Till Time's Last Sand

by David Kynaston

  Come 15 July, the due date, and there set in almost immediately an appalling drain of dollars (by far the world’s strongest and hardest-to-obtain currency), with little let-up for several weeks. Eventually on 20 August, with Britain virtually out of dollars, Dalton had no alternative but to announce suspension of convertibility. By then, Cobbold had abruptly broken off his holiday in the south of France, flying from Nice to Croydon and then shortly on to Washington, joining the Treasury’s beleaguered Sir Wilfrid Eady. According to Time, he arrived there ‘unshaven and with his old school tie (Eton’s black with narrow light blue stripes) holding up his pants’, with the American magazine reflecting on the obvious symbolism: ‘Not even the Old Etonian belt could disguise the fact that this flurried arrival departed from the tradition of the British Treasury and the Bank of England. Ties as belts were not normal Threadneedle wear, Britain’s financial pants for two and a half centuries had been held up by the stoutest braces.’ Cobbold himself would never waver from his belief that the convertibility crisis had followed the Loan Agreement ‘as night follows day’; and that is surely correct, though it is also pos-sible that for once in its life the Bank had been guilty of not issuing the government with enough dire warnings in advance. Catto for one, however, was disinclined to share in any blame. ‘Convertibility very nearly succeeded,’ he told Per Jacobsson soon after suspension. ‘Had it not been for the crisis in imports and exports, and the government measures [essentially an austerity package] announced by Attlee, it might have come off. We have, of course, hoped that the convertibility would have made people more inclined to hold sterling, but the lack of confidence which arose caused people to leave sterling.’3 The pound and ‘confidence’: it was becoming once again a familiar tune.

  Not least just two years later. ‘I had the Chancellor [Cripps] to lunch alone,’ noted Cobbold on 1 June 1949, three months after succeeding Catto. ‘We had a general talk, particularly about the external situation. He is very strong and sound against any move in sterling but is fearful of the effects of a prolonged talking campaign.’ Against a background of Britain’s already threadbare reserves starting to suffer serious losses, the paramount question that summer was whether it would be possible to sustain the existing exchange rate (agreed at the outbreak of the war) of $4.03 to the pound – whether, in short, devaluation was becoming an inescapable reality. Stiffened by Niemeyer (‘Jiggling about with devaluation of Dollar exchange will not help us’), Cobbold over the coming weeks took the predictable line that what really mattered to the holders of sterling were indications that the government was taking a firm grip on public expenditure. ‘I reiterated the view,’ he recorded after a conversation with Cripps on 5 July (first anniversary of the creation of the National Health Service), ‘that the main thing necessary to restore confidence was evidence of action about Government expenditure, and that devaluation was not a positive policy but rather a recognition of disagreeable facts.’ Even so, it was on the governor’s part a careful balancing act, being well aware of the political ghosts of 1931; and in early August, when stressing to Attlee that ‘devaluation by itself cannot be a remedy for the present difficulties’, he was careful to add that ‘it is no part of our submission that the present rate should be maintained at all costs by what may be termed a classic deflationary policy’. That rider was not enough to banish the ghosts. ‘Montagu Norman walks again,’ Dalton had already privately reflected; and during the three-month sterling crisis as a whole, ministers made a determined, broadly successful attempt to marginalise the Bank.

  The end-result was Cobbold reluctantly concurring in devaluation – to which the Treasury ultimately saw no alternative – while achieving little movement in terms of expenditure cuts. On the evening of Sunday, 18 September, just before Cripps broadcast to the nation that the pound would henceforth be worth only $2.80 (a fall of 30 per cent, substantial enough to make the pound appear a little under-valued and thereby create some subsequent headroom), Cobbold spoke to an informal meeting of the Court: ‘The one essential thing – and this I repeat and underline – is that devaluation can be done once but can and must not even be in question a second time unless there have been major events such as a world war in the intervening period.’ Solemn enough words, and a moment of national humiliation, but in the immediate future life staggered on. ‘We are getting back into our stride and trying to tackle the numerous problems in front of us,’ the Bank’s Jack Fisher (deputy chief cashier and in charge of exchange control) wrote at the end of the month to an opposite number at the Fed. ‘The weather is delightful, the children are back at boarding school and I am hoping for a little golf this weekend for a change.’4

