Till Time's Last Sand

by David Kynaston

  By then, during the winter of 1926–7, a committee under Trotter’s chairmanship had been in action, seeking to stand back and look at the whole question of the governorship in a larger perspective. The evidence it took revealed a strong continuing attachment to the principle – if not hitherto in the 1920s the practice – of rotation, with a particularly thoughtful contribution coming from Baron Cullen of Ashbourne, as Cokayne had been since stepping down as governor. Expressing himself ‘greatly impressed’ by the argument of his fellow-director Sir Robert Kindersley that ‘if the Governorship of the Bank became a life, or even a long term, appointment it would be impossible long to resist pressure from the State – from whom the Bank derive their chief powers – to force its own nominee or nominees upon them’, he advocated a return to rotation from March 1928, noting pointedly that ‘any opposition to that course the present Governor could do much to prevent or allay’; and he went on to describe himself as ‘oppressed by the thought that even now we may, by departing for so long from the policy of our predecessors in this fundamental matter, have forfeited the magnificent legacy of independence which their prudence and altruism has secured for the Bank’. Cullen concluded with a not very soft impeachment, declaring of the period since 1920 that ‘if our action should lead to some loss of the Bank’s independence, posterity will assuredly say that it was forfeited by the laziness of the Court who found a “willing (and most capable) horse” and got him to do all the work rather than take their turn at the wheel’.

  The Committee’s eventual report – calling for rotation to resume in 1930 – went to the Committee of Treasury in September 1927 but never made it to the Court. Instead, the real battle was fought in autumn 1928, as Norman pushed hard for Sir Ernest Harvey (Nairne’s successor as chief cashier, then comptroller) to succeed in 1929 to the deputy governorship on a permanent basis, with – it was tacitly understood, given that he had come up through the ranks – no realistic prospect of succeeding to the governorship. Initially, there seemed to be a critical mass of opposition on the Court, as Cullen put forward a resolution proposing a return to rotation and Anderson was (in Revelstoke’s words) ‘condemning’ of ‘M.N. and all his works’. Yet again, however, Norman got his way, making at the following week’s Court ‘a most conciliatory speech’, as Cullen’s motion was defeated by a majority of two.22 Henceforth, the main internal threat to Norman’s position would be his own health, psychological as much as physical.

  From the point of view of many of the directors, there were arguably three main problems during these years. One of course was the absence of rotation: not only in flat contradiction to over two centuries of Bank custom, but directly detrimental to their own chances of advancing to the top position. They may have accepted the logic – in Addis’s words, in a lucid, influential memo in September 1926, ‘the old familiar ways of finance are abandoned, and it is mere illusion to suppose that we can ever return to them … we have reached a critical stage … there is much to be said for allowing a craftsman to complete his own work’ – but only with considerable reluctance. The second problem was Norman’s almost congenital disposition to hold all the cards that mattered as close as possible to his chest. ‘Of course he will have to reform his ways about keeping things to himself,’ Peacock wrote to Strong later in 1926 after the Trotter challenge had been seen off, but there is little evidence that Norman did so. Finally, there was the problem of the rise of the expert. The governor himself had few doubts that this was the way to go. ‘We were late in building up a body of professionals drawn from outside,’ he conceded privately in 1928, but certainly by the mid-1920s he was vigorous in taking belated action, with senior recruits including Sir Otto Niemeyer and Harry Siepmann (both with a Treasury background) and the American economist Walter Stewart, none of them at this stage on the Court. The director giving Norman the strongest backing in this initiative was Frank Tiarks of Schröders. Half a dozen or so ‘experts’, he told the Trotter Committee in 1927, ‘should meet daily and reports of their Meetings should be available every week for all Members of the Court’, in which way ‘the interest of all Directors in the affairs of the Bank would be increased and the weekly Meetings of the Court would be become much more interesting’. Addis and Cullen were markedly less enthusiastic. ‘The proper place for an expert’, the former informed the Court the following year, ‘is to assist and advise, but it is for the Merchant Directors to determine the policy of the Bank, and it is the belief that that policy is so determined which has won for the Bank its traditional authority and prestige’; while Norman’s predecessor stated frankly at the same time, ‘I do not believe that the Trade of the Country will long be content to see the Central Bank controlled by financial experts,’ as opposed to the tradition of ultimate internal control resting with ‘a Board or Court of Directors consisting not of Bankers nor financiers but of sound and high-class business men’. Given that in English cricket it would still have been unthinkable not to have an amateur as captain of his county, let alone his country, a certain resistance to the professionalisation of the Bank was perhaps hardly a surprise.

