against what he saw as unwarranted interference in questions of exchange, especially by the Treasury’s Sir Robert Chalmers and John Maynard Keynes, it took the form by early July – at a critical stage of the war – of a near-mad attempt to block the government’s access to the Bank’s gold that was being stored for safekeeping in Canada. The governor acted entirely off his own bat; Bonar Law was incandescent, telling Lloyd George that Cunliffe’s telegram to the Canadian government had been ‘an act of extraordinary disrespect towards the British Government and a direct insult to me’. At which point the governor’s erstwhile ally summoned him to No 10, severely reprimanded him and threatened (according to Cunliffe’s report next day to the Committee of Treasury) to ‘take over the Bank’. The issue then became – in a correspondence-generating impasse that lasted virtually a month – the nature of Cunliffe’s written apology to the chancellor, with Cokayne gamely seeking to mediate between two stubborn men. The governor spent most of that time on a fishing holiday in Scotland; but Cokayne frankly warned him that unless he pocketed his pride and offered to resign, then ‘the position will become absolutely intolerable and there is bound to be a sort of public scandal’. Yet for the governor such an offer was tantamount to conceding that ‘I simply become a Government Official under [the chancellor’s] orders’; and in the eventual letter (drafted for him by Cokayne and grudgingly accepted by Bonar Law) that did at last get sent in mid-August, making an ‘unreserved apology for anything I have done to offend you’, the offer of resignation was conspicuous by its absence. Soon afterwards, he was back in London – ‘looking very blooming’, according to Gaspard Farrer of Barings, and promising ‘to be good’.
Cunliffe’s days as governor, however, were numbered. ‘No longer sane – if ever he was,’ was the blunt verdict in September of one director, Cecil Lubbock, as his behaviour became increasingly erratic and his bullying increasingly rebarbative. Finally, on 8 November, the Court elected Cokayne and Norman as governor and deputy governor respectively from the following spring. It was a decision that Cunliffe found impossible to accept, mounting a vain campaign over the rest of 1917 to persuade bankers, press and senior figures at the Treasury to try to get Bonar Law to apply pressure on the Court to reverse its vote – a campaign that involved systematic vilification of Norman and others at the Bank. Norman himself recorded Cunliffe’s graceless endgame during the early months of 1918. In February a ‘clear case of megalomania’, following a ‘violent display’ at the Committee of Treasury, ‘behaving like a spoilt child’; and next month, at a meeting of the General Court, reading ‘a longish speech – of wh D Gov & Directors knew nothing – i. eulogising the Bankers. ii. bum-sucking the Press,’ thereby creating a ‘very hot’ feeling, with ‘even’ Cokayne ‘much disgusted with such an unfriendly finale’. Norman’s damning account chimed entirely with the verdict of his fellow-director Teddy Grenfell, who was also at the meeting and confessed to being ‘reluctantly compelled to agree that able & strong as Lord C is, yet he is selfish, disloyal to colleagues & the Bank’. Or in short: ‘He has a bad yellow streak & is in no sense a white man.’10
Naturally, the gorier details of the latter stages of Cunliffe’s governorship were kept wholly out of public view. Even so, as Norman’s diary entry of October 1916 had already eloquently suggested with its talk of people wanting instead ‘a State Bank’, a notion almost inconceivable before the war, the Bank by this time was an institution feeling itself somewhat under siege. ‘The Bank of England should take stock of its own position,’ forcibly argued the Economist in September 1917, ‘widening as far as it can the sweep of the net with which it gathers new members into its Court, and modifying the system which puts autocratic power into the hands of the Governor for the time being.’ The following month an internal committee, under Lord Revelstoke’s chairmanship, was set up to consider ‘the Direction and general working of the Bank’.
Top of its agenda was the thorny question of whether joint-stock bankers should at last be allowed on the Court, with the submissions that autumn from existing directors showing opinion divided. ‘It would create jealousies,’ declared Campbell, while deputy governor Cokayne was adamant that ‘so long as none of the banks are directly represented on our Court, our advice (e.g. to the Treasury) on matters concerning their interests will carry greater weight’. On the other side of the argument, Frank Tiarks of the merchant bank Schröders, a director only since 1912, claimed not implausibly that ‘the Directors of the Bank have great responsibility and yet the majority know little or nothing of many important matters’, so that accordingly ‘I have no objection to the Directors of other Banks being elected.’ The Committee itself was split, with the decisive intervention probably coming from another merchant banker, Sir Robert Kindersley of Lazards – tall and determined-looking with bushy black eyebrows, and eventually recalled in his Times obituary as ‘a man with whom it would be safe to go tiger shooting’. The joint-stock banks, he insisted, ‘had too much power already’; and ‘it was his opinion that a man with such responsibility would naturally consider first the needs of his own Bank and that it would be impossible for him to give a fair and unbiassed opinion on the situation as a whole’. Revelstoke’s Committee duly decided against recommending a break with the Bank’s traditional principle of debarring clearing bankers, let alone recommending industrialists; but it did successfully suggest that the Committee of Treasury become more youthful in composition and be elected annually by free and secret ballot. The problem was that the right candidates were not always elected. ‘The inclusion of WMC [Campbell] than whom no one has been less useful, or more prejudiced or is more out of touch, shows how little value can be put on our plan for free ballot,’ noted Norman in March 1918, as the Cunliffe era of almost unopposed autocracy seemingly passed into history. And in April: ‘Election to T. Com of LHH [Colonel Lionel Henry Hanbury] … is an admission of seniority as agst brains! LHH admits as much & did not desire election. It shows that Democracy, ie a free ballot by Court, is not bold enough to supply best men …’ Democracy and the Bank would continue to be a work in progress.
The other significant aspect to the Revelstoke Report was the recommendation of creating a post at the Bank somewhat comparable to that of the general manager at the big joint-stock banks, in effect as the main institutional link between the staff and the governors; and in May 1918, shortly after Cokayne succeeded Cunliffe, this was implemented, as the highly capable Nairne (chief cashier since 1902) took up the new position of comptroller, in order ‘to manage the internal affairs of the Bank and to co-ordinate the two sides [Cash and Stock] and generally to assist the Governors’. Cokayne himself had his first major moment as governor that September, as the chancellor tried to persuade him to lower the Bank rate – again, something virtually unimaginable before 1914. Cokayne refused, informing Bonar Law that he felt ‘strongly’ that ‘it will be impossible to preserve our international credit unless we have comparatively dear money after the War and that the more we artificially cheapen it now, the more difficult it will be to revert to normal conditions’.11
Also looking ahead was the government-appointed Committee on the Currency and Foreign Exchanges after the War, meeting regularly from February 1918 under the chairmanship of Cunliffe (who as was customary would remain a Bank director after stepping down as governor) and mainly comprising bankers. Although the Federation of British Industries (forerunner of the CBI) argued in its submission that the key post-war priority should be the achievement of a favourable trade balance, its views were ignored. Instead, insisted the Cunliffe Report, appearing just a fortnight or so before the end of the war in November 1918, what was really ‘imperative’ was that ‘after the war the conditions necessary to have maintenance of an effective gold standard should be restored without delay’; for, it went on, ‘unless the machinery which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of credit is once more brought into play, there will be grave danger of a progressive credit expansion which will result in a foreign drain of gold menacing the convertibility of our note issue and so jeopardising the international trade position of the country’. The ultimate crux, in other words, was as speedy a return as possible to a fully operational gold standard – a reassuring prospect broadly welcomed by financial opinion at large. ‘Back to Sanity’ was the Economist’s headline, while The Times had no doubts that the City would ‘firmly approve’ the central objective of ‘getting back, after the war, to an unimpeachable gold basis for our currency’.12 Cunliffe himself may have become a semi-pariah at the Bank, but almost certainly no one there would have disputed the thrust of his Committee’s conclusions.
Strong was back in London in July 1919, staying at Norman’s house on Campden Hill and receiving in Threadneedle Street ‘a very warm welcome’ from Cokayne and Nairne. ‘They have even been good enough to put a telephone at the desk and a card with my name on the door, something which I have no doubt is without precedent in the history of the Bank.’ Even so, the American found the directors, whom he joined for lunch, notably lacking in the joys of peace:
There is undoubtedly a very blue feeling here in regard to the future. It seems based in part upon the huge governmental expenditures, which still continue largely in excess of revenues; the early maturities of short government obligations, which aggregate between nine and ten billion dollars within eighteen months; the existence of the huge foreign debt, principally to the United States, which they would be glad and relieved to see reduced to more definite terms; the government policy of continuing unemployment wages; and, more particularly and fundamentally than anything else, the general unrest and dissatisfaction of labor throughout the country …
‘You know,’ Cole told him a few days later, ‘England may have a revolution on her hands any day.’ But for the governor, whose Roehampton house Strong visited for a night, there was at least a safety valve. ‘I discovered that business and the Bank of England was taboo in the family. He apparently makes it a practice never to mention the Bank when he gets home nor his business, and Lady Cokayne, he says, is densely ignorant on that subject, and it is one thing which gives him relief from the anxiety of his work.’
Cokayne stepped down the following spring, to be succeeded by his deputy, Montagu Norman. The new governor continued to cultivate a close relationship with Strong. ‘Whenever you do come to London,’ he assured him later in 1920, ‘let me remind you of your hotel, of which the address is “Thorpe Lodge, Campden Hill, W8.” The Booking Clerk tells me that an hour’s notice will be enough to get your room ready, or, if you are in a hurry, this can be done after you have arrived.’ It is unclear who exactly coined the term ‘central banking’, but by early 1922 the two men were consciously formulating its principles. ‘If ever you should feel downhearted,’ wrote Norman, ‘just you remember that, economically speaking, there is only hope through a community of interest & cooperation between all the Central Banks.’ At the core of their shared conception was not just co-operation between central banks, recognising ‘the importance of international as well as national interests in the re-establishment of the world’s economic and trade stability’, but the notion that for those banks ‘autonomy and freedom from political control are desirable’.
