Till Time's Last Sand

by David Kynaston

  Fauntleroy met his maker on the last day of November 1824, almost exactly a year before the City was hit by arguably the most acute of the several financial crises of the first half of the century. The collapse of an absurdly overblown boom in ill-judged foreign loans and company promotions, speculative overtrading in imported commodities, rashness on the part of the country banks, the Bank’s credit policy veering between complacent expansion (fuelled in some measure by the perceived need to make up for lost paper-money income) and over-sharp contraction – all these factors undoubtedly played a part in the humdinger 1825 crisis. ‘The abundance of money has led to a variety of speculations in England, and scarcely a week has passed but some new company was founded to direct a wild projected adventure,’ reflected Thornton as early as New Year’s Day. ‘What must be the cure of this mania time only can show.’ Part of the problem as 1825 unfolded was a signal lack of co-ordination between government and Bank, even as bullion drained steadily away, down from almost £12 million the previous August to £3.6 million a year later; and when in autumn 1825 the Bank did start belatedly to reduce its note issue and ration its discounts, the effect was a sudden and almost total collapse of credit generally. ‘There is a tremendous pressure upon this town, & I suppose almost all the Bankers are more or less distressed,’ J. J. Gurney (a member of the great Norfolk banking family) found in mid-November on a visit to the capital. ‘The root of the difficulty is in the Bank of England, where they are extremely restricting their discounts with a view to producing a favourable effect on the exchanges, so as to prevent their being run upon for gold.’ And he added darkly: ‘It seems strange that the pecuniary facilities of the whole realm should thus depend on the management of a small despotic Committee.’9

  The pace quickened from early December, with runs on country banks under way and the Bank, reversing its recent policy, starting to discount largely. An especially piquant drama was played out at the City private bank Pole, Flinton, Free, Down & Scott, whose elderly senior partner, Sir Peter Pole, was connected by marriage to the Bank’s governor, Cornelius Buller. That bank, in generally poor shape and not helped by its extensive country banks agency, had been suffering from a run since the 1st; and on Sunday the 4th Buller persuaded his fellow-directors to lend it £400,000. For an intensely relieved Marianne Thornton (‘from the deepest sorrow, we are all at once the happiest of the happy’), sister of the young partner Henry and niece of Samuel, it proved a false dawn. News on the 8th of the failure of Wentworth & Co, a leading Yorkshire bank, prompted a severe run on the country banks; and Poles on Monday the 12th stopped payment, intensifying the general sense of crisis in the City. That week, the Court met almost every day, and some years later the veteran director Jeremiah Harman would make a celebrated claim about how the Bank during those desperate days sought to restore credit:

  We lent by every possible means, and in modes that we never had adopted before; we took in stock as security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on deposit of bills of exchange to an immense amount; in short by every possible means consistent with the safety of the Bank; and we were not upon some occasions over nice; seeing the dreadful state in which the public were, we rendered every assistance in our power.

  Perhaps there was a degree of exaggeration – for instance, it was not until Wednesday the 14th that the Bank abruptly jettisoned its policy of refusing discounts on bills longer than ninety-five days – but the substance probably holds; while, at the other end of town, the Cabinet on the 15th authorised the issue of £1 notes, on condition that such issue was ‘understood to be strictly temporary’.

  Next day, Friday the 16th, the situation remained critical. That morning, the diarist Mrs Arbuthnot and her husband (a Treasury minister) were put in the picture – charged and fractious – by the member of government closest to the City:

  Mr Herries told us that such had been the extraordinary demand for gold to supply the country bankers & to meet the general run upon them that the Bank of England was completely drained of its specie & was reduced to 100,000 sovereigns … The Bank expects to be obliged to suspend cash payments tomorrow, and they want the Government to step forward to their assistance & order the suspension. Lord Liverpool is unwilling to do this & wishes the Bank to do it upon their own responsibility. By Mr Herries’s account there seems to be considerable irritation between the Govt & the Governors of the Bank … Rothschild has made most gigantic efforts to assist the Bank & he told Mr Herries that, if he had been applied to sooner, he wd have prevented all the difficulty. As it is, if they can hold out till Monday or Tuesday, he will have enormous sums over in sovereigns from Paris, & the pressure will be entirely relieved …

  The exact timing and extent of Rothschild’s contribution would be disputed over the years, but there is evidence that even on that Friday he managed to get paid into the Bank a significant amount of bullion, possibly as much as £300,000. In any case, that evening the Cabinet met and eventually, after five hours, reached a political compromise about the Bank’s demand. The key figure was Wellington, who on the one hand reluctantly acceded to Huskisson’s insistence that the Bank should not be allowed to exploit the crisis as a way of going off gold, and on the other persuaded his colleagues that Huskisson’s wish to deprive the Bank of its Charter, should it be forced to stop cash payments, was absurd. ‘He told Lord Liverpool,’ recorded Mrs Arbuthnot about the resolute Iron Duke, ‘that while there was life there was hope; that there was a chance of the Bank standing & while that chance remained, he wd not despair; that the Government were bound to support them to the very utmost of their power … for that their interests were those of the country.’

