8

Money Will Not Manage Itself

‘THE GREAT IMPORTANCE OF THE LATE MEETING OF THE PROPRIETORS OF THE BANK OF ENGLAND’ was the Economist’s punchy headline on 22 September 1866, and it quoted at length from the speech of the Bank’s governor, Lancelot Holland, looking back on the Overend Gurney crisis some four months earlier:

This house exerted itself to the utmost – and exerted itself most successfully – to meet the crisis. We did not flinch from our posts. When the storm came upon us, on the morning on which it became known that the house of Overend and Co had failed, we were in as sound and healthy a position as any banking establishment could hold; and on that day and throughout the succeeding week we made advances which could hardly be credited …

We could not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and I am not aware that any legitimate application for assistance made to the this house was refused.

The paper’s editor was Walter Bagehot, who spelled out the momentous lender-of-last-resort implications of the Bank’s welcome sense of responsibility – ‘If no other reserve is kept but that of the Bank, and if the Bank at a crisis are bound to lend all that any one asks on good security, how large ought not that reserve to be, and how careful ought not the Bank to be of it?’ – before ending by congratulating Holland and his colleagues ‘on the safe issue of a period of great anxiety, and great responsibility, such as few men have to meet during their lives, and still fewer would consent to meet, when so little personal gain can conceivably be obtained by it’.

Two of those colleagues were Thomson Hankey and George Warde Norman, directors since 1835 and 1821 respectively, and neither the type to succumb to flattery. Hankey was preparing a treatise on The Principles of Banking, and that autumn of 1866 he wrote his preface, pulling no punches:

The Economist newspaper has put forth what, in my opinion, is the most mischievous doctrine ever broached in the monetary or Banking world in this country; viz., that it is the proper function of the Bank of England to keep money available at all times to supply the demands of Bankers who have rendered their own assets unavailable. Until such a doctrine is repudiated by the Banking interest, the difficulty of pursuing any sound principle of Banking in London will be always very great. But I do not believe that such a doctrine as that Bankers are justified in relying on the Bank of England to assist them in time of need is generally held by the Bankers in London.

Although his book was not officially published until the new year, the Economist responded in early December. Citing the most recent figures, showing the Bank’s reserve standing at £10.5 million (relative to deposits of £25.1 million), Bagehot asked: ‘Can any one fancy the sudden and to shareholders inexplicable reduction in the dividend of the joint stock banks, and the equal catastrophe to the income of private bankers, if they began to hoard bars or cash on a scale approaching this or resembling it?’ Accordingly, he went on, the Bank ‘alone has the means to meet a sudden emergency, and it must use those means, or it will fail in the universal ruin’. Norman entered the lists just before Christmas. ‘That the Bank of England should keep the whole unused reserve of the country seems to me an arrangement at once impracticable, and unsound in principle,’ he wrote to the Economist in defence of Hankey. ‘How is it possible that the directors should know, at any given time, the aggregate demand that may be made upon their resources, and provide accordingly?’ The old man’s letter could hardly have been gloomier. ‘With each oscillation of the financial pendulum,’ he noted with reference to the two most recent crises (1857 as well as 1866), ‘the pressure appears to become more sudden and intense’; and he blamed everyone but the Bank – above all, though he did not need to name them, the joint-stock banks that had become so large during his time – for the dark prospect that lay ahead: ‘If the present system of holding immense amounts at call in London without corresponding reserves be persisted in, no banking arrangements can meet the difficulty in times of extreme pressure. The result is obvious and inevitable, and I fully expect that younger men than myself will witness such a financial catastrophe as we have never yet seen nor can now imagine.’¹

The question of the Bank’s responsibilities was once again firmly on the table. Inasmuch as the Bank had a collective opinion, it seems over the next few years to have settled somewhere between the Bagehot and Hankey poles – to judge, anyway, by a parliamentary intervention in 1869. The catalyst was that most parsimonious of all Victorian chancellors, Robert Lowe, who not long before a Commons debate in May publicly asked, ‘What have I to do with the money-market?’, and equally publicly answered, ‘It must take care of itself.’ In the chamber he explicitly tackled the Economist’s demand that it was his duty ‘to keep a large balance in the Bank of England in order that it may be able to exercise control over the market’, a demand that he repudiated:

It is the duty of the Chancellor of the Exchequer to take care of the taxpayer and the revenues intrusted to his charge, and it is not his duty to put money into the Bank merely for the benefit of the shareholders of the Bank of England – which, after all, is really a private banking institution – or to enable the Bank to assist traders, or to set up storm signals announcing the coming of panics …

There is no monarch set up by any other department of business to warn those engaged in it of dangers to come; they must look out for themselves, and I don’t see that Government should go out of its way merely to strengthen a great institution like the Bank of England.

An immediate response came from Robert Crawford, not only a Liberal MP but also the recently elected governor. Observing that Lowe’s recent remark about the money market taking care of itself had caused ‘a considerable amount of consternation’ in the City, and adding that the City was ‘the centre of the commercial interests of the country, and as the Government acted upon that centre so would the public interests throughout the country be more or less affected’, he then turned to the Bank itself:

It was not the business of the Bank of England to find funds for the commercial community, nor had it been at any time. The business of the Bank of England was to take care of the funds intrusted to it, and to employ the money for the benefit of the proprietors. As to the ‘storm signals’ to which his right hon. friend had referred, the Bank of England did hoist storm signals, and, more than that, having the power, it used it in rectifying what otherwise might at the time be an unfortunate state of things.

Crawford finished with a peroration that almost certainly lacked nothing in sincerity. ‘He held that the Bank of England in past times had exercised the vast power which it held with great benefit to the public (hear, hear), and as long as he was in the position which he happened to fill he would do all in his power not to disparage but to make effective the services which the Bank of England have always rendered. (Hear, hear)’²

Neither Hankey nor Bagehot was done. In November 1872 the veteran director (and former governor) wrote to The Times, referring darkly to how ‘a recent writer on the subject considers it an error for the Bank of England not to keep a larger available reserve of bullion to meet the wants of the country whenever any unusual demand for gold occurs’, and went on: ‘Now, in reply to such an opinion, I venture to say that the Directors of the Bank of England neither have nor ought to have any more control over the reserve of bullion in this country than have any other bankers or any money dealer in England.’ Indeed, Hankey saw ‘no reason’ why the Bank ‘should increase the amount of money left unemployed in order to allow other banking establishments and other large traders in London to use up their own ready money more closely, believing that in case of need they may always avail themselves of the resources of the Bank of England, which resources are not kept for any such purpose’. Bagehot’s riposte, in the next issue of the Economist, appeared below a wholly predictable headline: ‘THE DANGEROUS OPINIONS OF A BANK DIRECTOR’. And in the article itself, after noting that a) ‘for the purpose of gold exportation it is of no use to look to the resources of other London bankers’, that b) ‘the only real source at which gold on a large scale can be obtained if wanted is the reserve of the Banking department of the Bank of England’, and that c) the consequence of the Franco-Prussian War of 1870 had been to knock out Paris as a rival ‘great European exchange centre’, leaving London as ‘the sole such centre’, he reiterated his argument: ‘The Bank of England is the bankers’ bank. Its reserve is the ultimate; our means of meeting a foreign payment depend on the magnitude of that final fund. The country must not go without a reserve while the London bankers and the Bank of England are squabbling who shall keep it.’ Moreover, he insisted, the apparent rule or custom by which the Bank kept about one-third of its deposits in cash was now anachronistic: ‘The nature of the demands upon the Bank of England has changed. The amount of foreign money now in London, the amount of the foreign liabilities of England, the amount of money which may be drawn out of the Banking department at any moment, is excessively increased.’