  Either side of devaluation saw the negotiations that eventually led to the creation in 1950 of the European Payments Union – forerunner of the whole European ‘project’ over the next half-century and beyond. It was a landmark that owed little to the Bank, whose attitude during the protracted discussions was almost uniformly suspicious and negative. ‘It no doubt required a considerable effort of mental adjustment in London, the centre of the sterling world, to accept that the tune should at this time be called by a minor power like Belgium,’ reflected John Fforde many years later; an even more damning retrospective judgement comes from Charles Goodhart, looking across the whole admittedly difficult phase from the US Loan to the early 1950s:

  It is arguable that the correct way for the UK to have pursued its quest for greater US support was to have put itself in the vanguard of European multilateral solution(s) to the postwar liquidity/convertibility problems. Instead, the Bank (and Whitehall) exhibited devastating Euro-blindness. They could not see much likelihood of joint European initiatives succeeding; they continually feared that any such initiatives would weaken, or complicate, their closer connections with the sterling area. So, although too close to the Continent, and too important, to exclude themselves, or be excluded, from such European negotiations, they were at best half-hearted, often negative and sometimes downright destructive on European proposals.

  Accordingly, the assumption in the Bank – as indeed in the City and in British politics at large – was that questions of Empire and the sterling area had a higher importance and priority than those of Europe, that it was sterling and the sterling area that represented Britain’s financial ticket to the world’s top table. One of the few questioning that assumption was Siegmund Warburg, who in 1946 started his own merchant bank but was still viewed by the Bank with distinct suspicion. ‘After the Second World War,’ he recalled some thirty years later, ‘I said to everyone – I even put it in writing – that we had become a debtor nation instead of a creditor nation, and a reserve currency status [a currency held by central banks and other key financial institutions] doesn’t make sense for a debtor country. It’s a very expensive luxury for us to have.’ Had the Old Lady, asked his interviewer, appreciated that iconoclastic perspective? ‘No, the Governor of the Bank of England at the time didn’t like this statement at all, it was against the general view.’5

  As for domestic monetary policy, that remained largely quiescent during Labour’s six years in office, with Bank rate staying unchanged at 2 per cent. Enthusiastically espousing cheap money, Dalton received in October 1946 only lukewarm support from the Bank when he decided to convert 3 per cent Local Loans into a 2½ per cent irredeemable Treasury stock (soon nicknamed ‘Daltons’), which by the following spring found themselves at a discount – a fate that only deepened the Bank’s already well-entrenched suspicions about an academic-cum-politician like Dalton getting involved in the practical niceties of market matters. By the late 1940s, with Cripps at No. 11 and Douglas Jay as economic secretary, the focus was on reducing the money supply in order to check inflation, and during 1948 there took place a lengthy, ill-tempered struggle, as the Treasury leaned on the Bank to in turn lean on the banks to keep their advances and deposits under control. The Bank resisted, for the most part successfully. ‘If it is necessary from the angle of credit policy to try to ke
ep advances down,’ Cobbold wrote near the end of the year to the ailing Catto, ‘I still believe that the only satisfactory way is the old-fashioned one of making borrowing more expensive’ – an approach, of course, fatally tarnished in Labour’s eyes by its association with Norman and inter-war monetary policy; while Catto soon afterwards from his sickbed sent Cripps the strongest possible memo that not only expressed his ‘utmost alarm’ about the impracticality of a proposed ceiling for deposits and advances, but declared that ‘it is an entire fallacy to suppose that pressure from the Bank of England on the banks could rectify inflationary pressure which comes from overgearing the country’s economy’. Why were he and Cobbold so hostile to the quantitative ‘ceiling’ strategy? Almost certainly their stated arguments were sincere (and indeed correct), but underlying them was a profound unstated anxiety: the existential threat that that strategy posed to the Bank’s steadily accrued powers of moral suasion over the banking system – powers that relied heavily on discretion and judgement rather than directives and figures.

