These were also the years of cheap money, with Bank rate at only 2 per cent from February 1894 to September 1896, further reducing the Bank’s already squeezed income. How to increase it? The obvious answer was to grow the Bank’s business in its provincial branches (several now housed in splendid buildings, such as Hardwick’s Italian-style Leeds branch), an approach that would also do at least something to redress the balance in relation to the ever-vaster resources and thus potential leverage of the joint-stock banks. It was a policy that engendered predictable resentments. ‘We do not complain about fair competition but this is fostered by free money costing the lender nothing at all,’ one leading provincial banker, Beckett Faber of Beckett & Co, asserted in May 1896 to the Central Association of Bankers. ‘How can we country bankers who pay well for our deposits meet such competition as this? Our loans are taken from us; our bills no longer exist in our cases and our current accounts are “touted” for …’ Faber finished with a dark warning: ‘The time is already arriving, if it has not already arrived, when the Bank of England must choose whether to be the banker for the Government or a commercial bank. It cannot be both …’ Over the next year or so the Bank did hold out the occasional olive branch, at one point promising Faber it would instruct its agents not to compete ‘unduly’ with their neighbours. But from March 1897 the man in overall charge of the branches was Ernest Edye, one of the more driven figures in the Bank’s history, operating semi-autonomously and producing in his first seven years an annual average profit of some £145,000, almost double what it had been over the previous nine years. ‘I hear from all sides that at the Branches they have adopted an aggressive and an irritating policy,’ a well-informed London bill broker told a visiting country banker in May 1899, adding that ‘I suppose they have too much regard for the power of the London Banks to go on similar lines here.’ That may well have been true; but the underlying reality by this time was not only that the great joint-stock banks had been getting vexed by the Bank’s competitive policy in the provinces, but also that they had become, by virtue of their enormous balances, so dominant in the London money market that they naturally wished for a tangible expression of that power. What better stick with which to beat the Old Lady than gold reserves? Later that summer both the Central Association of Bankers and the Committee of the London Clearing Bankers voted to set up committees on the subject; and in August the Bankers’ Magazine floated the idea of the joint-stock banks keeping their own bullion reserve at the Bank – but ‘withdrawable only by the associated banks, and held apart from the uncontrolled discretion of the Bank of England’.10
That autumn saw the start of the Boer War. ‘The clearest and most dramatic instance of the operation of the world-wide forces of international finance,’ would be J. A. Hobson’s famous verdict soon afterwards on its causes; and over the years historians have sought to establish – often on slender empirical evidence – connections, whether in the City or in the official mind, between London as the world’s only free gold market, the unsatisfactory state of the bullion reserve and the long-term ensuring of a regular supply of gold from South Africa. Yet even if there is no smoking gun, and even if one concedes (as one should) that there was a significant non-economic dimension to government policy, it is hard to deny the proximity of the two facts that South Africa meant gold and that gold had become the very pivot of the City’s existence. Certainly, during the febrile days of October 1899, the City was firmly to the fore of popular support for the war, culminating in a mass meeting at the Guildhall loudly backing the Tory government’s strong line. Among those making speeches were Samuel Gladstone the present governor, his predecessor but one A. G. Sandeman (‘the merchants of the City of London and of Great Britain are very adverse to having their affairs unsettled by war, but when the occasion arises, when the necessity is seen, as in this case, they rise as one man’), and William Lidderdale, who in a more nuanced speech regretfully saw no alternative and called for ‘a merciful victory’.
Meanwhile, discussion continued for some time about the gold reserves question, until early in 1900 the Union Bank of London’s Felix Schuster, emerging as a dominant figure in the banking world, announced that it could not be systematically considered again until after the war. That did not stop him, speaking a few months later at the Institute of Bankers, from offering some broader thoughts:
What we require is co-operation, and not legislation. More harmonious working together, although we compete with one another; more harmonious working towards one common end is absolutely necessary, not only between outside bankers, but between us and the Bank of England. In every foreign country, I believe, the State Bank has on its Board representatives of all the other great Joint Stock institutions in the banking world. The State Banks are practically managed, or supervised, by those whose special experience lies in the banking line. I hardly think that such a thing is practicable here – I would not advocate it for a moment – that is not in my mind; but I should think some means could be devised by which the Bank of England, instead of holding itself rather aloof from other banks, should periodically meet us and tell us what their views of the situation are, and that we should from time to time discuss a common policy, and act harmoniously with one another, instead of acting in the dark, as we are doing now, quite unaware of what may be in the minds of the Bank of England …11
In short, though Schuster refrained from spelling it out, the time was fast approaching for the company of merchants to accept, at last, him and his joint-stock counterparts as first-class citizens.