Norman’s ambitions continued to grow. ‘I think that Central Bankers are destined to play their own great part,’ he told Strong in September 1921 after visiting him in America, while five months later he predicted to his Dutch counterpart that the time was ‘not far distant when Central Bankers presenting an united front will at last have an opportunity to play a part in the affairs of the world’, in other words after the politicians had done their worst. Soon afterwards, in March 1922, he wrote to Strong in revealing terms about how ‘two years’ had been ‘wasted in building castles in the air and pulling them down again’: ‘Such is the way of democracies it seems, though a few “aristocrats” in all countries realised from the start what must be the inevitable result of hastily conceived remedies for such serious ills.’ Strong later that year resisted Norman’s idea of a grand conference of central bankers, but undeniably the idea of central banking was by the mid-1920s very firmly established. ‘Policy must be considered before profit,’ Norman explained in January 1925 to the seemingly backsliding president of the National Bank of Austria, ‘and the interests of Publics before those of Shareholders.’13 In a specifically British context, the Bank of England was now unambiguously, and without reservation, a public-oriented rather than a private-oriented institution, with an increasingly broad view of its responsibilities in an almost wholly changed world. Of course, in that challenging public realm, the exact nature of its relationship with the public’s elected representatives had yet to be definitively established; though, however that played out, Norman was unlikely to lose his belief in the freemasonry of disinterested central bankers as a necessary counterweight to grubby, vote-catching politicians.
From the very start – and subsequently sometimes overlooked because of the natural emphasis on the Norman/Strong relationship at a time when American financial power was largely displacing British – there was a crucial imperial dimension to the propagation of the gospel of central banking. Here the key figure was Henry Strakosch: Austrian by origin; London-based managing director of the prominent South African mining house Union Corporation; responsible in 1921 for the creation of the South African Reserve Bank; and described by Norman in February that year as ‘the best authority’ on ‘the principles which should govern the policy of central banks in any country’. The same month, a Bank memo declared that ‘a chain of central banks in our various dominions and their co-operation with each other and our own Central institution and those of other countries is of the greatest importance to the smooth work of the world’s financial machinery’; soon afterwards, Norman put Strong in the picture about the imminent election to the Court of a pragmatic, self-made Canadian, Edward Peacock, who had gained a high reputation in the financial world at large, including the City:
We are taking him with the view of pushing the Central Bank idea for all the Dominions. You will remember that Australia has a State Bank which in no sense acts as a Central Bank and which is doing more harm than good. You will also remember that a Central Bank is being set up in South Africa to which we have contributed a Governor, and it is of vital importance that its beginnings should be upon sound lines. You’ll know better than I do that Canada is without a Central Bank at all.
I am sure you will approve of our desire to see Central Banks in these various places on right lines; and I think you will agree that it is by the fact of our taking in the best Canadian we can get that we are most likely to influence Canadian opinion without offending their susceptibilities.
The establishment of Canada’s central bank would have to wait a decade, but the Bank was indeed applying pressure on the Commonwealth Bank of Australia to become a proper central bank, which duly happened in 1924. As for South Africa in 1921, the pioneer governor whom Norman referred to was William Clegg:
He had been Chief Accountant of the Bank of England at the time of his appointment [recalled half a century later a former director of the Reserve Bank] and lived out that association in every way, setting an example in dignity and dress and tolerating no familiarity. His official residence in Brynterion was called Threadneedle House and in initial discussion with local bankers on local banking practices and desirable policies for the new central bank, I was told these always ended with: ‘In the Bank of England we do things so and so’ and that would be the end of it.
Unsurprisingly, the two central banks kept in the closest possible touch; and when in 1923 they worked together to resolve a liquidity crisis in the South African commercial banking sector, the Morning Post obligingly reflected on how the episode had shown ‘some idea of the immense reserve power which is imparted to our banking system throughout the Empire by co-operation between Central reserve banking institutions’.14
All this was well and good from Norman’s point of view, but his higher priority was the financial reconstruction of Europe, a continent left in a wretched state after the war. There were two major related issues – reparations (where Cunliffe in almost the last significant action before his death had managed through his bull-headed presence at the Versailles peace conference to pitch them injuriously high) and war debts (where Norman was closely involved in early 1923 in Washington negotiations that led to an Anglo-American settlement) – but for the governor the crux was reconstruction itself. He did not underestimate the gravity of the task. ‘I have never thought’, he wrote to Strong in August 1922, ‘the immediate future of Central Europe looked blacker than it now appears to look. I cannot conceive how some sort of a break-up of Austria is to be avoided long before the end of the year; nor do I see how a condition very near to civil war can be avoided in Germany.’
Norman’s specific – and not unheroic – contribution to mending that dire state of affairs was to do everything he could to facilitate a series of large-scale reconstruction loans, often in the process having to overcome a degree of resistance from the City as a whole. One by this time had already taken place (to Czechoslovakia in April 1922); then came Austria in 1923 (the Bank itself issuing the £14 million loan); and the following year, with Norman having to strong-arm Rothschilds and Schröders into undertaking it, Hungary. Ultimately, as everyone knew, no country mattered more than Germany. ‘The black spot of Europe & the world continues to be on the Rhine,’ Norman declared to Strong after the Allied occupation of the Ruhr following the German failure to keep up reparations payments. ‘There you have all the conditions of war except that one side is unarmed. How long can Germany continue thus?’ Then, however, came the great breakthrough of 1924. It began with the new president of the Reichsbank, Hjalmar Schacht, visiting London at the start of the year and being privately acclaimed by Norman as, he informed Clegg, ‘a Banker pure and simple with no public position, but financially a man of sound and up-to-date views in the sense you would understand them’; in due course there emerged the Dawes Plan for Germany’s reparations payments, crucial to which was the huge ‘Dawes Loan’ in October, of which some £10 million was taken by the London market, as cajoled by Norman. None of this, of course, was pure altruism on his part. After all, it was obvious enough that the Bank being a leading player in Europe’s financial reconstruction would in turn help to re-establish the City’s and sterling’s international position. But to suggest that that was Norman’s main motive would not only be cynical but also, almost certainly, mistaken.15
Closer to home, these were the years when the Bank, above all through the person of Norman himself, began to exercise a far closer – and more continuous – control over the City than it had ever done before. From 1919 the chairmen of the main clearing banks not only met regularly with the governor but now stayed for luncheon, while the governor would also often summon them or their general managers to discuss those banks’ latest balance sheets; a close peacetime eye also started to be kept on the merchant banks, with the Bank from 1922 feeling compelled to carry Huths, one of the inner-City houses; even before Norman became governor, and well aware of the key role of the gilt-edged market (that is, in government stocks) following wartime’s tenfold increase in the national debt, Cokayne in early 1920 had instructed the firm that acted as government broker, Mullens, to strengthen its partnership and thus capital; soon afterwards, in relation to the money market, one of Norman’s first acts as governor was to implement his diary jotting, ‘See about weekly meeting with Ch’man of Discount Mkt’; and as for the capital market, at this stage a particularly important dimension in terms of the bigger economic picture, there was for most of the seven years after the war an informal embargo, largely exercised by Norman, on the issuing in London of foreign loans (excluding colonial and reconstruction loans) – an embargo reluctantly necessitated, in the governor’s mind, by the overriding need to bolster sterling and thus quicken the return to the gold standard.
Taken altogether, the Norman approach, heavily reliant on his mixture of charm and force of character, essentially amounted to moral suasion. It did not always work. ‘I regret more than I can say,’ he complained unavailingly in December 1921 to Sir Newton Stabb after learning that a long-term loan to the Siamese government was going ahead, ‘that you should find yourself committed to an issue through the Hongkong Bank [the future HSBC] which actually in the spirit, and practically in the letter, is opposed both to the wishes of the Chancellor and to the policy of the Bank of England.’ Nor were the chairmen of the clearing banks – hugely powerful figures in their own right – automatically inclined to bow to all the governor’s dictates, with Norman enjoying a distinctly mixed relationship with both Frederick Goodenough of Barclays and, perhaps inevitably, Reginald McKenna of Midland. ‘I do not like that type of mind, always anxious to make a personal dash,’ was the Norman view of Cunliffe’s old friend; while McKenna for his part reckoned the governor ‘an intellectual without an intellect’.16 The Bank/City relationship may have been significantly changing in the first half of the 1920s, but the human factor would always be in play.
It did not help on the Norman/McKenna front that the former politician emerged as one of the two most prominent public critics (the other being Keynes) of the Bank’s necessarily deflationary monetary policy – necessarily because it fully accepted the Cunliffe Committee’s conclusion in 1918 that in effect that was the only way of restoring gold parity between sterling and the dollar and thus enabling Britain to return to the pre-war gold standard.17 Unsurprisingly, not least in the immediate post-war context of a spectacular boom rapidly requiring dear-money measures (at this stage supported by Keynes), monetary policy now became increasingly politicised. The stakes and competing interests were clear as early as autumn 1919: wanting an increase in Bank rate, Cokayne warned the chancellor, Austen Chamberlain, that ‘the Court regard the restoration of the gold standard and the resumption of free gold exports at the earliest possible moment as of vital importance to the Country as a whole and consider that it is well worth a temporary sacrifice to secure that end’; but when, soon afterwards, the rate did rise from 5 to 6 per cent, Norman was still far from sure that ‘the certainty of sound money’ was ‘definitely settled’, expressing to Strong his concern about ‘the advocates of expansion and the printing press, which to a considerable extent is the view held by many political leaders’. The denouement to this first post-war phase came in 1920. In April, a fortnight after becoming governor, Norman secured an increase from 6 to 7 per cent; but then in July, pushing for 8, he was informed by Chamberlain that another rise was politically impossible. It was a telling moment. Interest rates, observed Norman in September to a colleague of Strong, ‘are now a political as well as a financial question’; and later that autumn he reproachfully told Chamberlain that ‘when I call to mind your remark to my predecessor (that an independent Rise in the Bank Rate would be an unfriendly act); when I remember our continuing desire for higher rates ever since last July and indeed long before it, and your continuing unwillingness to consent, owing to political reasons … I wonder what (in the spirit as well as in the letter) is the meaning of “political pressure”’. Yet in the long run, however much Norman may have wished otherwise, there was no escaping this politicisation – with the price of money now increasingly seen as impacting directly on levels of unemployment, on housing policy and on economic policy in general.