  The coming of the expert did not mean a significantly new, more open attitude to the outside world. With the odd exception (such as the trusted A. W. Kiddy, City editor of the Morning Post), Norman continued to hold the financial press in even more contempt than he did most politicians. ‘A second class sheet which prides itself on irritation and sore spots and tail twisting,’ was how in 1927 he characterised to Strong the City’s actually rather staid and respectable pink bible, the Financial Times. In practice, the reality of the underlying culture was a little more complicated, though a degree of disdain was seldom quite absent. From an essentially kindly but nevertheless insightful perspective, Michael Thornton in the 1970s would describe the Bank of the Norman era as

  an institution pragmatic, idiosyncratic, inarticulate, rather highly strung; knowing better than many of its critics its own strengths and weaknesses, and therefore often mistaking criticism for ignorance – and anyway deaf to both; never letting go of a sound argument when it had one; prepared to skip the high debate, act on instinct, and not be too troubled by the post-hoc rationalisers; but above all adaptable, because it was largely unhampered by doctrine, principle, or even tradition.23

  What matters is what works. Yet by the second half of the 1920s, the big problem in Norman’s life was the consequences of the return to gold; for that, sadly, had been a decision – in its strong emotional desire to return to the pre-1914 world – that transcended empiricism.

  The consequences themselves have been keenly debated ever since, but two aspects were immediately and undeniably apparent: that the recent catastrophic slump in foreign demand for coal (still the most important of Britain’s industries) was further exacerbated by the 10 per cent increase in cost automatically ensuing upon return to gold at the pre-war parity; and, more generally, that the pound could stay on the gold standard – crucial, in Norman’s eyes, to the City’s international business, as well as ‘knave-proof’ against politicians – only if foreign funds were attracted, which in practice meant high (or certainly not low) domestic interest rates, inevitably impacting on industry at large. The flashpoint came as early as December 1925, when Churchill learned that the Bank, faced by large quantities of gold leaving London and rates rising in America, was minded to increase its own rate from 4 to 5 per cent. The chancellor at once telephoned the governor, warning that in that case he would have no alternative but to inform the Commons that he had not been consulted and that it had been against his wishes. Whereupon Norman called his bluff, raising the rate and telling Churchill that if he made such a statement it would be ‘unprecedented’. The chancellor duly kept quiet, but for Norman it proved in practice a pyrrhic victory: henceforth, the possibility definitively no longer existed, in the context of unemployment of over a million, of Bank rate policy operating in its traditional pre-1914 ring-fenced political vacuum; while over the next few years (as Bank rate stayed largel
y unchanged, with Norman unable to bring it down but reluctant to raise it and risk another stand-off), not only did Keynes continue his campaign against the gold standard regime and what he regarded as the Bank’s malign influence on monetary policy, but he was increasingly joined by the Midland Bank’s McKenna. As for Churchill, all his frustrations were poured out in a memo that he sent to Niemeyer (about to move from the Treasury to the Bank) in May 1927, a year after the General Strike had sundered the country:

  We have assumed since the war, largely under the guidance of the Bank of England, a policy of deflation, debt repayment, high taxation, large sinking funds and Gold Standard. This has raised our credit, restored our exchange and lowered the cost of living. On the other hand it has produced bad trade, hard times, an immense increase in unemployment involving costly and unwise remedial measures, attempts to reduce wages in conformity with the cost of living and so increase the competitive power, fierce labour disputes arising therefrom, with expense to the State and community measured by hundreds of millions … We have to look forward, as a definite part of the Bank of England policy, to an indefinite period of high taxation, of immense repayments and of no progress towards liberation either nominal or real, only a continued enhancement of the bondholders’ claim. This debt and taxation lie like a vast wet blanket across the whole process of creating new wealth by new enterprise.