The financing of the conflict did not on the whole enhance the Bank’s authority. ‘An addition to Consols’ rather than ‘a separate Stock’ was, governor Gladstone advised Hicks Beach in February 1900, ‘the best way for Government to raise the money to pay for this South African War’; but counselled also by Sir Ernest Cassel, the great cosmopolitan financier, Hicks Beach decided that a separate stock would appeal to a significantly broader public. The governor – senior partner of the East India merchants Ogilvy, Gillanders & Co, a first cousin of William Ewart Gladstone, and described by a leading bill broker as ‘unfortunately very self-opinionated’ – did not react well. ‘In conclusion,’ ended his response to Hamilton in early March on the draft prospectus for the £30 million loan, ‘I feel regret that the loan is not to be raised by an addition to Consols and would have preferred a terminable 3% annuity at par to a 2¾% one at a heavy discount …’ Nor was he any less disgruntled when, just as the prospectus was published, Hicks Beach summoned to his presence not just Gladstone himself but the City’s top bankers. ‘In my humble opinion,’ he told Hamilton, ‘their patriotism is a mere matter of price – make that attractive enough and there will be no danger of the loan not being subscribed.’ In the event the ‘Khaki’ loan proved a roaring success, with the chief cashier (H. G. Bowen, May’s successor) reporting that ‘scores of clerks are here every night until 10, 11, 12 and even ½ past one o’clock’ – work that would have been less demanding (albeit less profitable) if Gladstone had not successfully resisted the Treasury’s suggestion that applications could be made to the main London clearing banks as well as to the Bank itself: ‘I hope it will not be pressed. It is not necessary & therefore undesirable: please leave this paragraph alone & turn a deaf ear to the suggestions of other Bankers.’12
The war’s second loan, raising almost £10 million, came towards the end of the summer and again was not without some ill-feeling. Once more, Gladstone took with Hicks Beach a strongly pro-Consols line (‘would be more popular with the City and the public than any other form’); and once more the chancellor was swayed by Cassel, this time settling on Exchequer bonds. Significantly, in an initiative apparently owing little to the governor, just over half of the new loan was placed in advance in America, in the knowledge that this would attract large quantities of gold to London, at a point when the Bank’s reserve was at its lowest for the time of year for seven years. The Treasury’s view was that that advance placing should ha
ve been stated in the prospectus, but, noted Hamilton, ‘the Bank of England are averse to this, and think we can arrange the matter by closing the list as soon as the sum required has been applied for’. The upshot was intense City criticism, with the Bank not only accused of withholding material information but also of angering some key players through its surely reasonable decision to close the lists as soon as it knew that the balance had been subscribed. ‘The Bank of England!’ privately groaned one leading merchant banker. ‘If that old institution is not reorganised on some better basis it will bring us into trouble yet.’
Things proceeded rather more smoothly for the rest of the war, including major tranches of Consols (at last) being issued in April 1901 and April 1902, raising between them over £86 million. Both were thoroughly international operations, involving a New York syndicate headed by Morgans and a London syndicate headed by Rothschilds, with the Bank helping to arrange matters, as well as each time itself taking up several millions.13 Even so, for those in the City who kept a close eye on such things, it was already clear enough from the circumstances of the earlier loans that the Bank now needed to raise its game.
‘The Bank all through gave an extraordinary impression of wealth, quality, permanence,’ recalled Janet Hogarth, evoking how ‘it was almost unbelievably soothing to sit in a quiet upper room with walls about two feet thick, looking into a soundless inner court, with nothing to do but lay out bank-notes in patterns like Patience cards, learning all about the little marks on them, crossing them up in piles like card-houses, sorting them into numerical order, counting them in sixties and finally entering their numbers in beautiful ledgers made of the very best paper, as if intended to last out the ages’. Yet for her, with a particularly strong sense of the possibilities of life outside Soane’s walls, the accumulated weight of the years cut both ways:
The Bank was full of eighteenth-century, and even earlier, survivals. The dress of its gate porters, the ‘nightly watch’ going round with Guy Fawkes lanterns (I once asked them, when I met them at 4 o’clock on a summer Saturday afternoon, why they did this and they seemed hardly to know, except that it was an immemorial custom); the company of Guards coming in at sunset, their sentinels stationed in the courtyard; the Bank cats which a parsimonious Governor put down by docking their ‘allowance’; the great bars of gold and silver in the fortress-like bullion vaults, brought in from Lothbury under guard through an archway which looked as if it ought to have a portcullis; the almost human gold-weighing machines, which spat out light sovereigns sideways and let the rest fall in a steady stream into copper vessels like coal pans – all the significant evidence of Britain’s wealth and British solidity, so picturesque, so historic, so reassuring and, in the long run, so unbearably tedious. I used to wish a bomb would explode and wreck the Bank as the only way to get out of it …
That was not a perspective shared by de Fraine, unambiguously proud of the Bank’s historic traditions. In 1898, having already worked in several offices (including at the Law Courts branch, which had been opened in 1881), he was posted to the Chief Cashier’s Office, staying there until 1907 and finding it a pleasingly unhurried contrast to the ‘rough and tumble’ of the Bill Office, ‘where the great thing was to get the cheques into the Clearing House, and where there was always a small staff hunting out “differences” which were bound to occur owing to the frantic speed with which we had to make entries’. He also found the functions of the Chief Cashier’s Office enjoyably various, with in his case the work involving ‘a spell on “The Books”’, in other words collating all the figures necessary each week for the Committee of Treasury (meeting on Wednesdays) and the Court of Directors (meeting on Thursdays):
These Books, showing in detail all the figures of the week’s working, became my responsibility in due course. They were so numerous that I had to have a messenger to help me carry them. They were put beside the Governor’s chair in the Parlour a few minutes before the time of the meeting, and I had to have them removed immediately afterwards. It was also my job to take in a Book to the Governor, and another to the Deputy Governor, every morning, showing the previous day’s transactions. I was on ‘The Books’ for two years, and thus got to know by name at least a few of the Directors, which didn’t fall to the lot of most of the Old Lady’s brood.