In due course, Bank rate did come down – eventually to 3 per cent by July 1922 – but in many external eyes all too slowly and timidly, given the sharp recession that had followed the boom. Yet, for Norman and his most trusted colleagues, there remained no alternative to deflation if a plausible road map to a return to the gold standard was to be charted and followed. One of those colleagues was the highly regarded international banker Sir Charles Addis, a director since 1918. Giving his presidential address to the Institute of Bankers in November 1921, he saw ‘no hope of the restoration of the old standard of living and of comfort for the great middle class of this country until prices are further reduced’; called on the country to ‘take a long pull, a strong pull, and to pull all together’; repudiated the ‘ingenious and insubstantial nostrums of claustral economics’; and, demanding a return to gold as soon as possible, beseeched, ‘Let us have done with short cuts and by-pass and, ohne hast ohne rast, bend our energies to return to the old standard.’ Norman would undoubtedly have agreed with every word, but it was a strategy that by 1923 was under increasing attack from the fluent pen of Keynes. In July he publicly declared that ‘so long as unemployment is a matter of general political importance, it is impossible that Bank rate should be regarded, as it used to be, as the secret peculium of the Pope and Cardinals of the City’; later that year he published A Tract on Monetary Reform (dedicated, perhaps ironically, to the Bank of England), which consigned the gold standard to oblivion as a ‘barbarous relic’ and instead advocated a system of managed money through which the central bank would be able to control the supply of credit and thus, in the words of one of his biographers, ‘even out fluctuations in business activity’. Norman for his part remained adamant that the Bank’s was the only true course. ‘We can have & perhaps deserve nothing but troubles until we are again anchored to Gold,’ he confided in Strong that autumn, though adding almost despairingly, ‘How & when can we do it?’18
In practice, that happy day came a little sooner than expected. During 1924, Labour’s first-ever chancellor, Philip Snowden, proved surprisingly City-friendly, finding in Norman, he would recall, the very reverse of the ‘hard-faced, close-fisted, high-nosed’ financier of socialist caricature, but instead someone herculean in his efforts, of international cast of mind and with ‘one of the kindliest natures and most sympathetic hearts it has been my privilege to know’. That summer, giving evidence to a parliamentary committee, the suitably encouraged governor calmly addressed the possible sacrifice to be made in the short term by ‘the trader’ (meaning those in the commercial and industrial world at large, as opposed to the financial) through a return to gold ‘at the earliest practicable date’:
I should think the thing is, in every country in the world and in every trade in the world unless he can obtain stability he will not prosper and in order to obtain stability through the only means by which I think it can be obtained, that is the gold basis, it is worth while for him to make once this sacrifice for the good of his business and for his future success, and if he does not make it he will be in a state of uncertainty and at the mercy of other countries until he does.
Furthermore, insisted Norman, ‘the danger of waiting is much greater than people imagine, much greater, not to currency, but to the trade of this country, to the financial standing of this country’. The winter of 1924–5 saw not only a new, unexpected chancellor in the person of Winston Churchill, after Stanley Baldwin’s election victory, but Strong at last swinging fully behind Norman over an early return at the pre-war parity. Churchill himself remained doubtful and reluctant until almost the last moment – ‘I would rather see Finance less proud and Industry more content,’ he wrote at one agonised point to his main Treasury adviser, Otto Niemeyer – but was ultimately unable to resist the formidable combined weight of Treasury and Bank opinion. By late March the decision was taken, with the announcement to be made in the budget at the end of April. ‘Let us be thankful we have escaped the “managed currency” people,’ declared Addis to Strong ahead of the public confirmation; ‘a signal triumph for those who have controlled and shaped our monetary policy, notably the Governor of the Bank,’ proclaimed The Times the day after Churchill had informed the world about a fateful step that in the end was as much a moral-cum-sentimental judgement as a strictly economic one; but some ten days later, writing to Strong, the governor himself was in thoughtful and far from triumphalist mode:
Many of the financial community do not realise the importance and even the possible dangers of the step which has been taken. They have lived for ten years in a dream: they have not had to use their wits … They ignore the fact that London is probably short of dollars; that India, almost irrespective of the Exchange, is a great absorber of gold; that Australasia is over-borrowed in London and may require the position to be put right, and that such a country as Egypt is not only in a position to draw a great deal of gold from London but for national or political reasons might not be averse from doing so …
Still, as he had scribbled to Churchill in his congratulatory note on the evening of the announcement, ‘Pray count on me to try to do my little bit.’19
Having become governor in the spring of 1920, Montagu Norman was still governor when Britain returned to the gold standard five years later, thereby equalling Cunliffe’s hitherto record length of tenure; he would still be governor at the end of the decade; and indeed would remain in post until almost the end of the Second World War – altogether, a phenomenal twenty-four years. There has been no single more important person in the Bank’s entire history. What sort of man was he? And why did no one else displace him during the 1920s?
‘A small, carefully-trimmed beard adds length and distinction to his fine-drawn, sensitive face,’ noted a profile in an American paper shortly before the return to gold. ‘His hair is brushed back from a high forehead, which is notably prominent just above the dark, searching, thoughtful eyes.’ The writer then portrayed Norman in his Threadneedle Street fastness:
In his room at the Bank, he receives visitors with his back to the fire, standing. His characteristic attitude is long legs apart and thumbs stuck in the armholes of his easy-fitting waistcoat. He does not like talking whilst sitting at a desk.
Talk to him, and you get his measure. His physique may not be powerful, but his brain is a vibrant dynamo. He speaks in a soft voice and each of his words is significant. ‘What d’you want?’ he will often ask people who come to see him. He never uses conventional phrases.
As for his life outside the Bank:
He goes for long walks, and he works in the garden. This is his only exercise, for sport has no attraction for him. He neither hunts, golfs, shoots, nor rides.
He reads much. Kipling is his favourite, and he is himself an earnest believer in the Empire idea and the Kipling man. He collects etchings, and is a connoisseur of silver-points.
No governor before, and possibly since, was the subject of more newspaper and magazine profiles than Norman over his long governorship, notwithstanding his own intense secretiveness; and this was one of the better ones.
Contemporaries whom he encountered were almost invariably fascinated. A selection from their descriptions and assessments gives us a three-dimensional (if occasionally contradictory) sense of a remarkable, enigmatic man who combined charm and steel in roughly equal measure:
He appears to have stepped out of a Van Dyck painting; elongated figure, pointed beard, a big hat; he has the bearing of a companion of the Stuarts. It is said that Israelite blood flows in his veins. I know nothing of this, but Mr Norman seemed, perhaps because of it, full of contempt for the Jews about whom he spoke in very bad terms … He adores the Bank of England. He told me: ‘The Bank of England is my only mistress. I think only of her and I have given her my life.’ (The Bank of France’s Emile Moreau on meeting Norman in Paris in 1926)
His beard and hair though greying are still mainly black or give that impression. His flashing eyes are probably brown but leave the impression of being black. His broad brow is of the kind one sees in the Dutch masters but rarely in real life. His movements are graceful and flowing and he has a voice of a singularly compelling and attractive timbre … I doubt if this man has an equal, never mind a superior, at controlling situations and putting the men who come to meet him where he wants them firmly and kindly but ever so effectively. (The Manchester Chamber of Commerce’s Raymond Streat after seeing Norman at the Bank, 1931)
He could enlist warm friendships and elicit the most devoted service, yet he could seriously upset the nerves of some of his most faithful collaborators. He disliked politicians as such, but found a congenial soul in Baldwin [a cousin of Kipling]. He was a mystic and read widely, but he had no clear-cut views on some of the most profound issues of thought. Although he disliked explaining himself to more than one person at a time, his written communications were admirably expressed. He could never have been a success on television. He would have despised it … (The veteran economist Sir Theodore Gregory, writing in the 1960s)
He had funny little tricks, he was vain – but it wasn’t the sort of vanity that mattered at all. And he was always using strange expressions. I remember he said to me once about someone, ‘Your friend’s a bit hairy in the heel, eh?’ The one thing Monty never wanted to be asked was why he did anything. He didn’t really know quite, but he had this extraordinary intuition … He never made jokes or anything of that kind. He was just amusing. A continual bubble of wit. (George Booth, a director of the Bank throughout Norman’s governorship)
He was a great banker, banking was his life, he created the ‘mystique’ of the Central Banker. But he did not look like a banker at all. There was something of the actor in him – but he did not act a part, he was very much his own real self. He had the touch of the artist in dealing with situations and people – he was not an artist. Intuition guided him but he was very rational and reasoned in his conception of problems. He was a traditionalist with an entirely unconventional approach. He exerted power but always through influence. He was, in every respect, immensely interesting. (J. W. Beyen, a Dutch banker who got to know Norman in the 1930s)
We see Norman in daily action through his desk diary (now accessible online) – invariably crisp, sometimes cryptic, in its judgements on his many visitors. The characteristic flavour comes through in a December 1922 entry: ‘Rob Martin. Fluff.’ Or the following autumn: ‘Dufour: a miserable man “with a tale of woe”.’ Of course, a request to attend the governor was almost a royal command. ‘A summons would come to Alfred Wagg,’ recalled Lawrence Jones of the merchant bank Helbert Wagg, ‘who must put on a top-hat in which to obey it, for the wide-brimmed soft hat that hung outside Mr Governor’s room would tolerate no rival.’ That hat became part of City lore, with Norman travelling on the Underground each day to the square mile with his ticket stuck in the hatband, before at the exit he bowed his head for the collector to remove it.
