Till Time's Last Sand

by David Kynaston

  Keynes: I should like to see our Report centre round the magnification and evolutionary enlargements of the functions of the Bank of England … so that by the time her new mansion is ready for her [a reference to the physical rebuilding of the Bank], she must be no longer the ‘Old Lady of Threadneedle Street’ gathering her skirts round her, but some new image must be thought of appropriate to the occupant of the new palace.

  Macmillan: A bright young thing?

  Keynes: I hardly know what – perhaps Mr Lubbock can suggest something?

  Lubbock: Well, I am one of the old timers.32

  So he was, though that did not stop him, ahead of the report and surrounded by Keynes et al, from fighting a quietly effective rearguard campaign on the Bank’s behalf.

  All this was against the background of a seriously struggling British economy. Bank rate did steadily come down – from 6½ per cent before the Wall Street Crash to 3 per cent by May 1930, where it stayed for over a year – but in the eyes of many too slowly and not far enough. ‘The Bank’s policy,’ observed a Treasury insider in February 1930, ‘seems to me quite inexplicable except by an unreasoning terror of cheap money,’ and it was a plausible assessment. Nor, as unemployment climbed rapidly during the rest of the year (by the end of 1930 up to 2.7 million, compared with barely a million in summer 1929), did Norman deviate from his belief that nothing mattered more than Britain’s capacity to stay on the gold standard; and at the start of 1931 he warned Snowden that ‘if loss of gold, Budget prospects, socialist legislation or any other cause’ appeared likely to trigger a flight from sterling, then he would have no alternative but to raise Bank rate in order to bring pressure to bear upon what he termed ‘the unsatisfactory position’. In short: the Labour government had to retrench on expenditure or accept the consequences; and a few weeks later, in February, Snowden took the cue and agreed to establish an Economy Committee (to be chaired by Sir George May, a distinguished actuary) that would search for places to make spending cuts – a search under way even as Norman-endorsed foreign loans, symbolically so important to the international-oriented City, enjoyed that spring a last hurrah.33

  The 1931 financial crisis began for real in mid-May with the failure of Austria’s largest commercial bank, Credit Anstalt.34 ‘A monetary breakdown in Austria might quickly produce a similar result in several countries,’ the governor was soon warning his opposite number at the Fed, George Harrison; and although the Bank did what it could – including a £4.3 million credit to the Austrian central bank – financial instability spread rapidly to Hungary and Germany. Some of the City’s biggest names were heavily exposed in the latter, with Norman, umbilically committed to the international economy, now applying strong pressure on them to keep credits running. ‘Germany – shd they withdraw Credits &c as others are said to be doing,’ he noted in his diary on 10 June after a visit from Eric and Charles Hambro of the family bank. ‘I say Germany is a good bet in the long run & needs help & comfort rather than worrying.’ Briefly in late June the German situation seemed to have stabilised – helped by the provision to the Reichsbank of a $100 million credit from the Bank and other central banks – but Norman was far from sanguine in his update to Clegg at the start of July: ‘You can really have little idea of the times through which we have been going here lately, during which as near as no matter Austria, Hungary and Germany – indeed Eastern Europe – went over the dam; and we are not by any means clear of trouble yet …’ Nor were they. That same day, 1 July, a new run of foreign withdrawals began from German banks; and a week later, the news from the Reichsbank was of the German financial system in a state of crisis.