During these two years, de Fraine introduced in the Bank (‘a little behind the times, perhaps’) the first graphs, making it easier for the governor of the day to grasp more easily the implications of the returns. ‘In time, there were quite a number, and he kept them in a special upright box standing by the side of his chair, which I saw every day.’14
Was that pre-1914 governor presiding over something recognisably akin to what later generations would call a ‘central bank’? In at least four distinct respects, the answer is surely in the negative:
A public body? For all its many important wider responsibilities, most of the time willingly shouldered, the Bank remained before the First World War a part-public, part-private institution, wholly making its own senior appointments and largely unaccountable to government or Parliament. ‘The Bank of England is trying to serve two masters,’ persuasively argued the Financial News in 1893, shortly before the May scandal broke:
One of these masters is the body of its own shareholders, whose dividends depend upon the amount of discount business done by the Bank, and who do not like to see their prospects injured by the successful competition of the open market; and the other is the vast interest of British credit, represented in the City mind by the amount of gold in the Bank’s vaults. The policy of the directors, as exemplified in their latest exploit of reducing the minimum official rate to 3 per cent, is too obviously the policy that animated Mr Facing-both-ways in Bunyon’s allegory. They want to get some of the business which now drifts into other channels, and they do not want to encourage withdrawals of bullion by foreign customers. As usual in similar attempts, they have adopted a compromise course which is not at all certain to achieve either of the desired ends …
The paper called in strong terms for the Bank’s precise character to be more clearly defined. In practice, however, little was done in that direction over the next twenty years; as for the Bank’s daily operations over that period, John Pippenger’s detailed analysis has shown that, despite its ultimate and abiding commitment to maintaining convertibility into gold, the necessity of continuing to make profits and thus to pay dividends significantly affected policy. ‘Like a normal commercial bank,’ he explains, ‘the Bank of England reduced reserves and the proportion [of reserves to deposits] as interest rates increased. The tendency to reduce the proportion as interest rates rose and raise it as nominal income increased meant that the Bank followed conflicting policies over the business cycle.’15
Attentive to the broader national economy? In reality it seems to have been entirely up to the Bank itself to what extent it prioritised the concerns of the UK economy. Certainly there was little government interference. ‘In pre-war days,’ recalled Sir Otto Niemeyer (a major figure at both the Treasury and the Bank) in 1929, ‘a change in Bank rate was no more regarded as the business of the Treasury than the colour which the Bank painted its front door.’ Yet on the part of British industry itself, certainly by the 1900s, a striking critique was starting to emerge. ‘That the constant and violent fluctuations in the Bank of England rate of discount are injurious to trade and commerce,’ declared in 1907 a motion at the annual meeting of the Association of Chambers of Commerce, carried once the mover had agreed to substitute the more tactful ‘frequent’ for ‘constant and violent’; later that year, the Association pushed for three representatives of the state to be co-opted on to the Bank’s Court, in order to judge whether Bank policy was ‘conducive to the welfare of the country and the advantage of trade and business’. Of course, the Bank was not wholly oblivious to the domestic implications of Bank rate rises made in order to protect its reserves or to forestall trouble. Indeed, it seems that sometimes, ‘out of tenderness f
or home trade’ (to quote R. S. Sayers), the Bank resorted to other, less damaging devices than Bank rate, such as intervention in the gold market, in order to raise rates in the money market. Even so, in the most thorough examination we have of the issue, another historian, Dieter Ziegler, has found relatively little evidence, on either a micro or a macro level, of such ‘tenderness’ – and, in particular, he stresses the absence of any appetite on the Bank’s part to use interest rates in a helpfully counter-cyclical way.16
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