Every now and then, amid Norman’s voluminous correspondence, there is a moment of apparent revelation, a moment when we seem to draw close. Take a trio of examples from the 1920s. ‘Hawtrey is extraordinarily clear and clever,’ he wrote in 1922 to Benjamin Strong about the senior Treasury figure R. G. Hawtrey, ‘but he seems to me to treat his subjects as if they existed in a vacuum; whereas, as we see more and more, Currency and Finance are continually at the mercy of political and psychological and international and incalculable influences.’ It was a distinctive and perhaps very English approach, prompting in the 1960s one exasperated economic commentator, Andrew Shonfield, to recall Norman as ‘the apotheosis of the English cult of the administrator as artist-leader – a kind of Künstlerführerprinzip’. The second example came in January 1928, as the bachelor governor, writing again to his American friend, let himself go about the Bank’s recent recruit from the Treasury insisting on taking his wife with him on a working trip to New York: ‘Niemeyer pretends to me that he will be as free with a wife as without: that she will sit in the hotel & twiddle her thumbs & ask no questions: I might just as well pretend to be the same with the toothache as without it – he is trying to prove that you can serve God & Mammon – I don’t believe it.’ Echoes indeed of ‘the Bank of England is my only mistress’ … Finally, also to Strong but the previous summer, this from on board the ship as he left New York after a difficult visit: ‘What about it? Where does it all lead & what can we do? I always come away with the same thoughts – flies in a web: can lift one (but only one) foot clear: hard work to keep steady: the personal touch largely usurped by the mechanics of the web: & so on.’20
There is little doubt that, despite precedent and despite occasional protestations to the contrary, Norman during the 1920s was determined to stay on as governor for as long as he could – and, broadly speaking, his colleagues fell into line with that in the overriding context of the very changed post-war financial world, though not without some perturbation on the way. ‘I earnestly hope you may be persuaded to serve for at least another year,’ his deputy, the merchant Henry Trotter, wrote to him during Norman’s third year as governor. ‘I am convinced it would be in the best interests of the Bank and the Country.’ Norman himself conceded soon afterwards to Strong that ‘people prefer the Rotation’, before adding: ‘But how swap horses just now?’ Trotter’s successor from 1923 was Cecil Lubbock – managing director of the brewers Whitbread and a classical scholar, though not really governor material in the new world – before in 1925 an altogether tougher egg, the ambitious shipper Sir Alan Anderson, became deputy. ‘A masterful & strong man,’ Norman had already informed Strong, and Anderson by October 1925 was insistent that he would not stay on as deputy governor unless (recorded the director Charles Addis) ‘assured of being made Governor in a year’. Norman held firm – ‘the trouble is’, he informed Strong, ‘not that he is not clever & courageous & a good fellow but that his wishes are contrary to our ideas & the whole of our tradition & while we admit they may perhaps be suitable for a shipping business we are sure they are not suitable for a Central Bank’ – and the outcome was that Trotter agreed to return as deputy in spring 1926, but only on the basis of a moral undertaking that he would become governor in 1927. Autumn 1926 was decision time, and once again Norman declined to play the rotation game. ‘We tried to get him to accept Trotter for a year,’ Edward Peacock told Strong, adding that Norman had been adamant that if he stepped down as governor but continued at the Bank under Trotter, ‘it would break down within three months’. As the Committee of Treasury’s support for him crumbled, Trotter accepted the inevitable outcome graciously enough – assuring Revelstoke that ‘we must retain the master hand’ and that he was ‘without one particle of feeling of having been let down’ – but his cousin Robert Boothby would subsequently relate how not becoming governor ‘broke’ him.21 As for the deputy governorship, the musical chairs continued with Lubbock succeeding Trotter in spring 1927.
By then, during the winter of 1926–7, a committee under Trotter’s chairmanship had been in action, seeking to stand back and look at the whole question of the governorship in a larger perspective. The evidence it took revealed a strong continuing attachment to the principle – if not hitherto in the 1920s the practice – of rotation, with a particularly thoughtful contribution coming from Baron Cullen of Ashbourne, as Cokayne had been since stepping down as governor. Expressing himself ‘greatly impressed’ by the argument of his fellow-director Sir Robert Kindersley that ‘if the Governorship of the Bank became a life, or even a long term, appointment it would be impossible long to resist pressure from the State – from whom the Bank derive their chief powers – to force its own nominee or nominees upon them’, he advocated a return to rotation from March 1928, noting pointedly that ‘any opposition to that course the present Governor could do much to prevent or allay’; and he went on to describe himself as ‘oppressed by the thought that even now we may, by departing for so long from the policy of our predecessors in this fundamental matter, have forfeited the magnificent legacy of independence which their prudence and altruism has secured for the Bank’. Cullen concluded with a not very soft impeachment, declaring of the period since 1920 that ‘if our action should lead to some loss of the Bank’s independence, posterity will assuredly say that it was forfeited by the laziness of the Court who found a “willing (and most capable) horse” and got him to do all the work rather than take their turn at the wheel’.
The Committee’s eventual report – calling for rotation to resume in 1930 – went to the Committee of Treasury in September 1927 but never made it to the Court. Instead, the real battle was fought in autumn 1928, as Norman pushed hard for Sir Ernest Harvey (Nairne’s successor as chief cashier, then comptroller) to succeed in 1929 to the deputy governorship on a permanent basis, with – it was tacitly understood, given that he had come up through the ranks – no realistic prospect of succeeding to the governorship. Initially, there seemed to be a critical mass of opposition on the Court, as Cullen put forward a resolution proposing a return to rotation and Anderson was (in Revelstoke’s words) ‘condemning’ of ‘M.N. and all his works’. Yet again, however, Norman got his way, making at the following week’s Court ‘a most conciliatory speech’, as Cullen’s motion was defeated by a majority of two.22 Henceforth, the main internal threat to Norman’s position would be his own health, psychological as much as physical.
From the point of view of many of the directors, there were arguably three main problems during these years. One of course was the absence of rotation: not only in flat contradiction to over two centuries of Bank custom, but directly detrimental to their own chances of advancing to the top position. They may have accepted the logic – in Addis’s words, in a lucid, influential memo in September 1926, ‘the old familiar ways of finance are abandoned, and it is mere illusion to suppose that we can ever return to them … we have reached a critical stage … there is much to be said for allowing a craftsman to complete his own work’ – but only with considerable reluctance. The second problem was Norman’s almost congenital disposition to hold all the cards that mattered as close as possible to his chest. ‘Of course he will have to reform his ways about keeping things to himself,’ Peacock wrote to Strong later in 1926 after the Trotter challenge had been seen off, but there is little evidence that Norman did so. Finally, there was the problem of the rise of the expert. The governor himself had few doubts that this was the way to go. ‘We were late in building up a body of professionals drawn from outside,’ he conceded privately in 1928, but certainly by the mid-1920s he was vigorous in taking belated action, with senior recruits including Sir Otto Niemeyer and Harry Siepmann (both with a Treasury background) and the American economist Walter Stewart, none of them at this stage on the Court. The director giving Norman the strongest backing in this initiative was Frank Tiarks of Schröders. Half a dozen or so ‘experts’, he told the Trotter Committee in 1927, ‘should meet daily and reports of their Meetings should be available every week for all Members of the Court’, in which way ‘the interest of all Directors in the affairs of the Bank would be increased and the weekly Meetings of the Court would be become much more interesting’. Addis and Cullen were markedly less enthusiastic. ‘The proper place for an expert’, the former informed the Court the following year, ‘is to assist and advise, but it is for the Merchant Directors to determine the policy of the Bank, and it is the belief that that policy is so determined which has won for the Bank its traditional authority and prestige’; while Norman’s predecessor stated frankly at the same time, ‘I do not believe that the Trade of the Country will long be content to see the Central Bank controlled by financial experts,’ as opposed to the tradition of ultimate internal control resting with ‘a Board or Court of Directors consisting not of Bankers nor financiers but of sound and high-class business men’. Given that in English cricket it would still have been unthinkable not to have an amateur as captain of his county, let alone his country, a certain resistance to the professionalisation of the Bank was perhaps hardly a surprise.
The coming of the expert did not mean a significantly new, more open attitude to the outside world. With the odd exception (such as the trusted A. W. Kiddy, City editor of the Morning Post), Norman continued to hold the financial press in even more contempt than he did most politicians. ‘A second class sheet which prides itself on irritation and sore spots and tail twisting,’ was how in 1927 he characterised to Strong the City’s actually rather staid and respectable pink bible, the Financial Times. In practice, the reality of the underlying culture was a little more complicated, though a degree of disdain was seldom quite absent. From an essentially kindly but nevertheless insightful perspective, Michael Thornton in the 1970s would describe the Bank of the Norman era as
an institution pragmatic, idiosyncratic, inarticulate, rather highly strung; knowing better than many of its critics its own strengths and weaknesses, and therefore often mistaking criticism for ignorance – and anyway deaf to both; never letting go of a sound argument when it had one; prepared to skip the high debate, act on instinct, and not be too troubled by the post-hoc rationalisers; but above all adaptable, because it was largely unhampered by doctrine, principle, or even tradition.23
What matters is what works. Yet by the second half of the 1920s, the big problem in Norman’s life was the consequences of the return to gold; for that, sadly, had been a decision – in its strong emotional desire to return to the pre-1914 world – that transcended empiricism.
