Till Time's Last Sand

by David Kynaston

  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