  Over the weekend, the Bank managed to avoid suspension of cash payments – possibly helped by the chance discovery, according to a well-worn story that may or may not have been true, of a large box of unissued £1 notes, but certainly assisted by a fresh supply from the printers of £5 and £10 notes. By Monday, or Tuesday at the latest, Rothschild had come through with major tranches of gold from France; and by Christmas Eve the run on the Bank’s reserves was conclusively over. ‘For the extraordinary exertions of the clerks,’ remembered Samuel Harrison about some of the Old Lady’s most demanding weeks, ‘they were rewarded with a gratuity each of £10 and £20. I missed by a half-year’s service coming under the latter category though working as much as any.’10 The cost of the crisis had been – and would continue to be – severe, involving amid much else the collapse of numerous country banks. The Bank itself had just about survived unscathed, but it did not take a Nostradamus to predict that a major overhaul of the nation’s banking system, including the Bank’s place in it, would soon be under way.

  Liverpool himself took the initiative as early as January 1826. England’s existing banking structure was, he informed governor Buller, ‘unsound and delusive’, in which ‘the effect of the law at present is to permit every system of banking except that which is solid and secure’. He proposed therefore two main structural changes: first, that the Bank would have to give up its historic monopoly on joint-stock banking, in order to allow the creation of joint-stock banks with greater financial resources and stability than the country banks, confined to a maximum of six partners; and second, that the Bank itself should establish branches in the provinces, thereby further reducing the influence of the country banks. In both cases the Bank reluctantly agreed, though in the former successfully insisting that the new joint-stock banks should be confined to areas sixty-five miles or more outside London. As for the latter, it seems to have been a matter of some internal debate. ‘My opinion was that the branches would give increased stability to the currency generally,’ recalled Norman three decades later. ‘That they would augment the necessity for, and the importance of, the Bank of England, which was then at a low ebb, and that they would furnish large profits to the proprietors.’ Accordingly, ‘I carried my point in spite of the opposition of most of
the seniors and of the Committee of Treasury.’11

  Those two major changes may have been forced on the Bank, but soon the Bank itself was seeking to be more proactive, even to stake – as it had seldom or never done before – the intellectual high ground. Following an initiative by William Ward, 1827 saw the rescinding of the resolution that the directors had put forward in 1819 to the parliamentary committee on resumption – a resolution that had obstinately denied that the note issue could have any impact on the foreign exchanges. Then, over the next few years, John Horsley Palmer really came to the fore, as deputy governor from 1828 and governor from 1830. His contribution was threefold: resisting a Huskisson plan to introduce a form of bimetallism (that is, a monetary system in which the currency is backed by silver as much as it is by gold), effectively arguing that the Bank already possessed enough silver bullion to overcome panics and ‘combinations made to their prejudice’; pushing increasingly hard (as far as political circumstances allowed) for the note issue to be centralised upon the Bank; and above all, starting to implement what would become known as the ‘Palmer Rule’ – essentially, a currency principle by which the Bank’s deposits and note circulation would fluctuate in relation to its holding of specie, in effect seeking to further the Bank’s operational independence from government, while at the same time being entirely consistent with Palmer’s conception of the Bank as fundamentally a public rather than a private institution. George Warde Norman, although as an economist uneasy about the specifics of the principle itself, did not underestimate Palmer’s achievement. Whereas, he reflected, ‘the absurdities of the Harmans &c of former days as to the uselessness of adverting to the state of the exchanges in managing the Bank of England’ had ‘disgusted sensible men and made them regard the Bank as a great overgrown job, deserving of being consigned to the Limbo of things’, it was Palmer by contrast who ‘first abandoned the rule of thumb system of management, or rather the absence of all rule’, and ‘devised a principle which although not quite sound, had at any rate some reference to sense and reason, and he thus won for us many and powerful adhesions’.

  Palmer’s strength of will came fully into its own during 1830, as the Wellington government sought, against a darkening economic backdrop, to end the 65-mile restriction on the new joint-stock banks. Wellington’s chancellor was the capable Henry Goulburn, whose biographer notes that Palmer ‘proved to be as formidable and skilful a defender of a strong position as Wellington had been on many a battlefield’. Eventually in April, after two months of correspondence and meetings, negotiations were suspended, but not before Goulburn had told Palmer to his face that ‘he [Goulburn] thought it to be quite practicable to obtain the formation of a new Bank, which would be willing to undertake the management [of government business] without any charge for that agency, considering itself sufficiently compensated by the collateral advantages which it would derive from the countenance & support of Government’ – a threat that the newly elected governor seems to have ignored. In September, not long before the fall of the ministry, the two men talked again. Might the government be willing, asked Palmer, to give, prior to the establishment of any further joint-stock banks, a ‘fair trial’ to extending the circulation of the Bank’s notes? Might the government also be willing to restrict heavily those new banks in the issuing of their own notes? To both questions, Goulburn answered in the negative, leaving a difficult relationship to end with neither side happy.12 Even so, as both men were well aware, the Bank’s Charter was up for renewal in only three years, and inevitably these and related matters would soon be revisited.