  Things even started to get personal, as Churchill, according to his private secretary, ‘got into the habit of almost spitting out comments on the presumed enormities of “that man Skinner”’ – Ernest Skinner being the governor’s private secretary in whose name Norman used to reserve his passages across the Atlantic. Nor was Churchill in later years inclined to forgive. ‘The biggest blunder in his life’, his doctor noted him declaring in 1945, ‘had been the return to the gold standard. Montagu Norman had spread his blandishments before him till it was done, and had then left him severely alone.’24

  A significant side-effect of the politicisation of Bank rate was the need for Norman to continue to keep a tight rein on London as an international capital market. Back in July 1925, during the post-return honeymoon period, the Committee of Treasury ‘discussed the embargo on foreign and colonial issues’, Anderson reported to the absent governor, ‘and everyone agreed that the sooner we could get back to freedom the better’, with the result that four months later the formal embargo on foreign loans (in place for the past year) was lifted. Yet from the start London in its attempt to regain lost ground on New York was operating with one hand tied behind its back, as Norman, well aware even before the December clash with Churchill that a high Bank rate was political dynamite, was understandably concerned about the gold-exporting implications of an avalanche of foreign loans – for all his keen desire to help the City reassert itself. The consequence, as caught by his diary, was a prolonged exercise in encouraging a significant degree of self-denial:

  2 Rothschilds.? Loan to Poland for Tobacco Monop & Exch. I say in confidence that they shd avoid all such transactions: not even worth discussion at present. (2 December 1925)

  Fleischmann [of the merchant bank Seligman Brothers]: considering Loans here for 1. Central American Country & 2. Italian Industrial. I say free market – OK, BUT many more foreign issues – mean gold exports & higher B Rate & an end of such business. (8 October 1926)

  A de Rothschild … He protests bitterly agst continued embargo on French Loans … (4 October 1928)

  Norman tended to look more liberally at potential foreign issues if they fitted in with his picture of the ongoing European reconstruction jigsaw. These included a series of German loans (arranged by Schröders) in 1925–6, a major loan for Belgium in October 1926, and in late 1927 an Italian stabilisation loan. Norman had initially declined to give the last his blessing, telling an American banker that in Mussolini’s Italy ‘opposition in any form is gone: freedom of speech, opinion, criticism and press – even private life as we understand it’; but eventually he changed his mind, asserting to Strong that although ‘Italy is not a free country in the usual sense of the word’, nevertheless ‘the fact remains that she has made economic and financial progress and is probably making social progress too’.25

  So much, in Norman’s eyes, still depended on his harmonious relationship with the New York Fed’s chief and the other key central bankers. ‘The main object’ of ‘the encouragement of close co-operation among Central Banks’ was, he spelled out to Schacht barely a week after the return to gold, ‘in order to secure regulation of rates of interest and exchange – and so prices of gold and commodities – and by these means the improvement of international trade’. He certainly put in the time and effort. ‘We are staying here rather longer than I had expected or wished but that can’t be helped,’ he reported to Anderson not long afterwards, in July 1925, from Berlin’s Hotel Adlon. ‘B.S. likes to go into everything with a gimlet, as well as a good deal of talk, which takes time. He & Schacht are making friends & a good feeling is growing up from which much else may follow, sooner or later.’ There followed, in response to a query from his deputy, some dense paragraphs infinitely suggestive of Norman’s perplexing preoccupations:

  Now as to Gold: see Schacht’s telegram of the 11th & mine of 13th. When I came away from London I supposed that Schacht still had to buy Mks 200/250 mil (i.e. the Mks 300m mentioned in their telegram last month less our later purchases) for which he wd have to pay in the form of valuta [foreign notes] – or exchange.