By this time, Bagehot had almost finished writing one of the great City books: Lombard Street. Subtitled A Description of the Money Market, and published in the summer of 1873 (almost simultaneously with a new edition of Hankey’s Principles, with the author conceding no ground in his latest preface), it fleshed out in wonderfully vivid and persuasive style the two key arguments in relation to the Bank’s policy that he had been expounding for at least seven years. One, of course, was that the Bank should do everything in its power to protect its reserve. For, as he explained:

A panic is sure to be caused if that reserve is, from whatever cause, exceedingly low. At every moment there is a certain minimum, which I will call the ‘apprehension minimum’, below which the reserve cannot fall without great risk of diffused fear; and by this I do not mean absolute panic, but only a vague fright and timorousness which spreads itself instantly, and as if by magic, over the public mind. Such seasons of incipient alarm are exceedingly dangerous, because they beget the calamities they dread. What is most feared at such moments of susceptibility is the destruction of credit; and if any grave failure or bad event happens at such moments, the public fancy seizes on it, there is a general run, and credit is suspended.

So what, then, was that ‘apprehension minimum’? In present-day conditions, he reckoned, there was no alternative but to plump for the historically high figure of £10 million – below which ‘the important and intelligent part of the public which watches the Bank reserve becomes anxious and dissatisfied’. But ideally, he went on, the reserve should be significantly higher, no less than £11½ million and preferably of the order of £14–15 million. Bagehot’s other key theme concerned what the Bank should do if, despite its best efforts, there was a recurrence in the future of financial panic. His answer was straightforward – that ‘in time of panic it must advance freely and vigorously to the public out of the reserve’ – and he set out his twin rules: that ‘these loans should only be made at a very high rate of interest’; and that ‘at this rate these advances should be made on all good banking securities, and as largely as the public ask for them’. As for those who maintained that the Bank’s reserve might not be enough for all such loans, Bagehot’s reply was bracingly clear: ‘The only safe plan for the Bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent. This policy may not save the Bank; but if it do not, nothing will save it.’³

How much did Lombard Street shift the dial? During the middle years of the twentieth century, as historians and occasionally practitioners reflected on the evolution of modern central banking, the consensus formed that to a significant degree it had done so. ‘After Bagehot,’ reckoned R. S. Sayers, ‘no one could again put forward the doctrine of 1844 in all its nakedness,’ and instead the Bank’s ‘special position’ was ‘taken for granted’, in other words as ‘the holder of the single reserve, the ultimate source of support for the country’s financial structure in times of difficulty’; to another economic historian, E. Victor Morgan, Bagehot’s vanquishing of Hankey in the court of public opinion ‘may be said to mark another and final stage in the assumption by the Bank of the responsibilities of lender of last resort’. Yet the reality was perhaps somewhat more complicated. For one thing, it was a striking fact (highlighted by Hugh Rockoff in the 1980s) that the Bank’s reserve signally failed to increase during the decade and a half after Lombard Street, in half of those years averaging less than during the early 1870s and presumably, at least in part, reflecting a reluctance to damage the Bank’s profitability; for another thing, the Bank in practice showed itself wholly unwilling to take Bagehot’s advice and commit publicly to being the lender of last resort in times of panic or crisis, perhaps because of an understandable reluctance to surrender the dimension of moral hazard.

Indeed, it is even possible that the widely held assumption that most of the Bank’s newer directors were instinctively if tacitly on Bagehot’s side of the argument, broadly speaking, may be mistaken – in the sense, anyway, of sharing Bagehot’s almost febrile urgency about the larger financial situation. Suggestive evidence comes from William Lidderdale, a director since 1870, writing to a partner in Liverpool a few months after the book’s publication:

That our Banking and Monetary system in this Country is of an overcomplicated & interdependent nature which makes difficulties in any important quarter a serious matter for every one, is a fact upon which none of us are likely to differ. The system of taking enormous sums on deposit at call or short notice, on which interest has to be paid & which there is almost a necessity to employ if serious losses are to be avoided, is one which carries risk on its face. Mr Bagehot says things are so & that it is useless trying to change the system, & then throws upon the Bank of England the onus of providing a reserve adequate to the needs of all its competitors as well as regular customers.

Crucially, however, Lidderdale insisted that the system could take the strain; and he asserted that ‘so far as concerns the big Joint Stock Banks, they most undoubtedly have remembered their lesson & materially improved their practice in the last 6 years’. Such an attitude is doubly instructive, given that Lidderdale was appreciably less complacent and more independent-minded than many of his colleagues. Not that Bagehot himself would have been surprised. Memories of the 1866 crisis may have been all too vivid in his own mind, Paris in the early 1870s may have vanished as a helpful counterweight to London, the sheer volume of the City’s liabilities as well as assets may have been daily growing – and yet:

It is not easy to rouse men of business to the task. They let the tide of business float before them; they make money or strive to do so while it passes, and they are unwilling to think where it is going. Even the great collapse of Overends, though it caused a panic, is beginning to be forgotten. Most men of business think – ‘Anyhow this system will probably last my time. It has gone on a long time, and is likely to go on still.’ But the exact point is, that it has not gone on a long time. The collection of these immense sums in one place and in few hands is perfectly new.

In short, ‘money will not manage itself’.⁴

In addition to questions of policy, Bagehot offered one other major reform thrust: the improved governance of the Bank. ‘The Bank directors,’ he argued, ‘are not trained bankers; they were not bred to the trade, and do not in general give the main power of their minds to it. They are merchants, most of whose time and most of whose real mind are occupied in making money in their own business and for themselves.’ Thus, he went on:

We have placed the exclusive custody of our entire banking reserve in the hands of a single board of directors not particularly trained for the duty, – who might be called ‘amateurs,’ – who have no particular interest above other people in keeping it undiminished – who acknowledge no obligation to keep it undiminished – who have never been told by any great statesman or public authority that they are so to keep it or that they have anything to do with it – who are named by and are agents for a proprietary which would have a greater income if it was diminished, – who do not fear, and who need not fear, ruin, even if it were all gone and wasted.

Accordingly, argued Bagehot, ‘we should diminish the “amateur” element; we should augment the trained banking element; and we should ensure more constancy in the administration’. Specifically, he recommended two things: a permanent deputy governor, who would be ‘a trained banker’ having ‘no business save that of the Bank’; and, in terms of the Court as a whole, that ‘the London bankers’ should no longer be ‘altogether excluded’:

The old idea was that the London bankers were the competitors of the Bank of England, and would hurt it if they could. But now the London bankers have another relation to the Bank which did not then exist, and was not then imagined. Among private people they are the principal depositors in the Bank; they are therefore particularly interested in its stability; they are especially interested in the maintenance of a good banking reserve, for their own credit and the safety of their large deposits depend on it. And they can bring to the court of directors an experience of banking itself, got outside the Bank of England, which none of the present directors possess, for they have learned all they know of banking at the Bank itself. There was also an old notion that the secrets of the Bank would be divulged if they were imparted to bankers. But probably bankers are better trained to silence and secrecy than most people. And there is only a thin partition now between the bankers and the secrets of the Bank. Only lately a firm failed of which one partner was a director of the London and Westminster Bank, and another a director of the Bank of England. Who can define or class the confidential communications of such persons under such circumstances?