The consequences themselves have been keenly debated ever since, but two aspects were immediately and undeniably apparent: that the recent catastrophic slump in foreign demand for coal (still the most important of Britain’s industries) was further exacerbated by the 10 per cent increase in cost automatically ensuing upon return to gold at the pre-war parity; and, more generally, that the pound could stay on the gold standard – crucial, in Norman’s eyes, to the City’s international business, as well as ‘knave-proof’ against politicians – only if foreign funds were attracted, which in practice meant high (or certainly not low) domestic interest rates, inevitably impacting on industry at large. The flashpoint came as early as December 1925, when Churchill learned that the Bank, faced by large quantities of gold leaving London and rates rising in America, was minded to increase its own rate from 4 to 5 per cent. The chancellor at once telephoned the governor, warning that in that case he would have no alternative but to inform the Commons that he had not been consulted and that it had been against his wishes. Whereupon Norman called his bluff, raising the rate and telling Churchill that if he made such a statement it would be ‘unprecedented’. The chancellor duly kept quiet, but for Norman it proved in practice a pyrrhic victory: henceforth, the possibility definitively no longer existed, in the context of unemployment of over a million, of Bank rate policy operating in its traditional pre-1914 ring-fenced political vacuum; while over the next few years (as Bank rate stayed largely unchanged, with Norman unable to bring it down but reluctant to raise it and risk another stand-off), not only did Keynes continue his campaign against the gold standard regime and what he regarded as the Bank’s malign influence on monetary policy, but he was increasingly joined by the Midland Bank’s McKenna. As for Churchill, all his frustrations were poured out in a memo that he sent to Niemeyer (about to move from the Treasury to the Bank) in May 1927, a year after the General Strike had sundered the country:
We have assumed since the war, largely under the guidance of the Bank of England, a policy of deflation, debt repayment, high taxation, large sinking funds and Gold Standard. This has raised our credit, restored our exchange and lowered the cost of living. On the other hand it has produced bad trade, hard times, an immense increase in unemployment involving costly and unwise remedial measures, attempts to reduce wages in conformity with the cost of living and so increase the competitive power, fierce labour disputes arising therefrom, with expense to the State and community measured by hundreds of millions … We have to look forward, as a definite part of the Bank of England policy, to an indefinite period of high taxation, of immense repayments and of no progress towards liberation either nominal or real, only a continued enhancement of the bondholders’ claim. This debt and taxation lie like a vast wet blanket across the whole process of creating new wealth by new enterprise.
Things even started to get personal, as Churchill, according to his private secretary, ‘got into the habit of almost spitting out comments on the presumed enormities of “that man Skinner”’ – Ernest Skinner being the governor’s private secretary in whose name Norman used to reserve his passages across the Atlantic. Nor was Churchill in later years inclined to forgive. ‘The biggest blunder in his life’, his doctor noted him declaring in 1945, ‘had been the return to the gold standard. Montagu Norman had spread his blandishments before him till it was done, and had then left him severely alone.’24
A significant side-effect of the politicisation of Bank rate was the need for Norman to continue to keep a tight rein on London as an international capital market. Back in July 1925, during the post-return honeymoon period, the Committee of Treasury ‘discussed the embargo on foreign and colonial issues’, Anderson reported to the absent governor, ‘and everyone agreed that the sooner we could get back to freedom the better’, with the result that four months later the formal embargo on foreign loans (in place for the past year) was lifted. Yet from the start London in its attempt to regain lost ground on New York was operating with one hand tied behind its back, as Norman, well aware even before the December clash with Churchill that a high Bank rate was political dynamite, was understandably concerned about the gold-exporting implications of an avalanche of foreign loans – for all his keen desire to help the City reassert itself. The consequence, as caught by his diary, was a prolonged exercise in encouraging a significant degree of self-denial:
2 Rothschilds.? Loan to Poland for Tobacco Monop & Exch. I say in confidence that they shd avoid all such transactions: not even worth discussion at present. (2 December 1925)
Fleischmann [of the merchant bank Seligman Brothers]: considering Loans here for 1. Central American Country & 2. Italian Industrial. I say free market – OK, BUT many more foreign issues – mean gold exports & higher B Rate & an end of such business. (8 October 1926)
A de Rothschild … He protests bitterly agst continued embargo on French Loans … (4 October 1928)
Norman tended to look more liberally at potential foreign issues if they fitted in with his picture of the ongoing European reconstruction jigsaw. These included a series of German loans (arranged by Schröders) in 1925–6, a major loan for Belgium in October 1926, and in late 1927 an Italian stabilisation loan. Norman had initially declined to give the last his blessing, telling an American banker that in Mussolini’s Italy ‘opposition in any form is gone: freedom of speech, opinion, criticism and press – even private life as we understand it’; but eventually he changed his mind, asserting to Strong that although ‘Italy is not a free country in the usual sense of the word’, nevertheless ‘the fact remains that she has made economic and financial progress and is probably making social progress too’.25
So much, in Norman’s eyes, still depended on his harmonious relationship with the New York Fed’s chief and the other key central bankers. ‘The main object’ of ‘the encouragement of close co-operation among Central Banks’ was, he spelled out to Schacht barely a week after the return to gold, ‘in order to secure regulation of rates of interest and exchange – and so prices of gold and commodities – and by these means the improvement of international trade’. He certainly put in the time and effort. ‘We are staying here rather longer than I had expected or wished but that can’t be helped,’ he reported to Anderson not long afterwards, in July 1925, from Berlin’s Hotel Adlon. ‘B.S. likes to go into everything with a gimlet, as well as a good deal of talk, which takes time. He & Schacht are making friends & a good feeling is growing up from which much else may follow, sooner or later.’ There followed, in response to a query from his deputy, some dense paragraphs infinitely suggestive of Norman’s perplexing preoccupations:
Now as to Gold: see Schacht’s telegram of the 11th & mine of 13th. When I came away from London I supposed that Schacht still had to buy Mks 200/250 mil (i.e. the Mks 300m mentioned in their telegram last month less our later purchases) for which he wd have to pay in the form of valuta [foreign notes] – or exchange.
In the last 2 or 3 weeks the position regarding their gold needs has changed for 2 reasons – first: They have bought from Switzd & Norway (in connection with Govt operations) Mks 50 mil – German gold coin – & may buy a similar amount more: secondly – they have had to repay short foreign Loans to German Bankers &c of about Mks 200 mil, directly or indirectly arising out of the Stinnes affair. This reduces their stock of valuta & as later they may perhaps have to find money to repay other short foreign Loans (made by N.Y. or London) they cannot contract to buy Clegg’s Gold during several months for fear of running short of valuta. (This valuta or exchange belongs of course to the Reichsbank: they hold other exchange as proceeds of Loan &c, of which they cannot dispose.)
Thus Schacht must go slow & see what happens: he will also have to restrict Circulation as much or more than of late, because he has to hold a Gold Reserve of 40% agst all his Notes (of wh 10% may be in Exchange) & now he has not much more than enough Reserve for present size of circulation.
Generally it looks as if Schacht was going to have a difficult time with shortage of Note-cover. If necessary Strong or we will have to lend him some money again.
‘I hope this is clear,’ he added, ‘but I doubt it! Letters don’t suit such a subject.’
