‘We here feel that this is a satisfactory outcome, which makes virtually no change in the reality of existing normal practices,’ Cobbold assured central bankers around the world on 27 November, the day after the chancellor’s formal statement to the Commons about the government’s response to Radcliffe; and a week before Christmas, the Bank gave Makins a well-earned dinner in his honour, with his Treasury colleague Hall among those present:
As the governor made clear in his speech, it was a sort of demonstration of appreciation for all the help Roger gave them in the troubled weeks of the Bank Rate Tribunal and of Radcliffe. Almost the whole Court were there … We were received by swarms of tall footmen in their plush livery and had sherry in the ante-room and dinner in the Court Room, which was comfortably filled but with plenty of room. One large table with a white cloth and a good deal of silver, nearly all bought by the Bank because it was [hallmarked] around 1694 … All the servants have learned one’s name for the occasion and whisper in a friendly manner when they offer you anything. In fact it was rather like dining in one’s own College.
The Governor made a little speech about how much their safe survival owed to Roger, and he replied pleasantly. I sat between the Governor and Cadbury [Laurence Cadbury, a non-executive director since 1936] – the former much more talkative than I had ever known before and making slightly malicious sketches of his colleagues. Afterwards we stayed at table and the hosts moved around … About 9.45 the Governor began to edge us out and it must have been all over about 10. And it was really extremely well done and most enjoyable …36
14
Honest Money
Cobbold’s final eighteen months, at the start of a legendary decade, were not entirely easy. From spring 1960 the post-election brakes on the economy began all too predictably to be applied, with the Bank reluctantly implementing the special deposits scheme in relation to the clearing banks – a move towards the quantitative controls that Cobbold had always dreaded, seeing them as likely to erode the Bank’s authority. Then in June, with the balance of payments position deteriorating, not only was a second tranche of special deposits removed from the clearers but Bank rate went up from 5 to 6 per cent. ‘There is no crisis,’ noted one of the discount market’s representatives after their regular weekly meeting with the governor. ‘Asked whether he [Cobbold] had not fired two barrels at once, he said that it was no bad idea to discharge an extra round at the retiring enemy.’ The relief lasted only until March 1961, when a surprise revaluation of the deutschmark precipitated a sudden surge of pressure on Britain’s gold and foreign exchange reserves, in turn leading to Cobbold and Roy Bridge negotiating at the Bank for International Settlements the so-called ‘Basle credits’, running through to July and totalling some $910 million. ‘Parsons felt that the tide had turned, at least temporarily, against the speculators,’ recorded the Fed’s Charles Coombs soon afterwards about the Bank’s reaction; and in the event ‘temporarily’ proved correct, as another sterling crisis gathered in June, amid what Cobbold called ‘the recurrent market rumour about early sterling devaluation’, a rumour that, writing to his counterpart at the Fed, Bill Martin, he wholly repudiated: ‘We are determined to hold the present position and are most anxious not to give public opinion the slightest excuse for detecting any weakness in that determination.’ Cobbold had become governor in 1949 under the threatening cloud of devaluation; now he was leaving under the same cloud, perhaps slightly less threatening but undeniably present. ‘It has all been great fun,’ he told a leading City figure, and it was to his credit that at least some of it had been.1 Over the twelve years he had grown into his office and, through strength of personality as much as anything else, would come to be seen as perhaps the ultimate ‘Mr Governor’ of the nationalised Bank.