Neither suggestion seems to have been discussed, let alone countenanced, by the Bank itself; and although the Court had seen a certain broadening since the late 1840s with the election of various merchant bankers, these were far from the ‘trained’ commercial bankers that Bagehot had in mind. Again, it was Lidderdale who offered a private commentary:

You have [he wrote in October 1873 to his Liverpool correspondent, who had dared to raise a moral eyebrow in the context of the Bank lifting its rate to 7 per cent against the background of bad news from both America and Europe] a very curious notion about the action of the Merchants who occupy seats at the Bank Court – the effect of alterations of rate is generally much less felt in their business than in Banking arrangements, & people who do the latter on a large scale are much more constantly face to face with questions of self interest … Then many Directors, men like Morris, Latham, Hankey, Hubbard, Huth, Campbell, the present Governor Greene, & Gibbs are personally in a position so little touched by anything which goes on in the Bank that it cannot be a matter of material interest what the rate is. Certainly no body of men have a right to claim superiority to even unconscious promptings of self interest, but I am bound to say that I have never seen more honest endeavours to decide in the true interest of the Bank, even when I have differed with the majority.⁵

In politics, in cricket, in Threadneedle Street, the cult of the disinterested amateur was only just approaching its apogee.

Even so, one can overdo the Bagehotian exasperation, shading into scorn. The men who ran the Bank during the final third of the century were for the most part serious, conscientious and intelligent, usually with a highly developed sense of the practical. Take a handful of examples. Robert Crawford in 1869, a few months after becoming governor, declined the offer of a baronetcy, on the grounds (he informed Rothschilds) that ‘a man in business ought not to be Sir Robert’; Benjamin Buck Greene (governor, 1873–5), of a firm trading largely in Mauritian sugar, was a thoroughly sound operator, a member of the Bank’s inner councils for many years, and renowned for his private collection of statistics relating to its accounts; J. W. Birch (governor, 1879–81), senior partner of a Hispano-English merchanting firm (Mildred, Goyenesche & Co), was described in a contemporary profile as ‘a shrewd man of business, impatient of the refinements of theorists, careful of facts, and, therefore, as a necessary consequence, judicious in a crisis’; while Sir Mark Collet (governor, 1887–9) was, as senior partner of the steadily rising merchant bank Brown, Shipley & Co, a capable, hugely experienced figure, as well as being brother-in-law of George Warde Norman and a benevolent, closely involved grandfather to young Montagu Norman.

In a category of his own was Henry Hucks Gibbs (governor, 1875–7) of the merchant bank Antony Gibbs & Sons, a man of energy and versatility, if not always directed sufficiently to the gently declining fortunes of his own firm. He was a vigorous correspondent (despite the loss of his right hand in a gun accident); he had a keen interest in architecture, books, pictures and genealogy, not to mention ecclesiastical politics; he was an authority on card games (especially ombre) as well as matters of currency; and, befitting a dedicated philologist, he contributed much of the letter ‘C’ to the Oxford English Dictionary. In the closing months of 1877, no longer governor but still a director (as he would remain until 1900), he engaged in some typically direct correspondence with an Oxford professor, Bonamy Price, on the subject of the Bank’s reserve. Price at one point attacked the ignorance and narrow-mindedness of ‘City oracles, who are emphatically practical men’, prompting Gibbs not only to launch a defence of practical man – ‘a man who, knowing the theory, has personally seen it in practice – who knows not only the theoretic forces, but can take into account the friction of external circumstances which modifies them’ – but also to state bluntly to the professor that ‘your theory is right and good, but your practice is defective’. ‘Pray’, he declared later in what turned into a marathon letter, ‘don’t father upon the Bank of England the follies of others, the slipshod stuff of sciolists, the nonsense of newspapers …’ And he ended with a resounding, difficult-to-answer affirmation about who knew best:

When it is necessary to rectify a disproportion, present or foreseen, between Reserve and Deposits, we cannot wait till the evil is upon us, and neither you nor any one else has ever given us the slightest reason why we should so wait.

Of that disproportion and that necessity, the only persons who have the faintest means of judging are those who have before them the ever-changing character of the Deposits and the ever-changing condition of the Reserve, viz., the Directors of the Bank of England; and the only lever which they have in the ultimate resort, the only force which can efficiently act on the Reserve, is the rate of discount. Experto crede! ⁶

‘Trade does not revive – Credit is shaken – our Finances are not in good order – our Foreign Relations are overcast with dark clouds and threatening Thunder …’ The gloomy commentary came from Lord Overstone, writing to his old friend George Warde Norman (no longer a director) on 19 October 1878. It was just over a fortnight after the spectacular failure of the City of Glasgow Bank, reckoned by Clapham to be ‘perhaps the most discreditable British banking catastrophe of the century’, involving as it did not just undue risk-taking, but systematic fraud and the subsequent imprisonment of directors. In what was the only major financial crisis of the 1870s and 1880s, the next few months saw many provincial banks under significant pressure, while in the City the mood was apprehensive enough that shortly before Christmas one of the Rothschilds – presumably Alfred, in his additional capacity as a Bank director – went to the chancellor, Sir Stafford Northcote, and asked him if, before he departed from town, he would leave a signed letter in effect suspending the Bank Charter Act, with the letter to be used at once should necessity arise. In the event, potentially fourth time around since 1844, suspension was not required, but what otherwise was the Bank’s role in alleviating the crisis? Historians are agreed that it was generally supportive, helped by the reserve being in a state sufficiently strong that Bagehot (who had died the previous year) would have approved, but there is debate as to what degree it acted as lender of last resort. Michael Collins contends for a high degree, on a de facto basis, given that it was the Bank that ‘substantially met the increased demand for cash and near-cash assets’ during the crisis; Dieter Ziegler is more sceptical, pointing to how ‘the Bank was almost completely separated from the provincial banks’, so that ‘even during the weeks of crisis there was no significant increase in the Bank’s holding of bills of exchange and loans on bills at the [Bank’s] provincial branches’.⁷

More generally, the 1878 crisis has been seen by some as a fateful turning-point in British banking and indeed economic history – the crisis whose legacy was to shift bank assets away from industrial loans and towards more liquid securities.⁸ One commentator, Will Hutton, puts the Bank itself at the historical heart of the fractured City/industry relationship:

In the 1870s [he wrote in 2011] the UK was faced with the same decision as Germany – how to get banks to step up lending to industry as industrialisation moved up a gear. Bismarck set up the Reichsbank in 1876, mandated to finance German banks as they stepped up their industrial lending; the new German central bank would provide banks with the necessary finance and stand ready to buy back any commercial loans they made if they went sour or if for any reason banks needed cash fast.

Successive governors of the Bank of England refused to do the same. This would be financially unsound and politicise the central bank, ran the argument. The Bank of England would only supply cash to the banking system in exchange for gold-standard government debt, not corporate debt. And it would never create credit. In the 1870s, British banks began to go bust. To save themselves, more than 1,000 merged, creating today’s highly concentrated banking system, while disengaging from the industrial lending. No explanation of British decline and German industrial pre-eminence is complete without understanding the Bank of England’s approach to industrial financing.