  The Bank’s most serious attempts to get monetary policy conducted the ‘old-fashioned’ way came during Labour’s final year in office, with the arch-Wykehamist Hugh Gaitskell now chancellor and disinclined to be unduly deferential. ‘I must say,’ he reflected quite early about Cobbold and his colleagues, ‘that I have a very poor opinion not only of him – he is simply not a very intelligent man – but of also most of the people in the Bank’; and he added that ‘they are singularly bad at putting their case’. In January 1951, and then in June, he faced considerable pressure from the Bank to strengthen sterling and check inflation (against a backdrop of the Korean War) by sanctioning an increase – albeit modest – in Bank rate. Both times he refused, instead pushing for the banks to restrict their advances and even in July telling Cobbold that he would like to talk directly for himself to the clearing bank chairmen. The governor was not unnaturally alarmed, probably not solely because this request threatened the Bank’s own authority in the City. ‘I believe in the voluntary system by which our banking arrangements are run,’ he recorded after reluctantly agreeing to arrange a meeting for late September, ‘and I believe that once we get into direct Government interference in the credit system we run into very deep waters.’ In the event, Gaitskell’s rendezvous with the bankers never happened, because instead that autumn he and his fellow-ministers were fighting a general election campaign. Cobbold’s public – and carefully bipartisan – contribution was his speech at the Mansion House dinner some three weeks before polling day. ‘We are all in the same boat, capital, management, office, industrial and agricultural worker,’ he declared. ‘If the forces of inflation and depreciation were to be allowed to take real hold of our currency, we should all lose not only what we hope for, but much of what we have. We have faced stormy weather before and the City is ready, along with the rest of the community, to face it and come through it.’

  The general expectation – certainly in the City – was that the Conservatives under Churchill would return to power. That was probably also the expectation at the Bank, where on 22 October, three days before decision day, the chief cashier, Kenneth Peppiatt, wrote to ‘Gus’ Ellen, formerly of Union Discount, asking him to call on the 24th. ‘Perhaps I should add that I do not wish the fact you are coming to see me to be known to your old friends at the UD!’6 The subtext was clear enough: with a change of government likely to lead to a return to old-style, pre-1932 monetary policy, guidance from an old money market hand was required in order to oil the very rusty mechanism for Bank rate changes. It was time, in short, to return to the future.

  ‘After the Second World War,’ reflects Forrest Capie in recounting the muted impact of nationalisation, ‘the Bank continued to regard itself as in many ways independent, and frequent appeals to its independence were made. Throughout the 1950s and 1960s, it was left pretty much alone to manage the exchange rate, manage the government debt, administer exchange controls, take the initiative in monetary policy, look after the City, and so on.’ All that was undoubtedly the case. And Capie quotes Cobbold himself, publicly observing in 1962 that without a significant measure of independence from government – ‘both in operations and in policy’ – it would be impossible for central bankers (including of course at the Bank of England) to carry out their responsibilities. What were those responsibilities? Soon afterwards, in a chapter on the Bank in a BIS publication, the Bank’s John (Jack) Fisher identified eight key tasks or objectives: overseeing the note issue; acting as registrar for the public debt; defending the value of the pound; standing ready to be lender of last resort; supplying expert advice to government; maintaining ‘the credit and reputation of the banking and financial system’; promoting ‘orderly financial and exchange markets’; and promoting ‘the orderly flow of capital in the capital markets’. Fisher seems to have viewed these as perennial, time-honoured responsibilities, ‘implicit’ in the very existence of the Bank in the second half of the twentieth century; and certainly this noble eightfold path that he outlined was as applicable to the 1950s as to the 1960s.7

  The 1950s were Cobbold’s decade, being governor throughout. He subsequently recalled his own key priorities:

  1 The current weakness of the overseas balance and consequently of sterling, largely due to the legacy of debt left by the War.