  Before then, there was the small matter of a profound political crisis over the extension of the franchise. In October 1831 the House of Lords rejected the Whig government’s Reform Bill, leading to widespread riots, including loss of life at Bristol – where an attempt was made to blow up the Bank’s recently opened branch. Then the following spring came the dramatic ‘May Days’, as the anti-reform Wellington sought to form a government. By Sunday the 13th, a placard devised by the leading radical Francis Place – ‘to Stop the Duke, Go for Gold’ – was widely on display in London. Hectic scenes ensued over the next two days. ‘The demand for gold at the Bank is increasing,’ reported The Times’s ‘Money-Market and City Intelligence’ on Monday evening. ‘The counter in the Cashier’s office at which sovereigns are obtained, was beset during the whole day with applicants.’ And the following evening, after another day of ‘a steady demand for gold’: ‘Every man of common understanding is convinced that the gold in the Bank will be exhausted in a week if a Tory Ministry is appointed in the face of the obstinate determination against it on the part of the people.’ The Bank itself, quite apart from making substantial purchases of bullion, took action on Wednesday the 16th. ‘Under the peculiar circumstances of the moment,’ as Palmer explained to the Court next day, a notice was issued stating that the Bank was ‘ready to receive applications for Loans upon the deposit of Bills of exchange, Exchequer Bills, East India Bonds, or other approved Securities’ – a significant panic-averting move. By the end of the week it was clear that Wellington was not going to be able to form a ministry, and by early June the Great Reform Act was a reality. How decisive had Place’s intervention been? Accounts have differed, not helped by the Bank’s continuing reluctance in the 1830s to disclose figures, though according to one informed calculation as much as £1.6 million of gold drained away in the course of a week or so; and Michael Brock, in his authoritative history of the reform crisis, reflects that the key politicians ‘may well have known that the figures popularly given for the Bank’s reserves were too high’.13

  The ‘Go for Gold’ drama was barely over before, on 29 May 1832, a parliamentary committee – which included Peel, Goulburn and the chancellor of the exchequer, Lord Althorp – began taking evidence in connection with the renewal of the Bank’s Charter. Sole witness for the first four days was Palmer (entering his third year as governor), who lost little time in stating his Rule:

  What is the principle by which in ordinary times the Bank is guided in the regulation of their issues? – The principle, with reference to the period of a full currency, and consequently a par of exchange, by which the Bank is guided in the regulation of their issues (excepting under special circumstances) is to invest and retain in securities, bearing interest, a given proportion of the deposits, and the value received for the notes in circulation, the remainder being held in coin and bullion; the proportions which seem to be desirable, under existing circumstances, may be stated at about two-thirds in securities and one-third in bullion; the circulation of the country, so far as the same may depend upon the Bank, being subsequently regulated by the action of the Foreign Exchanges.

  Perhaps the most telling sequence, though, came after Palmer had agreed with a questioner that the Bank should be ‘a bank of discounts only in cases of emergency’:

  Is not the accommodation of discount to the commerce of the country, one of the main objects for which the Bank has ever been instituted, and for which all banks are instituted? – As an exclusive Bank of issue in the capital, it appears to me that it cannot beneficially conduct a discount account to any great extent with individuals, except in times of discredit. When the circulation is full, a competition with the bankers would in all probability lead to excess …

  Then you consider that it ceases to become the paramount duty of the Bank, because there are other bodies, in the shape of private bankers, and so on, that do it? – Yes, who employ the circulation.

  What do you consider as the principal function which it is the duty of the Bank to perform? – To furnish the paper money with which the public act around them, and to be a place of safe deposit for the public money, or for the money of individuals who prefer a public body, like the Bank, to private bankers.

  Are not those functions the functions of a Government rather than a private company? – That is for the Government to determine.

  Other Bank witnesses included the former governors
Harman, growling six years on from the joint-stock legislation that he was ‘always jealous of the measure’, and John Richards, dismissing concerns about the Bank’s lack of transparency and declaring that ‘the best security you have is to get individuals of integrity to manage it’. Among non-Bank witnesses, a powerful sense came through of major City figures closing ranks around its indispensable if sometimes unloved institution. ‘Speaking generally, it is exceeding well managed,’ insisted Samuel Gurney, the square mile’s dominant bill broker; ‘I feel the management, and I know that it is good,’ agreed Nathan Rothschild; while George Grote – private banker, the City’s main pro-reform spokesman during the political crisis, and future historian of Greece – explained how in times of difficulty ‘a man can get to the Bank without that special, permanent, and exclusive connexion which he preserves with his own Banker, and which cuts him off from all other Bankers’. Particular attention was paid to the evidence of Samuel Jones Loyd, by now emerging among the City’s private bankers as the intellectual heavyweight on monetary subjects:

  Is not the Bank of England as much an engine of Government, and an establishment performing the functions of Government, as it is an engine performing the functions and connected with the interests of a private company? – The Bank of England is a body issuing currency, which is the public currency of the country, and at the same time performing Banking business …