It is a fascinating and suggestive critique, but needs further detailed research to become authoritative. Moreover, in truth, Ricardo’s company of merchants had always had an international rather than national orientation, in the sense that the City’s most powerful commercial interests, which they represented, almost invariably related to overseas trade and business. Of course, there was the odd exception – James Currie for instance, governor in the mid-1880s, was a distiller in Bromley – but for those merchants and merchant bankers who continued to dominate the Court, they naturally tended to look to points west, south and east rather than north.⁹

All this was especially so from the 1870s, as a whole new phase opened up in the internationalisation of the City. The key moment was the Franco-Prussian War at the start of the decade, with its manifold consequences including the non-convertibility of the franc for eight years (confirming sterling as the unrivalled medium of settlement), the Bank of France’s suspension of specie payments (leaving London as the only world bullion market), and more generally the flow to London from other countries of ‘hot money’ (seeking instantly higher returns) that so agitated Bagehot. Increasingly through the decade, as most of Europe moved to a gold standard and the sums of money passing through London became ever greater, the cumulative and interlocking logic was irresistible: sterling, backed by the Bank’s adherence to the gold standard, as the international currency; the City as the place where the world’s trade was financed and settled; and Lombard Street itself as the short-term money market of unrivalled liquidity and security. ‘If England be the heart of international trade and cosmopolitan finance, and London be the heart of England, the City is the heart of London,’ declared the leading journalist T. H. S. Escott in his 1879 survey of England: Its People, Polity, and Pursuits; and in a bravura set-piece passage, he convincingly depicted the Old Lady herself as lying at the very heart of the City’s unrivalled financial machinery:

Outside and beyond the specially national functions which the Bank is bound to discharge in being the banker of the Government, the issuer of notes that, under certain conditions, are legal tender and therefore national currency, in taking charge of Government securities and paying the dividends thereon to the holders, and in discharging the other various offices of a bank for the public, there are other multifarious functions which it is compelled by its position to fulfil. Bills from all parts of the world are drawn payable in London, as in other capitals, because it is convenient to have recognised places at which the international trading balances and the balance between the markets and traders of different countries may be settled; while, by mere force of geographical circumstances, London has, in a special degree, drifted into the position of international Clearing-House of the world, and the banking functions connected with it are largely, though not exclusively, discharged by the Bank of England, which is known as the bankers’ bank at home. This is not all. In the final resort, when balances remain to be discharged as between one nation and another, after all the complicated mechanism of bills set off against each other has accomplished its utmost, they must be paid in gold. There is no other means of settling the final outcome of the mass of transactions in international commerce except through the precious metals – gold and silver; and while silver is mainly employed in the East, gold is chiefly used in the West. London consequently, as the convenient centre that may be drawn upon from all parts of the world, must possess a stock of gold sufficient to meet the demands that may be made on it. The Bank of England, as the banker of the nation, is the custodian of this treasure; and being thus constituted a bullion storehouse, to it flow all supplies of the precious metal that reach our shores. Circumstances have thus caused it to become a dealer in bullion as well as a banker. The Bank of England, in fact, discharges wider than national banking functions. Along with the joint stock and private banks by which it is surrounded, and with which its relations are close and intimate – for as the central institution it keeps the reserves of the other banks as well as its own – it represents the banking of the metropolis, and therefore, in the final issue, of England. Owing to England’s world-wide commercial relations, this same banking system, and the subsidiary agencies by which it is buttressed, acts as the general international Clearing House; and bearing in mind the duties that further devolve on it from the fact that London is the great bullion centre, we can form some faint idea of the multiplicity and complexity of its operations, and the vastness of the weight which presses on the central pivot around which the entire commercial and financial system revolves.

A word of caution is necessary. For all its concern about ensuring the convertibility of sterling (albeit a concern sometimes compromised by the perceived need to make acceptable profits for the Bank’s shareholders), it would be an exaggeration to say that the Bank in any real day-to-day sense actively managed the international gold standard. Moreover, contact with other national (not yet ‘central’) banks seems to have remained distinctly spasmodic for the rest of the century. Even so, in terms of the international orientation, it is worth quoting from an interview given by Birch in 1887, six years after the end of his governorship but while he was still a director:

When I entered the Bank [in 1860] I remember in our discussions as to raising or lowering the Bank rate we were always talking about the balance of trade and trade returns. We know now that the balance of trade has very little to do with our international balancing. The great thing which governs us is the enormous transactions on the Stock Exchange, in France, in Germany, and in the United States. These are the operations we have to follow most carefully. We have to observe the course of the foreign exchanges, and they are more carefully watched than they used to be. We have also to follow the movements of gold, and within the Bank we are not simply working le jour pour le jour, but we try to look ahead and forecast what is likely to result from the negotiation of public loans, not only in this country but on the Continent. For instance, if a loan is contracted in Germany for the Argentine Republic it is more than probable that if gold is required, it will be taken not from Germany, but from England.

What about, in this new dispensation, the impact on domestic trade and industry of all the Bank rate changes necessary to maintain convertibility? The interviewer (for the Journal of the Institute of Bankers) failed to ask the question; but, if he had, it is unlikely that Birch would have seen it as any more than a desirable – but not crucial – consideration.¹⁰

Instead, during these two decades, the 1870s and the 1880s, the major monetary controversy concerned the arcane subject of bimetallism: in other words, the increasingly noisy school of thought arguing that, against a post-1873 background of world economic depression and a falling general price level, including the price of silver, the only realistic solution was for the leading nations, above all Britain, to return to a bimetallic standard – that is, abandoning the monometallism of the gold standard and thereby permitting the free coinage of silver in addition to gold. By 1881 the Bimetallic League was under way, with its two most prominent members being the former governors Henry Hucks Gibbs and Henry Riversdale Grenfell (a copper merchant, with close links to Welsh mining), both still directors. Five years later, as trade depression deepened, the government agreed to appoint a Gold and Silver Commission; and the governor, Currie, asked his directors for their private views, which they gave during the winter of 1886–7. A handful (Gibbs and Grenfell inevitably to the fore) saw merit in the double standard, but the overwhelming majority, whether merchants or merchant bankers, preferred to stick with the reassuring certainties of the status quo:

I am most decidedly of opinion that it would be very unwise to make any alteration in our currency laws, by which gold of a fixed standard and quality in England, and, I believe, in all of the Colonies, is and has been for many years in existence. (Thomson Hankey)

My opinions have never inclined in the least to the side of, as it seems to me, an unpractical and dangerous economic fallacy. (R. W. Crawford)

If there were any advantage to England in Bimetallism, which I deny, it would never do for her to rely upon any international agreement whatever. (Benjamin Buck Greene)

I prefer to make the best of existing circumstances rather than surrender our single standard with the advantages it possesses. (William Lidderdale)

It must be wiser to adhere to our present system of currency rather than ‘take a leap in the dark’, and enter upon an experiment the result of which no one can possibly foresee. (Charles Goschen)

To sum up the situation in a few words, London being the centre of the financial world, we have to be doubly careful to protect our stock of gold. (Alfred de Rothschild)

I have the pleasure to rank myself on the side of the firm monometallists. (Lord Revelstoke)

I do not believe Bimetallism would be a cure for the so-called depression in trade. (Everard Hambro)

Significantly, there was concurrence from two of the directors with strong industrial links, namely the linen-yarn manufacturer Lancelot Holland (governor twenty years earlier) and Henry Blake, a civil engineer who was London partner of the Birmingham-based James Watt & Co:

I believe it to be an impossibility to fix a permanent ratio at which gold and silver shall be interchangeable all over the world; and I should expect that any attempt to do so would fail, in spite of national agreements, which cannot possibly become universal …

The monometallic currency in Great Britain based upon a gold standard is admitted by general consent to be as perfect, if not more so, than that of any other country; and this, coupled with the universal trade which England possesses, and other reasons, makes London the chief centre of exchange for the settlement of commercial transactions …

The Bank did not formally present its collective judgement; but, asked by the Royal Commission in May 1887 if his bimetallist views represented ‘the preponderating views amongst the directors’, Gibbs had no alternative but to accept that he was ‘in a small minority’. Not that he gave up the battle. ‘I believe that the notion that England’s prosperity is due to our having a single gold standard is merely a vain imagination,’ he declared at the following April’s Bimetallic Conference. ‘What a futile and miserable foundation on which to build the commercial greatness of England!’¹¹ In the event, after the Royal Commission’s report later in 1888 had failed to come down decisively on one side or the other, it became apparent during 1889 that there was as yet no parliamentary majority for bimetallism; and as long as the City, headed by the Bank, was broadly antagonistic, that was almost certainly not going to change.