  Back home, the name of the game during June was getting the politicians to face the facts – or, more specifically, softening them up ahead of the anticipated findings of May’s Economy Committee. An exchange of letters between Norman and MacDonald, with that politician thoroughly apprehensive and not knowing which way to turn, was revealing about who called the shots. The prime minister began by wondering, in the wake of recent gloomy speeches by the Bank’s Professor Sprague, whether the central banks could not do more, co-operatively, to stabilise prices and thus prevent the appalling unemployment consequences of severe deflation. ‘I hope,’ he added, ‘you will not resent my intruding in these technical fields. I scarcely dare to contemplate, however, what it will mean for the world, and for this country in particular, if all prices and wages have to be forced down to meet the fall in commodity prices.’ Norman in his reply stated flatly that the prospect of central banking co-operation raising commodity prices was a chimera, while as for Sprague, ‘if his utterances may seem to some to have been on occasions hard, crude or ruthless, may it not be that having convinced himself that the true facts and difficulties of the position have too long been unperceived or faced in this and other countries, he finds it necessary to paint the colours with a heavy brush if he is to succeed in forcing home on unwilling minds the facts as he sees them?’ MacDonald’s apologetic response was almost abject: ‘I am constantly being bothered about this matter, and it is a subject which I have never really studied and therefore know nothing about.’35

  Events at large continued to pick up speed from mid-July. On Monday the 13th, the publication of the Macmillan Report (with little critical about the Bank, and mainly remembered for its identification of the ‘Macmillan gap’, that is, in the financing of small to medium-sized firms) was overshadowed by news that one of Germany’s largest banks, the Darmstadter, had suspended payments; next day it emerged that the merchant bank Lazards was in trouble (as a result of fraud), requiring in due course a £3½ million loan from the Bank; and, increasingly, well-founded anxiety about London’s German exposure saw gold flowing out from the Bank, some £22 million in the course of a week. Norman himself was under huge pressure, and eventually buckled. ‘12.30 about – left C. Treasy and went home about 3 o’clock,’ recorded his diary on Wednesday, 29 July. ‘Queer.’ Thereafter, he was only a bit-player as the rest of the crisis unfolded, with his capable deputy, Harvey, stepping into the breach and at once on the 30th ensuring a rise in Bank rate, from 3½ to 4½ per cent, to try to stem the gold losses.

  Next day, Friday the 31st, was pivotal. Not only did Harvey inform MacDonald that the Bank’s reserves had fallen by an alarming £55 million since the middle of the month, but the long-awaited May Report was published, claiming that the budget deficit was likely to be £120 million (an alarming figure at the time) and strongly recommending that the government achieve a cut in unemployment benefit of £67 million – a recommendation that over the next few weeks the Bank did not deviate from supporting, insistent that on international confidence in sterling depended the very fate of Britain’s indispensable maintenance of the gold standard. Harvey spelled it out to Snowden on 6 August:

  I wish to explain to you that in less than four weeks we have to date lost more than £60 millions in gold and foreign exchange and, apart from the credits, we have virtually no foreign exchange left. If the flood does not abate we cannot maintain ourselves long …

  We are doing all that we can but our power to act is rapidly diminishing. As I tried to explain to you last week, the reports which reach us all show that the sign which foreigners expect from this country is the readjustment of the budgetary position, and this attitude on their part has again been forcibly expressed today in messages from both Paris and New York. I am most anxious not to step beyond my province but I feel I should be failing in my duty if I did not say that with the prospects as they present themselves today the time available for the government to reach decisions on this subject (as a means of safeguarding the value of sterling) may be much shorter than recently seemed likely.

  The sense of urgency was palpable. Speaking to the Committee of Treasury on 11 August, Harvey ‘feared that neither the Prime Minister nor the Chancellor were yet prepared to face the position and from certain information which he had received he feared that the Chancellor might even be considering the advisability of an a
bandonment of the Gold Standard’; a day or two later, the absent Norman, about to leave for Canada and convalescence, was asked if the country would ‘pull through’ and he replied, ‘Yes, if we can get them frightened enough,’ with little doubt about the identity of ‘them’; or as Harvey expressively put it to a former Treasury chief on the 17th: ‘We are having a desperate struggle in the hope that the government, on whom we are keeping a strong pressure, will adopt and announce this week a programme of financial reform which will sufficiently restore confidence abroad … At the present moment it looks like being a neck and neck race …’36