The selection of the new governor – ultimately the government’s decision, but intimately involving Cobbold and other senior figures at the Bank – had been far from uncomplicated. The front-runner at the start of 1960, following the Court’s recommendation, was Morgan Grenfell’s Lord Harcourt, who in the mid-1950s had spent three years in Washington as the UK’s economic minister; but Sir Frank Lee, permanent secretary at the Treasury, was soon persuading Heathcoat Amory that Harcourt was not up to it and that instead they should look to Sir Oliver Franks, a brilliant administrator and former ambassador in Washington who was now chairman of Lloyds Bank. Eventually, in September 1960, the new chancellor, Selwyn Lloyd, formally offered the position to Franks. ‘The Governor won’t like it and the Deputy perhaps will be a bit prickly,’ predicted Hall at the Treasury, ‘but in nine months’ time everyone will be saying what a good thing it is.’ The diarist was mistaken, as there took place during October what was in effect a Cobbold-led rebellion at the Bank, with the governor deploying three senior members of Court to make it clear to both Macmillan and Lloyd that Franks was unacceptable. The reasons they gave are apparently unrecorded, but it is a fair guess that they and Cobbold had at least a triple motivation: Franks was someone whom they regarded as essentially a civil servant, not a City man; who was probably too fastidious for the increasingly important public-relations aspect of the office; and who, with his formidable, ultra-analytical intelligence, was ominously likely to turn the Bank into a study group, not a bank. Nor did it help Franks’s cause that, if Labour had won the 1959 election, he would have been the unambiguous choice of the new government. Almost certainly Franks got wind of the Old Lady’s hostile sentiments, and on 25 October he informed Lloyd that he no longer wanted the position. ‘Kim Cobbold,’ noted Macmillan somewhat bitterly after trying and failing to persuade Franks to change his mind, ‘is, of course, triumphant.’2
Within days, Macmillan and Lloyd made their final decision: Lord Cromer, intimately connected with Barings and currently the UK’s economic minister in Washington. Tellingly, as Hall now noted, Cobbold and the Court had been ‘plugging’ him ‘ever since they knew they could not have Harcourt’. Cromer was forty-two (making him the youngest governor for over 200 years); and the Financial Times reckoned that ‘with membership of the right clubs (Brooks’s and the Beefsteak), descended from a family which has combined business acumen and great wealth with pro-consular tradition, and married into one of the great 20th century newspaper dynasties [the Harmsworths], his qualifications must have appeared irresistible to the Prime Minister’. Or as Macmillan himself reflected after Cromer became governor: ‘Lord C. has a nose. He is not a Baring for nothing – a long business and financial tradition.’ During his governorship, though, he would provoke mixed emotions in Threadneedle Street. To some he was an accessible figure who brought a welcome, indeed novel, degree of verve and imagination to the job; to others he seemed self-important and, in an unwelcome patrician way, lacking in sympathy for life’s toilers in the ranks. ‘He was an aristocrat,’ recalled one colleague. ‘He didn’t always bother to defend his arguments, I mean he was rather good at stating things …’ Or according to another: ‘For me Cobbold is still the great Governor. Cromer was written up enormously because he was very good with the press. But to those of us in the Bank he was an outsider …’ And, even worse, he was ‘much more inclined’ than his predecessor ‘to like to see his name in the papers’.3 Transcending those judgements is a larger question. At a time when Britain was poised to undergo a social revolution, was this really the right moment for George Rowland (‘Rowley’) Stanley Baring, third Earl of Cromer, to become the Bank’s new public face? In retrospect it is perhaps surprising that Cobbold, largely responsible for engineering the appointment, failed to see the danger.
In July 1961 the new governor – who right from the start, noted the visiting Per Jacobsson, ‘seemed as natural as any man could be’ – was confronted by a serious sterling crisis. ‘Sterling is under extreme pressure and the threat of imminent devaluation is only being held in abeyance by massive short-term support enlisted from other Central Banks,’ he bluntly informed Selwyn Lloyd on the 7th, adding that the underlying circumstances were ‘more serious i
n many ways than the previous all too frequent post-war sterling contretemps’. Demanding a comprehensive statement by the end of the month, Cromer then set out his stall. ‘Wage and salary increases unrelated to increased productivity’ amounted to ‘a fraud on other sections of the people’; organised labour was guilty of ‘restrictive practices’, management of a ‘high degree of complacency’; public expenditure comprised far too much ‘non-productive investment’; and it was high time to start fashioning a defence policy that was no longer ‘a heritage from the great days of our Imperial past’. Over the next two and a half weeks he continued to keep up the pressure, above all insisting – as for so many years Cobbold had done – on the necessity of strong fiscal measures to accompany monetary ones if there was to be, he reiterated to Lloyd on the 19th, ‘a reasonable prospect of achieving the object of defending the existing parity of sterling’.