The Bank certainly called most of the shots in the expanding new field of colonial loans, with Australasia the prime example. ‘It is almost essential that inscription of New Zealand Stock should be done through the Bank of England, if it is to be made a success,’ noted New Zealand’s representative in London, Sir Julius Vogel, in 1875, while the following year he reflected that ‘the fact of the Bank of England managing the loans will enhance the estimation in which they are held’ and that ‘it will be difficult to overrate the collateral advantages arising from the employment of such an institution as the Bank of England’. The Colonial Stock Act of 1877 made colonial loans possible, and next year the Bank made its first issue for a colonial government (New Zealand), followed in 1884 by issues for Queensland and New South Wales. For its part, the Bank did not take on the responsibilities of loan agent solely out of imperial sentiment. ‘The Bank consider,’ reported Queensland’s man in London shortly before that state’s loan, ‘that if they give their prestige to any Colony by affording facilities for the inscription of its Stock they are entitled to the profit connected with the issue of the loan.’ Moreover, over the rest of the 1880s, a distinct high-handedness tended to characterise the Bank’s approach. In 1888 for instance, Collet as governor not only insisted on New Zealand having a three-year loan moratorium – during which time it was to pursue an ‘urgent need for retrenchment and for an increase of revenue’, which he held to be ‘of vital importance to the wellbeing of the Colony and to the full restoration of its credit’ – but was similarly stern in the course of a meeting with Queensland’s representative, who reported back to Brisbane after a less than enjoyable visit to Threadneedle Street: ‘That gentleman [Collet] dwelt very strongly on the subject of the rapidly increasing debt of Queensland, and the delicate position in which the Bank of England is placed by the heavy responsibility attaching to the placing of these many Queensland loans on the market at short intervals.’ Furthermore: ‘The Governor requested me to represent to my Government the desirability of discontinuing this system, and hinted very strongly that if it were continued it would be necessary for his Board to take steps to rid the Bank of that responsibility.’ Unsurprisingly, all this engendered a degree of resentment; and it was perhaps telling that the cipher code for the Bank used at this time by both New South Wales and Queensland was the less than flattering ‘bastard’. Even so, as Bernard Attard observes in his study of the colonial loan process, ‘direct attacks on the Bank’s good faith could only have disastrous consequences’, and ‘the consequences of the Bank of England declining to float a loan were never far from the minds of Colonial Treasurers’.¹²

The late-Victorian Bank could also seem a formidable presence when it came to politicians. An invaluable witness was the Treasury’s Edward Hamilton, a marvellously watchful diarist who accompanied successive chancellors on visits to the parlour. In September 1886 it was the turn of Lord Randolph Churchill. A year earlier, while at the India Office, he had declared to the viceroy that the ‘financial knowledge’ of Rothschilds was ‘as great as that of the Bank of England is small’; but now his mood was rather different. ‘Tenders for Treasury Bills [a recent innovation that was becoming increasingly important to the short-term funding of the government] afforded a good opportunity of introducing him to the Governor & Deputy Governor with whom the Chanc of the Exchequer ought to be on good terms,’ recorded Hamilton. ‘He seemed quite nervous about presenting himself …’ Almost certainly this was the episode when Lord Randolph was reduced, in his son’s words, to ‘hovering for half an hour outside in a panic of nervousness’. Once inside, however, things went smoothly enough:

We sit [noted Hamilton] round the Governor’s table. The Cashier & two others bring in the Tenders, open & sort them. The Governor then proceeds to read them out. The cashiers then give roughly the average price at which our requirements can be met by three months Bills & six months Bills … Today we wanted about 2 millions, & as nearly a million falls due in 6 months Bills next December we took one million in three months Bills at about 2¼% per annum, & the other million in 6 months Bills at about 2¾% p.a. One of course defers to the judgement of the Governor & Deputy Governor; but it is generally a simple & straightforward business … Randolph Churchill said he was interested in the ceremony. The Bank of England is certainly a grand institution. After we had done our business we had luncheon. The working of the Bank Act very appropriately formed a subject of discussion.

‘One of course defers’ – four words conveying a wealth of meaning. Or as Hamilton had reflected of a similar occasion a year earlier, ‘one must practically follow the advice of the Governor & Deputy Governor’, even though ‘I am not satisfied with the bargain I made.’ Politicians came and went, and the Bank was intensely careful not to be drawn into party controversy, but there was one eminent politician towards whom its private view was now consistently negative, reflecting a larger shift in the City’s political mood as well as specific institutional memory. ‘At luncheon in the Bank parlour one generally hears grumbles, if not expletives, about Mr G,’ recorded Hamilton in January 1888 after a visit. ‘Mr G’ was of course Gladstone, still the Liberal leader in his late seventies. ‘One Director,’ added Hamilton, ‘said he intended to send Mr G a naive advertisement of an enterprising undertaker, who expressed surprise that people should go on living a life of trouble to themselves and others when they could be comfortably interred for £3 …’¹³

There were warmer feelings towards George Joachim Goschen, Churchill’s successor and the only former Bank director ever to have become chancellor (1887–92). His first great moment of reliance on the Bank was in the spring of 1888, as he sought to convert almost £600 million of British government 3 per cent stock to 2½ per cent. The circumstances were propitious – cheap money, dear securities, Goschen’s own high reputation in the City – but only four years earlier a debt-conversion scheme had failed unexpectedly. ‘The Chanc of the Exchequer is fortunate in having a very sensible Governor of the Bank (Collet) and a shrewd hard headed Deputy Governor (Lidderdale) with whom to consult,’ noted Hamilton in early March, and not long afterwards Goschen publicly announced his scheme. This time it came off triumphantly, with Lidderdale in due course expressing to Goschen the Bank’s pride in having contributed to ‘the complete success of a financial operation of such unprecedented magnitude’, an operation that earned Collet a knighthood. For those at the Bank never in line for honours, though, the work involved was huge and continuous for weeks if not months – ‘beyond all precedent’ in the words of Collet himself, while the principal of the Transfer Offices broke down under the round-the-clock strain. ‘I had no love for it,’ admitted Allan Fea many years later:

The great thing, I remember, was to knock off as many addressed envelopes as possible, and the speed records were easily carried off by Scotsmen, for I believe it was ‘piece-work’ – pay on the hop-picking system – the greater the bulk the taller the pile of solid cash. I must confess I didn’t make much myself over the job. The novelty of nocturnal scribbling soon palled … I, therefore, escaped into the open-air whenever I could alight upon a plausible, though obviously shiftless excuse, and like the moral story of Hogarth’s ‘Good and Bad Apprentice’, left the diligent to earn his own reward.