  2 The need for international monetary stability and the fight against inflation.

  3 The movement from the controlled economy of wartime to a freer (and hopefully more prosperous) economy of peace.

  These were the objectives of someone who was very much his own man, including being significantly more sceptical than some of his colleagues of Keynesian economics, not least theories about demand management and a managed economy. At a more micro level, the flavour of the man and his style comes through in three early snippets, all from 1949. ‘I spent a lot of the day talking to Bolton, Wilson Smith and others about the American efforts about European exchange rates, convertibility etc,’ he noted only a few weeks after becoming governor. ‘Everybody seems rather over-excited and inclined to rush about in aeroplanes and I encouraged them to go away for Easter.’ A little later, he summarised a talk he had had with Midland’s chairman about the quarterly meetings with the clearing bankers: ‘I have a feeling that they are sometimes a little bare and I had in mind, without trying to launch a Debating Society, to say a word or two occasionally about things of particular interest at the time.’ And in early July he recorded how the Treasury’s Eady had ‘mentioned that somebody in the Board of Trade had written to somebody in the Treasury asking if a junior official in the B.O.T. [Board of Trade] could spend a week or so in the Bank of England to get a closer idea of what we do’, and how in turn he had reacted: ‘I trod firmly on this suggestion.’

  Cobbold was not everyone’s favourite. A notably harsh verdict (perhaps owing something to having been overlooked for the top job) comes from George Bolton:

  Cobbold was a man of violent contrasts and many puzzling contradictions. He inspired loyalty rather than affection among the immediate circle of his friends in the City and among his colleagues in the Bank, but as a public figure he appeared remote and cold. He could be ruthless, too, and was never quite at ease with financial journalists. He enjoyed the respect of Civil Servants and the City and, to some extent, industry, but was never able or willing to develop an atmosphere of personal warmth and therefore failed to get the best out of his relations with his contemporaries.

  More favourable is the judgement of John Fforde, who joined the Bank in 1957 as an economist and would subsequently write a detailed history of the Cobbold era:

  He was a careful listener and a thoughtful reader. But he was not a lengthy debater. His meetings were inclined to be short and to the point. He was determined to maintain the authority of the Governor as the Chairman and Chief Executive of the Bank. He was certainly a commanding personality and was to exercise command in an almost military fashion for over twelve years. He was, however, sensi
tive to any questioning of the decisions that he was not slow to take but in which he may not always have had complete self-confidence. Once he had firmly declared a point of view he had as often as not announced his decision, or at least the general shape of it. Persuading him to change his mind was not impossible but was not a task to be taken lightly.

  Ultimately, Cobbold was someone who was comfortable in his own skin and slept soundly at night – invaluable qualities in any central banker. Class helped. Married to Hermione Bulwer-Lytton (daughter of the second Earl of Lytton), and living from 1947 at her ancestral seat of Knebworth House, he was a distinctly Etonian Etonian. ‘During my time in the City, those who hadn’t been to Eton were striving for Eton standards and the Eton ethos dominated from Kim Cobbold downwards,’ recalled one leading merchant banker, Michael Verey of Schroders. ‘Good Etonian standards means a total trust – if you say you’ll do something, you’ll do it.’8 Crisp, authoritative, pragmatic, not always articulate: Cobbold had the stature and the steel for his office.

  Who were his colleagues? Dallas Bernard (1949–54) and Humphrey Mynors (1954–64) were his two deputy governors: the former’s background was Jardine Matheson and the Far East, but he had become an executive director in 1939; while the latter was of course the Bank’s pioneer economist – though an economist with a marked horror of the words ‘economics’ and ‘research’, and who in 1948 confessed to Eady that ‘I do not move easily in the post-Keynesian terminology, although I believe it is largely only restating the old truths.’ Deeply unimpressed that same year was Robert Hall, head of the Treasury’s Economic Section. ‘It is hard not to get the impression that the Bank do not think at all about credit control as economists do,’ he noted after a meeting with Mynors, ‘and indeed that they don’t quite understand what it is all about.’ Fforde put it a little more gently. Mynors had, he insisted, ‘a first-class mind’ (as well as ‘great personal charm’), but ‘he often gave the impression either of keeping his cards very close to his chest or else of great reluctance to disturb the conventions and ambience of Norman’s Bank’.9