Norman’s dearest hope, as he explained to Siepmann two months later, was to see the ‘inauguration’ of what he called a ‘private and eclectic Central Banks’ “club”, small at first, large in the future’ – a club with ‘subscriptions in the shape of exclusive relations; appropriate balances with other Central Banks; proper ratio of free balances and earning assets in each market; no undue regard for profit; political freedom by right or by custom; credits when there is bad weather in any particular place; and so on’. By summer 1927 it looked as if the dream of institutional central banking co-operation was on track, as there assembled the so-called Long Island ‘Club’, comprising Strong, Norman, Schacht and the Bank of France’s Charles Rist (deputising for Emile Moreau); but that dream soon foundered, in large part because of Moreau’s fear of Schacht and resentment of what in his wonderfully readable diary he called ‘the Bank of England’s imperialism’. ‘England,’ he explained to prime minister Poincaré in February 1928, ‘has managed to install itself completely in Austria, Hungary, Belgium, Norway and Italy. It will implant itself next in Greece and Portugal. It is attempting to get a foothold in Yugoslavia and it is fighting us on the sly in Romania. Should it be allowed to go forward?’ The answer was obvious, and over the next few months, supported by Strong, the very capable Frenchman, having already stabilised the franc and accumulated for his bank large sterling balances, successfully squeezed out Norman from a major loan to Romania. Strong, hitherto Norman’s staunchest ally, justified his change of tack to the American economist Walter Stewart who had recently gone to the Bank: ‘For some years past it has been more than current in Europe, both in political and banking circles, that Governor Norman desired to establish some sort of dictatorship over the central banks of Europe and that I was collaborating with him in such a program and supporting him.’ Norman was forgiving (‘think no more about Romania’), but that was the last letter between them before Strong died in the autumn. He departed at a pregnant moment. The previous year, at a point when the US economy had needed a firm touch on the monetary brake, he had pushed through a cut in New York interest rates in order to help the Bank of England support sterling without having to raise its own rate; but by late 1928 and going into 1929 Wall Street was enjoying an extraordinary credit boom. ‘Both financially and politically,’ Norman wrote to a correspondent in March, ‘the prospect has rarely seemed to me more obscure than it does now’; and he referred darkly to how in New York ‘the Stock Market is playing ducks and drakes with their own and other people’s money’.26
Nor was that all that troubled the governor. ‘In a few weeks,’ he added in the same letter, ‘we are liable to be tossed hither and thither by a General Election’; and, as he perhaps suspected, the outcome was the fall of Baldwin’s Conservative ministry and the arrival in June 1929 of a second minority Labour government under Ramsay MacDonald, again with Snowden at No. 11. Neither politician was disposed to nationalise the Bank (notwithstanding a recent Labour policy document advocating it), nor indeed to stray from the path of financial orthodoxy, but Snowden in particular was acutely aware of the political sensitivity of Bank rate decisions. Almost certainly, this sensitivity was becoming greater than ever. Norman in 1927 had told Moreau frankly that he could not raise Bank rate ‘without provoking a riot’, given that a rise would ‘intensify’ industry’s ‘burden’; the following year, Cullen had conceded to the Court that ‘we hear not a few whispers of complaint that our monetary policy is determined too much in the interests of finance and not sufficiently in the interests of Commerce’; and earlier in 1929, in February, Norman had managed to push through a small rise (to 5½ per cent) only because he had correctly guessed that Churchill was unlikely so soon before an election to make a public fuss. That summer saw delicate discussions between chancellor and governor (faced by a continuing drain of gold), culminating in early September in a concordat reached at Snowden’s country cottage in Surrey:
The Chancellor was persistent for a long time [recorded Norman] that a higher rate was no remedy; would harm trade; would be bitterly criticised; and would itself lead to still higher rates elsewhere and eventually here … The Governor said that his was the technical and financial side – the Chancellor’s was the political and fiscal side. On this basis the Chancellor must now leave the Bank rate to the Governor, to which the Chancellor agreed, stipulating that the Governor should see him next week; the Governor promising that he would not this autumn put up the Bank Rate for fun but only when it was essential …
Eventually, with Snowden’s reluctant consent, Norman later that month raised the rate to 6½ per cent – and the result was an intensely hostile reaction, not only from the left. ‘The Governor may be in touch with the volume of banking advances and trade bills,’ declared the Evening Standard, ‘but he is out of touch with the flesh and bones of industry.’
Firmly on the table by this time was the possibility of a major monetary inquiry, a prospect seriously displeasing to Norman and prompting him to try, shortly after the Bank rate hike, to put the frighteners on Snowden via the Treasury’s Sir Richard Hopkins:
I rather fear that the Congress [that is, the Labour Party conference] which is to be held at Brighton this week may be made the occasion for a general attack on the Bank Rate; credit policy: the effect of dear money on unemployment and other kindred subjects; and that in such event the attack might be met by some Minister present by a promise that the cabinet would at once set up a Committee to enquire into these subjects. I wish to impress upon you as definitely as possible that the mere promise of any such Committee under present conditions would of itself endanger our financial position, both at home and abroad. Indeed, the maintenance of the gold standard itself might by such action be suddenly and dangerously threatened.
To no avail: Snowden on 3 October announced to the party faithful that he would shortly be appointing a committee to inquire into the relations between finance and industry. His speech was deliberately low key – prompting Norman to congratulate him on how ‘it seems that you have got the extremists at both ends on your side’ – but at least as much to the point was the question put to the chancellor soon afterwards by his private secretary: ‘Is there not some danger of giving the impression that the Governor is being put in the dock?’
That, however, was probably not Norman’s greatest anxiety at this particular moment. 1929 was the year that the virtuoso, high-profile financier Clarence Hatry hit the rocks – confirmed by Norman’s refusal to help, despite a personal appeal – and then succumbed to the temptation of authorising the forgery of scrip certificates. A very public fall was played out during September (‘this Hatry affair has smirched us all,’ reflected Norman), for a time plunging the stock market into free fall.27 Then in late October came one of the seminal events of the twentieth century: the Wall Street Crash. All bets, whether for Norman or anyone else, were off.
Away from market ups and downs, the Bank by the late 1920s was in fact starting to get significantly involved in the problems of British industry.28 ‘In general I believe that the great industries can only be satisfactorily re-established by means of rationalisation, and this is slowly coming to be recognized in textiles, in iron and steel, and to some extent in coal and shipbuilding,’ Norman wrote in November 1928 to a Foreign Office mandarin. ‘In particular I am interested in the reorganisation of Armstrong, Whitworth & Co and its allied undertakings.’ That indeed was true – with Norman, Peacock and a ‘company doctor’ called Frater Taylor, an unsentimental Aberdonian, having already spent much time on the financial reconstruction of the troubled Tyneside armaments firm, eventually leading to the creation of Vickers-Armstrong, a pooling with the naval-shipbuilding business – but increasingly what concerned the governor by the end of the decade was the wretched state of the Lancashire textile industry. The conventional wisdom of the day was that the route to economic salvation lay in large-scale mergers in order to increase efficiencies and reduce over-capacity; and though both the Midland and Barclays banks declined to back the proposed Lancashire Cotton Corporation, intended instrument of rationalisation, the Bank stood firmly behind the LCC and made a series of temporary advances. Norman undeniably had misgivings, admitting to bankers and others in December 1928 that he ‘was not anxious for this business, which was entirely outside the normal sphere of the Bank of England’; but at the same time, he explained, ‘the Cotton Industry was not the only one in need of rationalisation, and he looked to any scheme for the rationalisation of the Textile Industry to lead the way and set the type for schemes of rationalisation in other industries’. The details of the LCC were announced soon afterwards, prompting rare public praise from Keynes about how ‘this incursion of the Bank of England – somewhat late in the day but wholeheartedly in the end – into the field of Rationalisation is in itself a matter of much interest and, in my opinion, of congratulation’.
What were Norman’s broader motives in his industrial initiative more generally? It is hard to imagine that he was unaware of the possibility that it might play well in the wider world, at a time of mounting criticism of the City’s neglect of industry and of the Bank’s industry-insensitive monetary policy; there is also evidence that through the 1920s he had been under increasing Treasury pressure for the Bank to become more constructively engaged in this whole area; yet equally, rather as with his commitment to international financial reconstruction, he did believe for its own sake in what he was trying to do, in the context of the deep problems faced by British industry, especially in the traditional exporting sector. What he did not want was for the Bank either to exercise managerial control or to be permanently involved, candidly telling Peacock in August 1929 that his ultimate goal was to get all the various industrial questions out of his room ‘and on a self-supporting and conducting basis’.29
The stakes were undeniably high. When in November 1929 the Bank established Securities Management Trust (SMT) – essentially a group of outside experts to advise the governor and see through rationalisation schemes – Norman explained to the Court ‘at considerable length the present position in regard to industry generally and his views as to the necessary steps to restore it to a healthy condition by private enterprise and without government intervention’. Two more Norman initiatives followed in quick succession: in January 1930 he sought to strengthen the national credit machinery, and simultaneously to keep government out of the money market, by sanctioning a major injection of capital into the City-based United Dominions Trust (UDT), offering hire-purchase finance along American lines; and three months later he established the Bankers’ Industrial Development Company (BIDC) – ‘a new private Company to finance rationalised industry’ (as he informed the Treasury), mainly comprising merchant bankers but with Norman as chairman, and with its £6 million capital coming partly from the Bank itself (£1½ million) but mainly from the suitably cajoled clearing and merchant banks. As all this unfolded, not every industrialist was convinced that Norman and his colleagues were the solution. ‘In their own affairs they have never given more employment than that vouchsafed to gardener, chauffeur, and valet,’ reflected after a visit early that year to Threadneedle Street a disgruntled twenty-seventh Earl of Crawford, with his family firm, the Wigan Iron and Coal Co, about to be ‘rationalised’ and become part of the Lancashire Steel Corporation. ‘They are,’ he went on, ‘too much detached from the realities of production with its tremendous problems; they are usurers and nothing else … The banks sail serenely above the tempests of industrial trouble.’