A further recollection came from another former Bank clerk, Arthur Rowlett. This was of the ‘courtly, white-haired old gentleman with Gladstonian collar and white choker’ who ‘refused to recognise’ Goschen’s conversion. ‘He always appeared on the same day and at the same hour, and asked for his Dividends on 3 per cent Consols. When told they were now 2½ per cent he shook his head, walked to the middle of the Office, looked at the clock, compared the time with his gold hunter, and then walked slowly out. This proceeding he repeated regularly each quarter for about fifteen years until he died …’¹⁴

Yet if the Bank remained indispensable, perhaps increasingly so during the 1870s and 1880s, it was hardly omnipotent. This was especially so in the money market, where the big commercial joint-stock banks, their deposits continuing to rise at a far greater pace than the Bank’s, enjoyed considerable clout. ‘It is felt on all sides that the old system of paternal government is passing away,’ one informed City practitioner wrote to the Economist in December 1874, adding that ‘the Bank of England, which once distanced every competitor, is now only primus inter pares’. The key problem was that of making Bank rate effective in the market, an especially pressing concern with the development in the mid-1870s of the so-called Greene–Gibbs policy (named after the two successive governors of those years), involving the systematic use of Bank rate to protect the reserve. ‘The Bank of England,’ explained Gibbs to his Oxford correspondent in 1877, ‘has but one weapon, the rate, wherewith they defend their own position, and make those who want to borrow money pay a little more for it, inducing, by the rise of interest, the foreigners to minister to the provisions of the Act of ’44, and send more note-producing gold into our coffers.’ Gibbs was honest enough to concede that the Bank no longer had the power ‘to command and control the market’, but even so, he went on:

Our rate is a real power; and as to export of gold, it is so also. So long as the bankers have with us more in balance than what is necessary for them to work with, they can of course buy gold and export it, whatever the rate of discount in the Bank; but we, of course, know by practice how far they can go; and, when they can go no farther, our rate is an all-controlling engine. Nor are we powerless while they have a surplus balance with us, for of course a timely disposal of some of our Consols or other securities takes the spare money off the market, and makes the Banker of Bankers (‘Shah-in-Shah’) the real arbiter.

Over the next decade or so the question of making the rate effective continued to exercise the Bank’s best minds. Three distinct approaches gradually evolved: first, as intimated by Gibbs, an increasingly frequent resort to open-market operations, selling securities (usually Consols) ‘spot’ for immediate delivery and repurchasing them forward, thereby impacting as desired on the reserve base of the commercial banks; second, gradually withdrawing the controversial 1858 rule and fostering closer relations with the discount houses, by now instinctively more co-operative than the commercial banks; and third, in relation to those banks, seeking to subdue antagonism by slowly retreating from the Bank’s own commercial business, a policy not always easy to sell to the Bank’s own shareholders. All three approaches helped, but the problem was far from solved by the end of the 1880s.¹⁵

There were signs of relative weakness in other areas too, most visibly the famous 1875 episode in which Benjamin Disraeli at 10 Downing Street, eager that the British government buy a major stake in the Suez Canal Company, cold-shouldered the Bank and instead turned to Rothschilds to put up the £4 million.¹⁶ Possibly there was a legitimate constitutional doubt whether the government could raise that sum from the Bank without the authority of Parliament (not sitting), but almost certainly Disraeli saw Rothschilds as the more dynamic outfit in an urgent situation. Ten years later, in July 1885, the Bank again found itself outflanked by that merchant bank, this time at the behest of Lord Salisbury’s government, choosing the issuer of the London portion of a £9 million loan to Egypt guaranteed by the British, French and German governments.¹⁷ ‘We were prepared,’ insisted a pained governor, Currie, in his reply to Salisbury’s letter giving the disappointing news, ‘to carry out the issue in the centres of the guaranteeing powers with, we believe, the greatest advantage to the Egyptian Government.’ Within weeks, moreover, Currie was writing again, this time to the chancellor, Sir Michael Hicks Beach, after a recent meeting at which Hicks Beach had, in Currie’s words, ‘informed us [the governor and his deputy] that it had been hinted that the government might have offers for the supply of their “Ways and Means” advances from some other source than The Bank of England’. A lengthy cri de coeur ensued:

The expediency of the Government entertaining offers of loans from other Banks than The Bank of England cannot be decided by a consideration of the present or any exceptional condition of the Money Market.

The Bank of England, as the Banker of the State, is by statute empowered to make loans to the Government under provisions which apply to it exclusively. The Advances under different Statutes, which The Bank is enabled to make in preparation of the dividends, or to meet deficits in the Revenue at other periods, are always made at exceptionally low rates of interest – lower considerably upon the average than could possibly be charged by any other Banks guided by the rate they could obtain in the open Market, or upon discount of bills spontaneously offered to them.

The Bank of England supplies the Government on exceptionally favourable terms because it regards the Government as its largest and, under every point of view, its most important customer, and believing hitherto that (with the exception of Treasury and Exchequer Bills) the Government invariably resorted to The Bank for the pecuniary advances indispensable to the punctual fulfilment of the engagements of the State, The Bank has always held itself bound to the extent of its power to render the assistance required by the Treasury in any exigency and under any condition of the Money Market.

Acting upon this sense of obligation, The Bank have at times encountered serious inconvenience and loss in order to enable them to comply with the requirements of the Government; selling, for instance, at a large sacrifice, portions of their public securities.

That there is at times a large amount of unemployed capital in the Money Market is certain, and there is no reason why the Treasury should not reap the benefit to be derived from its use. Treasury Bills were devised for the very purpose of enabling the Government to avail itself of these occasional redundancies of cash, and the experience of the present year demonstrates how successfully the instrument has worked in supplying the Exchequer with considerable sums at unprecedentedly low rates of interest.

The Bank at times holds large amounts of these Treasury Bills; and when the state of the Money Market has been at any time such as to cause fewer tenders to be made than would cover the requirements of the Government, The Bank has invariably come forward to supply the deficiency, although it may not have considered it advisable to tender at the time.

A statement could easily be framed exhibiting over a series of years the very moderate rates charged by The Bank upon advances to the State compared with the Market rate of discount or with The Bank’s charge to its ordinary Customers.

‘In conclusion,’ wrote Currie, ‘I would observe that the practice which has hitherto prevailed enables the State to depend upon The Bank of England for any Advances it may require, at all times, upon the most favourable terms; whereas offers from any other Bank would probably only be made under exceptional circumstances when it suits the interests of that Bank to make them.’ And he finished with what he clearly trusted was his killer point: ‘It must be borne in mind that any transactions between the Treasury and a Joint Stock Bank would certainly be known, whereas those subsisting between the Treasury and The Bank are accompanied with a secrecy greatly to the advantage of the State.’ To the extent that the Bank did indeed retain its monopoly of Ways and Means advances (short-term loans by the Bank to government to enable the latter to balance its immediate books), the governor’s missive worked; but the very fact of the letter was troubling enough.