  The political denouement would enter the history books. On Tuesday, 18 August, in a further stiffening letter to Snowden, and almost certainly in the knowledge that the Cabinet’s own economy committee was in the process of finalising its proposed package of cuts, Harvey warned that ‘everybody’ in the City was ‘anxiously awaiting the announcement of the Government’s programmes’, adding that ‘so long as the present tension lasts there must always be the danger of a sudden break taking place in some quarter and becoming the signal for a general sauve qui peut’; two days later he sanctioned a telegram from Morgan Grenfell in London to Morgans in New York, exploring whether the British government might be able to place there a $250 million loan, but only if it first made a ‘satisfactory announcement as regards balancing Budget’; and next day the deputy governor and Peacock candidly informed MacDonald and Snowden not just that the Cabinet’s so-far-agreed cuts of £56 million would be insufficient to enable further credits to be secured from abroad, but that such was the current flight from sterling, and accompanying desperation of the Bank’s exchange-support operation, that its reserves were likely to be exhausted in only four days.

  Decision time arrived on the evening of Sunday, 23 August. Harvey passed on to MacDonald the crucial message from the Morgan partners in New York, namely that a major short-term credit was available to the British government within days provided that ‘the programme under consideration will have the sincere approval and support of the Bank of England and the City generally’;37 the prime minister put this to the Cabinet; around half the Labour ministers refused to support the proposed cut in unemployment benefit that would enable such a programme to be implemented; later that evening, intending to resign, MacDonald (accompanied by Harvey) went to the Palace, where King George V was dining with his financial adviser, Peacock; the prime minister was persuaded to defer his decision; and late that night, accompanying him back to Downing Street, Harvey and Peacock sought to convince him that he could still serve the country by taking his place at the head of a National government – a government, of course, fully committed to the enhanced programme of cuts. Next day, that duly happened, as the Labour government fell and the King asked MacDonald to form a National government (inevitably Conservative-dominated) instead.

  Had the whole thing been a ‘bankers’ ramp’, as the accusatory phrase now went? In some fundamental sense not: the Bank’s unwavering priority had been to save the pound and thus stay on the gold standard, with a sincere belief that the only way to achieve this was through major cuts in government expenditure; whereas it had not been the aim to force the Labour government from office – and indeed the plausible belief was that the necessary cuts would be more generally accepted if they were implemented by Labour. Even so, for anyone reflecting on the balance of power between elected politicians and unelected central bankers, including the ability of the latter to frame the arguments and give the former little room in which to manoeuvre, there was much to ponder.

  That was not, in any event, the end of the crisis. International confidence in sterling continued to diminish, even after Snowden (who had stayed on as chancellor) delivered on 10 September an emergency budget more or less following the lines of the cuts package that the Labour government had failed to agree upon; while the Bank’s gold reserves ebbed away during the first half of September, before a conjunction of difficult circumstances – reports from Invergordon about a possible mutiny of naval ratings over pay cuts, a poor show by ministers in the Commons of toughing it out, the imminence of a general election, a new and serious Dutch banking crisis – led to a run of sharp losses: £3½ million on the 16th, £10 million on the 17th, and a demoralising £18¾ million on Friday the 18th. Late that evening Harvey and Peacock met MacDonald at No 10, in effect telling him that there was now no alternative but to go off gold; the prime minister ‘agreed that if one could not see one’s way through it was better to acknowledge it now’. Whereupon discussion turned to practicalities:

  The Deputy Governor stated that it was better to stop on Monday morning as that would give time to warn the press, and the public could be stopped from rushing the banks … The Prime Minister asked what would the effect be on things in general, particularly on the internal situation, of this upset? Mr Peacock replied that it would be an awful blow to everyone, but that the banks would loyally support one another in trying to keep working, and if the press played up, appearances at home might not be too bad … Mr Peacock went on to explain the shock to our people all over the world in Ireland, Egypt, India and so on: in every village a bill on London was looked upon as cash – and it would be cash no longer.