The first year or so of the new institutional dispensation tended to confirm the sceptics rather than the believers. As the LCC struggled – gaining for itself the reputation of being (in Norman’s regretful words) an ‘association of lame ducks’ – so the BIDC came under public fire in August 1930 from a local Conservative MP, who accused it of ‘a wilful lack of knowledge of the existing situation in Lancashire and of the practical difficulties that have to be overcome’; at the BIDC itself, the day-to-day leadership of the merchant banker Sir Guy Granet proved ineffectual, so that it soon became known in the City as the ‘Brought in Dead Company’; and in spring 1931 the LCC’s long-awaited debenture issue, made under the Bank’s auspices, flopped. Ultimately the problem was that the Bank found itself uncomfortably exposed, in the middle of a vicious circle. ‘Very large sums of money must be forthcoming if we are to make the slightest impression on the re-organisation of our basic industries,’ noted SMT’s managing director, the experienced iron and steel manufacturer Charles Bruce Gardner, on the occasion of BIDC’s first anniversary; but, as he added, ‘experience has shown that in most cases it will be impossible to help those industries to formulate schemes that can guarantee to the investor their interest and sinking funds and the money provided …’30
A few weeks before the Wall Street Crash, in September 1929, Norman had his initial sitting for what would become a controversial portrait by Augustus John. The painter was struck by the governor’s preoccupied air, ‘as though he was troubled by graver problems than beset other men’; and over the next year and a half there was ever more to be preoccupied by, as much of the world slipped into what would become the great depression of the early 1930s. A rare source of solace for Norman was the establishment in April 1930 of the Bank for International Settlements (BIS), enabling central bankers to mix on what he commended to Snowden the previous autumn as ‘neutral soil’ (in the event, Basle) and thus provide ‘the only way for Europe out of financial chaos’. It was not an easy birth – tangled up as it was with the whole reparations question – but Norman was hopeful at the outset, telling the BIS’s first general manager, Pierre Quesnay, that the new institution should aim ‘to direct short-term capital towards long-term markets by coordinating the policies of central banks, their discount rates, and by increasing the control each of them has over its own market’: in other words, an essentially supra-political approach. Elsewhere, difficulties continued to mount, including in Australia, with its economy in particularly dire straits because of the gathering world slump. The Bank’s answer (on a request from Canberra) was to despatch Niemeyer, who arrived in July in full deflationary mode, ready to recommend to the Labor government there the unappetising steps, especially in the form of wage cuts, that it needed to take so that its increasingly onerous financial obligations in London might be met with the Bank’s assistance. ‘I hope our good Niemeyer will succeed in converting these remote Australians to economic sanity and indeed to reason,’ observed Norman some weeks later to a London stockbroker, ‘but they have a long way to go’; and indeed the unbending, somewhat high-handed Niemeyer proved an intensely divisive figure down under, so that it was not until several months after the end of his mission that a compromise settlement was reached. As for Norman himself by this time, a certain understandable weariness was perhaps setting in. ‘As regards the Serbian negotiations, both the Serbs and the French have been very troublesome,’ he grumbled in November 1930 to Peter Bark, the last finance minister in Tsarist Russia and by now, as a Central European expert, one of the handful of people on whom the governor most relied. ‘The longer I go on,’ he added, ‘the harder do I find the path of an internationalist!’31
Casting a further shadow for Norman over this year and a half was the Committee on Finance and Industry that Snowden had set up. Its chairman was the Scottish lawyer Lord Macmillan, while members included Keynes, McKenna, the strong-minded trade unionist Ernest Bevin, and Lubbock for the Bank. ‘Whatever the outcome of the Committee may be, we at any rate have nothing to fear,’ the deputy governor, Sir Ernest Harvey, assured his chief in December 1929 after giving five days of very capable evidence, concentrating mainly on explaining the mechanics of the Bank rather than attempting to elucidate or justify questions of high policy; but for Norman himself, giving evidence one morning in March 1930 after an earlier postponement because of a physical-cum-nervous breakdown followed by a convalescent cruise in the Mediterranean (‘I have been away for a month to get my fire-box patched because the fire burnt it through’), the whole thing was a considerable ordeal.
Much of the session turned on the increasingly debated question of whether the Bank’s traditional threefold prioritisation – defence of sterling, adherence to the gold standard, maintenance of London’s position as an international financial centre – was to the detriment of the domestic economy. ‘I think that the disadvantages to the internal position are relatively small compared with the advantages to the external position,’ insisted the governor, before Macmillan courteously pushed a little further:
What is the benefit to industry of the maintenance of the international position? – This is a very technical question which I am ill equipped to explain, but the whole international position has preserved for us in this country the wonderful position which we have inherited, which was for a while thought perhaps to be in jeopardy, which to a large extent, though not to the same extent, has been re-established. We are still to a large extent international bankers. We have great international trade and commerce out of which I believe considerable profit is made; we do maintain huge international markets, a free gold market, a free exchange market – perhaps the freest almost in the world – and all of those things, and the confidence and credit which go with them, are greatly to the interest of industry as well as to the interest of finance and commerce in the long run.
One of the criticisms which has been made is that while the policy pursued may have been excellent from the point of view of the financiers of the City of London, it has not benefited the industries of this country, that the considerations which have moved that policy have been directed rather to the financial side than to the plain man’s industry? – Yes. Of course, industry has had ill luck, shall I say, and has been in a very unfortunate position and from one reason and another has suffered particularly. I agree; I am sure that is true.
There has been no doubt a conspiracy of causes at work? – Almost; yes.
At which point, a clearly frustrated Bevin pressed Norman to concede that the decision to return to gold at the pre-war parity had played a major part in industry’s misfortunes; to which the governor responded, ‘I do not attribute the ills of industry in the main to that change.’ Unconvinced, the trade unionist made a suggestion:
Having regard to the fact that the workpeople at home have to suffer the biggest blow of unemployment and the depression of their standard of life, can you see any way to separate the national and the international policies, so that the effect of restoring the gold position internationally can be in some way modified in its effect upon British industry? – I believe it is absolutely impossible to have two separate policies …
Supposing, for instance, you have to stop your gold flowing out, and therefore restrict credit, is it not possible to have a conscious direction of credit under those circumstances to the home market? – And to maintain, as it were, two separate supplies of credit at different rates?
Yes? – I do not think so.
Overall, the session left Norman in a depressed state, having held his ground but failed to articulate satisfactorily what in the end was instinctive behaviour and assumptions. At one moment during the session, the Committee’s secretary would recall, he had been asked how he knew something – to which he had simply replied by tapping his nose three times.
In any case, that proved to be Norman’s main appearance, though in February 1931 he did give two final and less challenging days of evidence, accompanied respectively by Granet and O. M. W. Sprague, his new American economic adviser. The Committee itself, meanwhile, spent part of the interim in private sessions, with Keynes inevitably to the fore and, equally inevitably, expressing the hope that the Bank would at last engage in ‘a more open discussion’ about matters of policy. ‘If at every stage in the last ten years,’ he went on, ‘the Governor of the Bank of England had stated publicly what his object was and what he thought the things he was doing were likely to result in and how he assessed the advantages and disadvantages of his policy, if he told us what he was aiming at and what his method was and what he thought his method would cost in order to gain the advantages he was seeking, then it would be possible for public opinion of an informed kind to be crystallised on the point whether his policy was wise and successful.’ McKenna for his part put it more crisply: the governor was guilty of ‘a mute and irresponsible despotism’. A further private session, in December 1930, included this piquant exchange:
Keynes: I should like to see our Report centre round the magnification and evolutionary enlargements of the functions of the Bank of England … so that by the time her new mansion is ready for her [a reference to the physical rebuilding of the Bank], she must be no longer the ‘Old Lady of Threadneedle Street’ gathering her skirts round her, but some new image must be thought of appropriate to the occupant of the new palace.
Macmillan: A bright young thing?
Keynes: I hardly know what – perhaps Mr Lubbock can suggest something?
Lubbock: Well, I am one of the old timers.32
So he was, though that did not stop him, ahead of the report and surrounded by Keynes et al, from fighting a quietly effective rearguard campaign on the Bank’s behalf.
All this was against the background of a seriously struggling British economy. Bank rate did steadily come down – from 6½ per cent before the Wall Street Crash to 3 per cent by May 1930, where it stayed for over a year – but in the eyes of many too slowly and not far enough. ‘The Bank’s policy,’ observed a Treasury insider in February 1930, ‘seems to me quite inexplicable except by an unreasoning terror of cheap money,’ and it was a plausible assessment. Nor, as unemployment climbed rapidly during the rest of the year (by the end of 1930 up to 2.7 million, compared with barely a million in summer 1929), did Norman deviate from his belief that nothing mattered more than Britain’s capacity to stay on the gold standard; and at the start of 1931 he warned Snowden that ‘if loss of gold, Budget prospects, socialist legislation or any other cause’ appeared likely to trigger a flight from sterling, then he would have no alternative but to raise Bank rate in order to bring pressure to bear upon what he termed ‘the unsatisfactory position’. In short: the Labour government had to retrench on expenditure or accept the consequences; and a few weeks later, in February, Snowden took the cue and agreed to establish an Economy Committee (to be chaired by Sir George May, a distinguished actuary) that would search for places to make spending cuts – a search under way even as Norman-endorsed foreign loans, symbolically so important to the international-oriented City, enjoyed that spring a last hurrah.33
The 1931 financial crisis began for real in mid-May with the failure of Austria’s largest commercial bank, Credit Anstalt.34 ‘A monetary breakdown in Austria might quickly produce a similar result in several countries,’ the governor was soon warning his opposite number at the Fed, George Harrison; and although the Bank did what it could – including a £4.3 million credit to the Austrian central bank – financial instability spread rapidly to Hungary and Germany. Some of the City’s biggest names were heavily exposed in the latter, with Norman, umbilically committed to the international economy, now applying strong pressure on them to keep credits running. ‘Germany – shd they withdraw Credits &c as others are said to be doing,’ he noted in his diary on 10 June after a visit from Eric and Charles Hambro of the family bank. ‘I say Germany is a good bet in the long run & needs help & comfort rather than worrying.’ Briefly in late June the German situation seemed to have stabilised – helped by the provision to the Reichsbank of a $100 million credit from the Bank and other central banks – but Norman was far from sanguine in his update to Clegg at the start of July: ‘You can really have little idea of the times through which we have been going here lately, during which as near as no matter Austria, Hungary and Germany – indeed Eastern Europe – went over the dam; and we are not by any means clear of trouble yet …’ Nor were they. That same day, 1 July, a new run of foreign withdrawals began from German banks; and a week later, the news from the Reichsbank was of the German financial system in a state of crisis.