‘The Declining Power of The Bank of England’ was the title of a leading article in the Bullionist in early 1890. Noting that the official rate of discount had been 6 per cent for several weeks, ‘yet this high rate has failed to attract gold, as it would have done in years gone by, when the power of The Bank of England had not been diminished substantially’, the paper argued that the Bank had not only lost control over ‘the Home Discount Market’ – ‘partly by its own antiquated methods of procedure and practice, and partly because of the active operation and greater liberality of its powerful competitors, the large joint-stock banks’ – but was also by this time significantly less influential in relation to ‘foreign money markets’, with London ‘not the monopolist of gold which it once was’, as increasing quantities of gold went instead to Germany and the United States. In consequence of all of which, declared the Bullionist, the Bank ‘finds itself in tight places’.¹⁸

By now the buck stopped with Currie’s successor but one, William Lidderdale, who in his mid-sixties had become governor the previous year. His own background was part Scottish, part Merseyside, and since the 1860s he had been the London partner of the Liverpool-based merchants Rathbone Brothers, developing in the process a distinct scepticism about the much trumpeted virtues of the City. He also had a clear-sighted view of the Bank’s weaknesses, and during the first seven months or so of 1890 took significant action on a handful of fronts, all designed to strengthen Bank control. These included raising its price for gold from Paris and no longer making importers of large bars bear the charge for melting; securing deposits from the new county councils; managing more closely the India Council’s considerable balances; seeking to co-ordinate the market actions of the Bank and the Treasury; pushing for greater business with the provincial banks; and jettisoning the last remnants of the 1858 rule, thereby readmitting the discount houses to regular borrowing and rediscount facilities at the Bank. This vigorous approach won praise. ‘It is said,’ noted Hamilton in August 1890, ‘that Lidderdale is considered in the City to be the best Governor the Bank has ever had (not excepting Collet). He always knows his mind, & his judgement is very good.’ But Lidderdale himself was far from satisfied with the larger situation, writing a few weeks later to the Treasury’s Sir Reginald Welby:

I don’t think any one who has not sat for 2 years in the Governor’s chair during the last decade can realise fully – the dependence of the English Banking system upon the Bank – the difficulty that this dependence creates in our management. Banking liabilities have enormously increased, not so Bankers’ reserves, & this makes our burden much heavier than before & leads to fluctuations in rates quite out of proportion to actual movement of currency.

Lidderdale’s particular grievance concerned the joint-stock bankers and their tendency to remove without warning their already inadequate balances from the Bank; as for bankers as a whole, he frankly told Welby that ‘a less public-spirited class … I do not know’.¹⁹ In the event, however, it was to be the hubris of a merchant banker that would put him to the ultimate test.

‘Went to the Bank, things queer!’ noted Goschen in his diary on about 10 October 1890. ‘Some of the first houses talked about. Argentine, etc, have created immense complications. Uncomfortable feeling generally.’ Over the next few weeks it emerged – though not to public knowledge – that the City house in most serious trouble was Barings, second in prestige only to Rothschilds but guilty of having rashly over-committed itself in the Argentine (site of a lethal blend of political chaos and financial mismanagement), and whose head was Edward (‘Ned’) Baring, elevated to the peerage as Lord Revelstoke five years earlier. A man of considerable ability but also high self-importance and poor judgement, he had been a director of the Bank since 1879; and it is possible that in 1887 he had had a moment with the governor of the day, James Currie, with the latter writing to him, ‘I am sorry that you express a feeling that the Junior Members of the Court [that is, including Revelstoke himself] have practically nothing whatever to do with the management of the affairs of the Bank.’²⁰

What became known as the Baring Crisis – in time as the first Baring Crisis – began for real on Saturday, 8 November.²¹ Early that morning, the merchant banker Everard Hambro, one of Revelstoke’s two closest friends in the City and likewise a Bank director, called first on Nathaniel (‘Natty’) Rothschild (who in 1885 had been elevated to the peerage at the same time as Baring), in order to put him fully in the picture, and then on Revelstoke himself, who bleakly informed him that he would be able to say on Monday whether or not Barings could go on. In response, Hambro told Revelstoke that the only person who could help him now was the governor; and, befitting a crisis that would be played out almost entirely behind closed doors, he arranged that Lidderdale should come to Hambros in the afternoon so that he could discreetly see Revelstoke. At that meeting – before which Lidderdale scribbled a note to Goschen asking him to come to the Bank first thing on Monday – Revelstoke and a fellow-partner presented to the governor and Hambro ‘a preliminary statement of their affairs’, in Lidderdale’s retrospective words, ‘which rendered it uncertain whether the Firm would have any surplus after payment of their liabilities’. In an unsurprisingly strained atmosphere, the governor, who had probably only discovered that day that Barings was in such dire, life-or-death straits, contented himself with observing that he needed further particulars and would wait until Monday to see whether Barings could continue. Already, though, he must have begun to see that the consequences of Barings going down were almost unthinkable: not only would the collapse of the City’s leading accepting house (that is, merchant bank), the world leader in trade finance, inevitably bring down an array of other firms, including all the discount houses, but the very status of the bill on London would be endangered and thus the pre-eminence of the City as an international financial centre.

Lidderdale occupied Sunday by taking his small son to London Zoo, but next morning was ready to receive the chancellor. ‘To the Governor of the Bank,’ recorded Goschen:

Found him in a dreadful state of anxiety. Barings in such danger that unless aid is given, they must stop. —— [that is, Revelstoke] came in while I was there; almost hysterical. Governor and he both insisted that the situation could only be saved if Government helped … Picture drawn of the amount of acceptances held by various Banks, which would have to stop. All houses would tumble one after the other. All credit gone. I entirely understood their reasoning, but remembering action taken in France when [in 1889] Comptoir d’Escompte was in difficulties, I said the great houses and banks in London must come together and give the necessary guarantees. This was declared impossible if the Government didn’t help.

The chancellor then called on two other (unnamed) bankers, who were likewise adamant that government help was necessary. ‘Both quite demoralised,’ noted Goschen. ‘Lidderdale much more of a man and keeping his head, though certainly he pressed me hard.’ That evening and into the small hours, after he had attended the lord mayor’s annual Mansion House banquet for bankers and merchants, Goschen agonised. ‘If I do nothing and the crash comes I shall never be forgiven: if I act, and disaster never occurs, Parliament would never forgive my having pledged the National credit to a private Firm.’ At last, his ‘night thoughts’ convinced him of the difficulty as well as undesirability of seeking to carry direct aid in Parliament: ‘How defend a supplemental estimate for a loss of half a million! And would not immediate application put the whole fat in the fire?’ The City, in short, would apparently have to rely on itself.²²

Over the next three days, Tuesday to Thursday, there were four main aspects-cum-developments. Firstly, neither Goschen nor Lidderdale giving ground, with the governor still insistent that the Bank could act only within a larger umbrella provided by government; secondly, the Bank persuading the Russian government not to make the £1½ million withdrawal from Barings due on the 11th; thirdly, after Lidderdale on the Monday had urged Goschen to get him involved, Natty Rothschild emerging as a constructive figure, not only leaning on the Bank of France to lend £3 million in gold to reinforce the Bank’s badly stretched reserves, but exercising informal pressure on his good friend the prime minister, Lord Salisbury, to take a less passive approach to the crisis; and fourthly, the real key, Lidderdale deciding to appoint a two-man committee to determine whether Barings was solvent in the long run, in other words whether it was worthy of rescue. The committee comprised the octogenarian director Benjamin Buck Greene and the leading banker Bertram Currie, the latter happening to be Revelstoke’s other particularly close City friend, the two men going back many years. ‘I don’t like to come & see you & hardly think I ought to write,’ a highly emotional Revelstoke wrote to Currie after the appointment was made, ‘but I cannot help sending one line in my wretched agony to implore you to do what you can. I know you will & I am sure you feel for us all in our nightmare.’²³