  In the last 2 or 3 weeks the position regarding their gold needs has changed for 2 reasons – first: They have bought from Switzd & Norway (in connection with Govt operations) Mks 50 mil – German gold coin – & may buy a similar amount more: secondly – they have had to repay short foreign Loans to German Bankers &c of about Mks 200 mil, directly or indirectly arising out of the Stinnes affair. This reduces their stock of valuta & as later they may perhaps have to find money to repay other short foreign Loans (made by N.Y. or London) they cannot contract to buy Clegg’s Gold during several months for fear of running short of valuta. (This valuta or exchange belongs of course to the Reichsbank: they hold other exchange as proceeds of Loan &c, of which they cannot dispose.)

  Thus Schacht must go slow & see what happens: he will also have to restrict Circulation as much or more than of late, because he has to hold a Gold Reserve of 40% agst all his Notes (of wh 10% may be in Exchange) & now he has not much more than enough Reserve for present size of circulation.

  Generally it looks as if Schacht was going to have a difficult time with shortage of Note-cover. If necessary Strong or we will have to lend him some money again.

  ‘I hope this is clear,’ he added, ‘but I doubt it! Letters don’t suit such a subject.’

  Norman’s dearest hope, as he explained to Siepmann two months later, was to see the ‘inauguration’ of what he called a ‘private and eclectic Central Banks’ “club”, small at first, large in the future’ – a club with ‘subscriptions in the shape of exclusive relations; appropriate balances with other Central Banks; proper ratio of free balances and earning assets in each market; no undue regard for profit; political freedom by right or by custom; credits when there is bad weather in any particular place; and so on’. By summer 1927 it looked as if the dream of institutional central banking co-operation was on track, as there assembled the so-called Long Island ‘Club’, comprising Strong, Norman, Schacht and the Bank of France’s Charles Rist (deputising for Emile Moreau); but that dream soon foundered, in large part because of Moreau’s fear of Schacht and resentment of what in his wonderfully readable diary he called ‘the Bank of England’s imperialism’. ‘England,’ he explained to prime minister Poincaré in February 1928, ‘has managed to install itself completely in Austria, Hungary, Belgium, Norway and Italy. It will implant itself next in Greece and Portugal. It is attempting to get a foothold in Yugoslavia and it is fighting us on the sly in Romania. Should it be allowed to go forward?’ The answer was obvious, and over the next few months, supported by Str
ong, the very capable Frenchman, having already stabilised the franc and accumulated for his bank large sterling balances, successfully squeezed out Norman from a major loan to Romania. Strong, hitherto Norman’s staunchest ally, justified his change of tack to the American economist Walter Stewart who had recently gone to the Bank: ‘For some years past it has been more than current in Europe, both in political and banking circles, that Governor Norman desired to establish some sort of dictatorship over the central banks of Europe and that I was collaborating with him in such a program and supporting him.’ Norman was forgiving (‘think no more about Romania’), but that was the last letter between them before Strong died in the autumn. He departed at a pregnant moment. The previous year, at a point when the US economy had needed a firm touch on the monetary brake, he had pushed through a cut in New York interest rates in order to help the Bank of England support sterling without having to raise its own rate; but by late 1928 and going into 1929 Wall Street was enjoying an extraordinary credit boom. ‘Both financially and politically,’ Norman wrote to a correspondent in March, ‘the prospect has rarely seemed to me more obscure than it does now’; and he referred darkly to how in New York ‘the Stock Market is playing ducks and drakes with their own and other people’s money’.26