Back home, the name of the game during June was getting the politicians to face the facts – or, more specifically, softening them up ahead of the anticipated findings of May’s Economy Committee. An exchange of letters between Norman and MacDonald, with that politician thoroughly apprehensive and not knowing which way to turn, was revealing about who called the shots. The prime minister began by wondering, in the wake of recent gloomy speeches by the Bank’s Professor Sprague, whether the central banks could not do more, co-operatively, to stabilise prices and thus prevent the appalling unemployment consequences of severe deflation. ‘I hope,’ he added, ‘you will not resent my intruding in these technical fields. I scarcely dare to contemplate, however, what it will mean for the world, and for this country in particular, if all prices and wages have to be forced down to meet the fall in commodity prices.’ Norman in his reply stated flatly that the prospect of central banking co-operation raising commodity prices was a chimera, while as for Sprague, ‘if his utterances may seem to some to have been on occasions hard, crude or ruthless, may it not be that having convinced himself that the true facts and difficulties of the position have too long been unperceived or faced in this and other countries, he finds it necessary to paint the colours with a heavy brush if he is to succeed in forcing home on unwilling minds the facts as he sees them?’ MacDonald’s apologetic response was almost abject: ‘I am constantly being bothered about this matter, and it is a subject which I have never really studied and therefore know nothing about.’35
Events at large continued to pick up speed from mid-July. On Monday the 13th, the publication of the Macmillan Report (with little critical about the Bank, and mainly remembered for its identification of the ‘Macmillan gap’, that is, in the financing of small to medium-sized firms) was overshadowed by news that one of Germany’s largest banks, the Darmstadter, had suspended payments; next day it emerged that the merchant bank Lazards was in trouble (as a result of fraud), requiring in due course a £3½ million loan from the Bank; and, increasingly, well-founded anxiety about London’s German exposure saw gold flowing out from the Bank, some £22 million in the course of a week. Norman himself was under huge pressure, and eventually buckled. ‘12.30 about – left C. Treasy and went home about 3 o’clock,’ recorded his diary on Wednesday, 29 July. ‘Queer.’ Thereafter, he was only a bit-player as the rest of the crisis unfolded, with his capable deputy, Harvey, stepping into the breach and at once on the 30th ensuring a rise in Bank rate, from 3½ to 4½ per cent, to try to stem the gold losses.
Next day, Friday the 31st, was pivotal. Not only did Harvey inform MacDonald that the Bank’s reserves had fallen by an alarming £55 million since the middle of the month, but the long-awaited May Report was published, claiming that the budget deficit was likely to be £120 million (an alarming figure at the time) and strongly recommending that the government achieve a cut in unemployment benefit of £67 million – a recommendation that over the next few weeks the Bank did not deviate from supporting, insistent that on international confidence in sterling depended the very fate of Britain’s indispensable maintenance of the gold standard. Harvey spelled it out to Snowden on 6 August:
I wish to explain to you that in less than four weeks we have to date lost more than £60 millions in gold and foreign exchange and, apart from the credits, we have virtually no foreign exchange left. If the flood does not abate we cannot maintain ourselves long …
We are doing all that we can but our power to act is rapidly diminishing. As I tried to explain to you last week, the reports which reach us all show that the sign which foreigners expect from this country is the readjustment of the budgetary position, and this attitude on their part has again been forcibly expressed today in messages from both Paris and New York. I am most anxious not to step beyond my province but I feel I should be failing in my duty if I did not say that with the prospects as they present themselves today the time available for the government to reach decisions on this subject (as a means of safeguarding the value of sterling) may be much shorter than recently seemed likely.
The sense of urgency was palpable. Speaking to the Committee of Treasury on 11 August, Harvey ‘feared that neither the Prime Minister nor the Chancellor were yet prepared to face the position and from certain information which he had received he feared that the Chancellor might even be considering the advisability of an abandonment of the Gold Standard’; a day or two later, the absent Norman, about to leave for Canada and convalescence, was asked if the country would ‘pull through’ and he replied, ‘Yes, if we can get them frightened enough,’ with little doubt about the identity of ‘them’; or as Harvey expressively put it to a former Treasury chief on the 17th: ‘We are having a desperate struggle in the hope that the government, on whom we are keeping a strong pressure, will adopt and announce this week a programme of financial reform which will sufficiently restore confidence abroad … At the present moment it looks like being a neck and neck race …’36
The political denouement would enter the history books. On Tuesday, 18 August, in a further stiffening letter to Snowden, and almost certainly in the knowledge that the Cabinet’s own economy committee was in the process of finalising its proposed package of cuts, Harvey warned that ‘everybody’ in the City was ‘anxiously awaiting the announcement of the Government’s programmes’, adding that ‘so long as the present tension lasts there must always be the danger of a sudden break taking place in some quarter and becoming the signal for a general sauve qui peut’; two days later he sanctioned a telegram from Morgan Grenfell in London to Morgans in New York, exploring whether the British government might be able to place there a $250 million loan, but only if it first made a ‘satisfactory announcement as regards balancing Budget’; and next day the deputy governor and Peacock candidly informed MacDonald and Snowden not just that the Cabinet’s so-far-agreed cuts of £56 million would be insufficient to enable further credits to be secured from abroad, but that such was the current flight from sterling, and accompanying desperation of the Bank’s exchange-support operation, that its reserves were likely to be exhausted in only four days.
Decision time arrived on the evening of Sunday, 23 August. Harvey passed on to MacDonald the crucial message from the Morgan partners in New York, namely that a major short-term credit was available to the British government within days provided that ‘the programme under consideration will have the sincere approval and support of the Bank of England and the City generally’;37 the prime minister put this to the Cabinet; around half the Labour ministers refused to support the proposed cut in unemployment benefit that would enable such a programme to be implemented; later that evening, intending to resign, MacDonald (accompanied by Harvey) went to the Palace, where King George V was dining with his financial adviser, Peacock; the prime minister was persuaded to defer his decision; and late that night, accompanying him back to Downing Street, Harvey and Peacock sought to convince him that he could still serve the country by taking his place at the head of a National government – a government, of course, fully committed to the enhanced programme of cuts. Next day, that duly happened, as the Labour government fell and the King asked MacDonald to form a National government (inevitably Conservative-dominated) instead.
Had the whole thing been a ‘bankers’ ramp’, as the accusatory phrase now went? In some fundamental sense not: the Bank’s unwavering priority had been to save the pound and thus stay on the gold standard, with a sincere belief that the only way to achieve this was through major cuts in government expenditure; whereas it had not been the aim to force the Labour government from office – and indeed the plausible belief was that the necessary cuts would be more generally accepted if they were implemented by Labour. Even so, for anyone reflecting on the balance of power between elected politicians and unelected central bankers, including the ability of the latter to frame the arguments and give the former little room in which to manoeuvre, there was much to ponder.
That was not, in any event, the end of the crisis. International confidence in sterling continued to diminish, even after Snowden (who had stayed on as chancellor) delivered on 10 September an emergency budget more or less following the lines of the cuts package that the Labour government had failed to agree upon; while the Bank’s gold reserves ebbed away during the first half of September, before a conjunction of difficult circumstances – reports from Invergordon about a possible mutiny of naval ratings over pay cuts, a poor show by ministers in the Commons of toughing it out, the imminence of a general election, a new and serious Dutch banking crisis – led to a run of sharp losses: £3½ million on the 16th, £10 million on the 17th, and a demoralising £18¾ million on Friday the 18th. Late that evening Harvey and Peacock met MacDonald at No 10, in effect telling him that there was now no alternative but to go off gold; the prime minister ‘agreed that if one could not see one’s way through it was better to acknowledge it now’. Whereupon discussion turned to practicalities:
The Deputy Governor stated that it was better to stop on Monday morning as that would give time to warn the press, and the public could be stopped from rushing the banks … The Prime Minister asked what would the effect be on things in general, particularly on the internal situation, of this upset? Mr Peacock replied that it would be an awful blow to everyone, but that the banks would loyally support one another in trying to keep working, and if the press played up, appearances at home might not be too bad … Mr Peacock went on to explain the shock to our people all over the world in Ireland, Egypt, India and so on: in every village a bill on London was looked upon as cash – and it would be cash no longer.
As the meeting ended, Peacock observed that ‘no one could accuse this country of not having made every effort before letting the pound go’; and ‘it was pointed out’ – by Harvey? by Peacock? by MacDonald? – ‘that by having balanced the Budget, whatever happened, this country had at least demonstrated her will to play the game at all costs’.
A formal announcement to the press was made on the Sunday, shortly after Harvey had sent a deliberately cryptic cable to Norman, returning home from Montreal: ‘Sorry we have to go off tomorrow and cannot wait to see you before doing so.’ Norman, understandably, was somewhat puzzled. In the event Monday, 21 September, with the Stock Exchange closed, was less troubled in the City than some had feared, no doubt helped by the press that morning resolutely looking on the bright side. ‘NO JUSTIFICATION FOR ALARM’ declared the Daily Telegraph on its front page, adding below, ‘A Speedy Return to the Gold Standard Assured’; The Times predicted the same, once the new government had done its work of ‘retrenchment and reform’; while for the Daily Mail, coming from a different angle, suspension of the gold standard was nothing less than ‘a blessing to British industry’: ‘The country was rashly hurried into it in 1925, against this newspaper’s protests. It has cost us tens of millions and almost ruined us. Now that it has gone we may breathe more freely.’
Undeniably, whatever the rights and wrongs, it was a major moment. ‘You will see by this morning’s papers that after all our struggles we are driven off the gold standard,’ lamented Teddy Grenfell (still on the Court) to Vice-Admiral Sir Aubrey Smith. ‘It has been rather a losing fight for some time – one rung a day – until the Navy business knocked us clean off the ladder. England was represented to the foreigner by the Navy and the Bank of England. It is all very bewildering and distressing.’ An ill-judged attempt to return to the prosperous certainties of the pre-1914 world had definitively failed, and a last word goes to Keynes’s friend Virginia Woolf. ‘We’re off,’ she scribbled in her diary, ‘and I write about Donne. Yes; & what could I do better, if we are ruined, & if everybody had spent their time writing about Donne we should not have gone off the Gold Standard – thats my version of the greatest crisis &c &c &c – gabble gabble go the geese – who cant lay golden eggs.’38