Friday the 14th, the decisive day, unfolded in three acts. The first took place at the Bank, where it became clear that in the view of Greene and Currie, notwithstanding Barings’ urgent need for a huge cash loan of up to £9 million, ‘if sufficient time be given for realizing the assets … the Firm will be left with a substantial surplus after discharging their liabilities’. ‘I must frankly say,’ Greene himself would subsequently write to Lidderdale about his memories of that morning, ‘that as the amount required was so large … I considered the shutters must go up soon after I reached The City, instead of which on delivery of the report to my surprise you instantly said “They must be carried on …”.’ At the same time, it was also becoming clear that, after almost a week of successful news management, the City at large was beginning to give way to outright panic. At about noon John Daniell, senior partner of Mullens the government brokers, rushed into the Bank, beseeching Lidderdale with his arms aloft: ‘Can’t you do something, or say something, to relieve people’s minds? They have made up their minds that something awful is up, and they are talking of the very highest names – the very highest!’ During the next hour, Barings’ bills started to pour into the Bank, as hardly anyone else would purchase them, though the Bank itself was naturally anxious that, with the value of those bills plummeting, it stood to make a serious loss when it came to reselling them; and at about two o’clock, with the entire credit of the City at peril, Lidderdale slipped quietly out of the Princes Street door.

He took a circuitous route until he secured a hansom cab to drive him to Downing Street. There he did not meet Goschen, who was committed to speak in Dundee that evening and believed he had to fulfil the engagement in order to avoid panic. Instead his place was taken by W. H. Smith (first lord of the Treasury), soon accompanied by Salisbury. For at least an hour there was give from neither side. At one point Salisbury offered authority to suspend once again the Bank Charter Act; but this the governor (as he was to recall) ‘emphatically refused’, declaring that ‘reliance on such letters was the cause of a great deal of bad banking in England’. Eventually, Lidderdale played his highest card:

I told Lord Salisbury I could not possibly go on with the matter at the Bank’s sole risk; that the Bank had been taking in Baring’s Bills all the week, pending the investigation; that they were probably coming in fast now that alarm had set in, and that unless Government would relieve us of some of the possible loss, I should return at once and throw out all further acceptances of the Firm.

This threat carried the day, as Salisbury and Smith in effect gave Lidderdale just under twenty-four hours to save Barings, promising that government would meet half the loss resulting from the Bank taking in Barings’ bills up to early afternoon on Saturday. By 5 o’clock, mercifully spared the traffic gridlock of late-Victorian London, the governor was back at the Bank for the day’s final act.

Bertram Currie was one of those waiting for him, as Lidderdale summoned an immediate meeting in his room and declared his intention of launching a guarantee fund for Barings, in effect a ‘lifeboat’, with the Bank itself putting up the first million pounds. Currie quickly responded by saying that his own bank, Glyn Mills, would contribute half a million provided that Rothschilds did the same. Moments later Natty Rothschild entered the room. Would he agree? ‘He hesitated and desired to consult his brothers,’ recalled Currie, ‘but was finally and after some pressure persuaded to put down the name of his firm for £500,000.’ What pressure? According to Hamilton, his ear close to the ground, it required Lidderdale to say bluntly to Rothschild: ‘We can get on without you.’ What would have transpired if Rothschild had called Lidderdale’s bluff is an unanswerable question. But he did not, and the success of the guarantee fund was assured: over the next half-hour the City’s elite rushed to contribute. Subscribers to the first list included Raphaels (£250,000), Antony Gibbs and Brown Shipley (£200,000 each), and Smith Payne & Smiths, Barclays (still a private bank), Morgans and Hambros (£100,000 each). That evening, Lidderdale met representatives of the five leading joint-stock banks, who put themselves down for £3¼ million. Essentially, the fund indemnified the Bank against any losses arising out of advances made to Barings to enable it to discharge its liabilities; and the certainty was that Barings – and the City – would now be saved.²⁴

‘The Bank of England has added to its historic services to the State and to the commercial community by prompt and courageous action which has averted a lamentable catastrophe,’ applauded The Times next day. ‘Thanks are due to the present energetic administration of the Bank, not only for providing for a vast reinforcement of the stock of gold to meet the possibility of the exceptional demands that arise out of panic, but for stepping out of the ordinary routine of business to prevent the downfall of one of the greatest and most respected of English financial houses …’ In the event, not all was sweetness and light over the following week, with Lidderdale for his part distinctly unhappy about the response from north of the border. ‘I am ashamed of my countrymen,’ he wrote on Tuesday, 18 November to the London manager of the Bank of Scotland:

£250^m [that is, £250,000] each from the three most important Scotch Banks as a contribution towards our effort to avert a national disaster! You Scots Bankers are dependent upon the Bank of England for the prompt return of the large sums employed in this market, and for the safety of a considerable part of the security you hold against that money. If the Bank of England had failed to save Barings, not a bill you hold would have been beyond question.

Next day, Wednesday the 19th, it seemed for a few hours in the City as if the guarantee fund had never been, with one well-informed banker, John Biddulph Martin, relating in his retrospective account a loaded encounter:

A rumour, more or less well founded, that the joint stock banks had announced that they would call in all loans from the Stock Exchange, caused almost a panic in the morning; it was certain that the Governor of the Bank of England called the managers in and told them that if they would not give their customers reasonable accommodation, they must not themselves look to the Bank in case of need. Thereupon they let it be known that they would make advances as usual, and a general improvement all round took place immediately. This seemed to be the turning point, and the crisis was at an end.

So it was; and at the end of the year, Lidderdale received a formal deputation from the Committee of the Stock Exchange, expressing admiration in their address for ‘the masterly ability with which the measures of yourself and the Court of Directors were carried out in the negotiations in this Country and abroad’ – and ‘more especially’ for ‘the firm and decisive manner, in which your great influence as Governor was so wisely and courageously exercised, that a panic of unparalleled dimensions was averted’. Lidderdale’s reply was characteristic: ‘I shall always remember with pride and satisfaction that, in the opinion of such a body as yours, in a moment of danger I was able to do my duty.’

The successful resolution of the crisis did not preclude the odd external criticism, notably – and perhaps predictably – from the Economist. For one thing, there was the issue of moral hazard, for another thing there was the question of being too big to fail. Neither phrase was in the contemporary vocabulary, but that was the gist of the paper’s critique in its issue dated 22 November: the guarantee, it argued, had been ‘rather too far reaching’; and it expressed anxiety about a precedent being set in which, after a sufficiently large financial institution had over-committed itself ‘to the extent of a sufficient number of millions’, this would automatically mobilise the banking system as a whole ‘to tide them over their difficulties’.²⁵ What contemporary analysis tended not to focus on was a comparison of the 1866 and 1890 crises – in particular, why the Bank had chosen to rescue Barings less than a quarter of a century after it had decided to leave Overend Gurney to its fate, even though Overends did in time pay its creditors. The answer lay partly in the objective and more or less accurate assessments made at the time about the larger damage that would be caused by the failure of those houses; but it also lay partly in more subjective considerations. Overend Gurney prior to 1866 had spectacularly blotted its copybook in the Bank’s eyes, whereas Barings in 1890 was supremely the establishment’s – political and social as well as financial – inside house. More than almost all his colleagues, Lidderdale may have been a semi-outsider in the City; yet as governor of the Bank he could not help but be, like Barings, at the very centre of a whole nexus of assumptions, influence and connections. Ultimately, the lesson of the crisis was that the establishment would always do its best to look after its own; and nowhere more than in the City, still in many ways an intimate and village-like place, did it pay to be fortunate in one’s friends.