  As the meeting ended, Peacock observed that ‘no one could accuse this country of not having made every effort before letting the pound go’; and ‘it was pointed out’ – by Harvey? by Peacock? by MacDonald? – ‘that by having balanced the Budget, whatever happened, this country had at least demonstrated her will to play the game at all costs’.

  A formal announcement to the press was made on the Sunday, shortly after Harvey had sent a deliberately cryptic cable to Norman, returning home from Montreal: ‘Sorry we have to go off tomorrow and cannot wait to see you before doing so.’ Norman, understandably, was somewhat puzzled. In the event Monday, 21 September, with the Stock Exchange closed, was less troubled in the City than some had feared, no doubt helped by the press that morning resolutely looking on the bright side. ‘NO JUSTIFICATION FOR ALARM’ declared the Daily Telegraph on its front page, adding below, ‘A Speedy Return to the Gold Standard Assured’; The Times predicted the same, once the new government had done its work of ‘retrenchment and reform’; while for the Daily Mail, coming from a different angle, suspension of the gold standard was nothing less than ‘a blessing to British industry’: ‘The country was rashly hurried into it in 1925, against this newspaper’s protests. It has cost us tens of millions and almost ruined us. Now that it has gone we may breathe more freely.’

  Undeniably, whatever the rights and wrongs, it was a major moment. ‘You will see by this morning’s papers that after all our struggles we are driven off the gold standard,’ lamented Teddy Grenfell (still on the Court) to Vice-Admiral Sir Aubrey Smith. ‘It has been rather a losing fight for some time – one rung a day – until the Navy business knocked us clean off the ladder. England was represented to the foreigner by the Navy and the Bank of England. It is all very bewildering and distressing.’ An ill-judged attempt to return to the prosperous certainties of the pre-1914 world had definitively failed, and a last word goes to Keynes’s friend Virginia Woolf. ‘We’re off,’ she scribbled in her diary, ‘and I write about Donne. Yes; & what could I do better, if we are ruined, & if everybody had spent their time writing about Donne we should not have gone off the Gold Standard – thats my version of the greatest crisis &c &c &c – gabble gabble go the geese – who cant lay golden eggs.’38

  11

  Look Busy Anyway

  The inter-war Bank was a significantly larger organisation than its pre-war counterpart. It was also much more mixed-sex. In 1914 there had been about 1,000 clerical staff, of whom only about 60 were women; by 1927 there were about 3,400 clerical staff, of whom some 1,270 were women, mainly employed either as shorthand typists or in connection with the progressive mechanisation of office work. Much of the increase in overall numbers was attributable to the tenfold rise in the national debt as a result of the war, a rise
that in particular directly led in the immediate years after 1918 to the creation of the so-called ‘Hump’ – a mass of rather hastily recruited men who had only limited promotion prospects and who over the ensuing decades would block the path of the more able generation coming up behind them. The cause of the Hump’s creation might not only have been the suddenly bloated national debt; it was said (though not documented) that there also was informal pressure from government, anxious to keep down unemployment figures at a time when the world was palpably not fit for heroes.

  Across the inter-war period as a whole, male recruitment continued for the most part along broadly traditional and non-specialist lines. A would-be recruit (who was seldom a graduate) still needed to secure a nomination from a director, which in practice meant that the overwhelming majority of clerical staff came from a middle-class background, albeit quite often lower middle class. Cricket helped. Leslie O’Brien, leaving grammar school in the mid-1920s, managed to obtain a nomination from Lord Revelstoke on the basis that his father had played with a Baring; some ten years later the Bank’s favourite game made all the difference in the life of a public schoolboy, David Harris:

  My father [he recalled] was the ‘beak’ at Thames Police Magistrate’s Court and commuted by steam train from Woking to Waterloo. Among his regular travelling companions was Basil Catterns [a director and until recently chief cashier]. One morning Dad, buried in his Times, spotted that I had made 126 not out for Sherborne against Westminster and proudly drew his attention to it.