Eventually, on the 25th, the chancellor announced his package: various personal credit and government expenditure restrictions; Bank rate up from 5 to 7 per cent; and a call for a ‘pay pause’. As almost invariably was the case in these situations, the Bank would have preferred a still tougher package, even though the Financial Times reckoned the measures ‘the toughest economic restraints since the austerity period of Sir Stafford Cripps’; and in early September, by when sterling was no longer under pressure but funds were failing to flow to London despite the Bank rate hike, Cromer explained to Lloyd that there still ‘unquestionably’ persisted ‘lack of confidence in our taking measures to increase our competitiveness’. Significantly, one area where Cromer would come to look for sharper elbows was among the cartelised and mainly sluggish clearing banks, publicly raising the question in 1963 (at a Martins Bank anniversary banquet) ‘whether the considerable rigidity in interest rates which has grown up in the banking world in the last twenty years or so is an encouragement to the growth of bank deposits’ – subsequently described by one commentator as ‘a moment of high drama in an industry not unduly given to histrionics’, and a pointer to that industry’s more dynamic if less stable future.4
1961, with the orderly Bretton Woods world of stable currencies palpably starting to come under attack from speculators and hot money in the foreign exchange markets, signified the start of the modern era of central bank co-operation. This took the form first of the swap arrangements involved in the Basle credits and then the inauguration that autumn of the so-called ‘gold pool’. The old-style gold standard might no longer exist, but gold was still (in Forrest Capie’s phrase) ‘the anchor for the US dollar’. Indeed, ‘the Bretton Woods system depended on the United States standing ready to buy and sell gold at $35 an ounce.’ Even before the pool was formally established in November, essentially as a US initiative to share the cost of intervening on the London gold market in order to stabilise the dollar’s gold value, the Bank was working closely with the Fed. ‘With respect to the Bank of England activity in the gold market, he said that he saw no reason for anyone getting hysterical if the price goes above $35.20,’ noted the Fed’s Thomas Roche in September after a phone conversation with the Bank’s foreign exchange virtuoso. ‘Bridge said that he expects lots of trouble between now and the end of the year and that the Bank of England would use all the artistry possible. Bridge feels that the Bank of England being on the scene must handle the market as they see fit since, in his opinion, it is difficult for us to be of any substantial help at the fixing time, for example, since it would be 5.30 a.m. in New York and we would not be able to get the feel of the market.’ February 1962 saw the gold pool’s role expanding, with the key central banks agreeing to form a buying syndicate for the coordinated purchase of gold on the London market. External reaction was generally favourable, with one of the Bank’s executive directors, John Stevens, observing to the Fed that he had been ‘gratified’ that the London press ‘had not tried to delve deeply into some of the figures, especially the matter of the ¼% buying or selling charge’.
All this was consistent with Cromer’s strong, Norman-like internationalism, if not necessarily with his perhaps equally strong belief in free markets. ‘He had a particularly strong relationship with the Federal Reserve System, both in Washington and through the Federal Reserve Bank of New York, where he counted respectively Bill Martin and Al Hayes amongst his close friends,’ recalled an obituarist. ‘He built equally good relationships with the Governors of the Group of Ten countries [G10, established in 1962 to boost the IMF’s lending capacity] whom he met regularly in Basle.’ A typical moment occurred in July 1963, just before the governor headed off for a three-week holiday in Majorca. The context was the Fed’s recent discount-rate action; and, recorded Hayes after his transatlantic phone call, ‘I thanked Governor Cromer for the helpful way in which his bank had cooperated in holding things steady during the last hectic day or two – including the gold market.’5
Befitting his merchant banking background, Cromer also had a powerful sense of the need to restore London’s position as an international financial centre – and, crucially, he stimulated and encouraged his colleagues to think likewise. Emblematic, as well as hugely important in its own right, was the unfolding Euromarkets story. There, as far as the infant but fast-growing eurodollar market was concerned, the Bank’s policy remained broadly one of benign neglect. ‘However much we dislike hot money we cannot be international bankers and refuse to accept money,’ a report to the Treasury stated in October 1961. ‘We cannot have an international currency and deny its use internationally.’ Undeniably there were qualms, not least during the winter of 1962–3 after Sir Charles Hambro (still on the Court almost thirty years after stepping down as a pioneer executive director) had told Humphrey Mynors that he was getting ‘quite alarmed’ at the way the market was expanding, a market in which Hambros had a significant stake, and had asked for guidance. After a two-month internal debate at the Bank, the eventual steer was unequivocal. ‘It is par excellence an example of the kind of business which London ought to be able to do both well and profitably,’ the deputy governor wrote to Hambro in January 1963. ‘That is why we, at the Bank, have never seen any reason to place any obstacles in the way of London taking its full and increasing share. If we were to stop the business here, it would move to other centres with a consequent loss of earnings for London.’ Similarly, when during the second half of 1963 bank runs on the Continent prompted widespread anxiety about the stability of eurodollar deposits, the Bank held the line, with Bridge (by now an adviser to the governors) asserting that ‘the international framework of monetary co-operation which we now have’ was capable of dealing with any ‘misplaced lack of confidence’. Or as he candidly explained his thinking the following spring to the chief economist of Bankers Trust in New York:
The so-called Euro-dollar market is nothing other than a natural international money market. My point of analysis is that while domestic money markets are subject to the supervision of the monetary authorities and indeed to the banking laws of the countries concerned, there is not in existence any comparable international monetary authority to supervise and, where necessary, regulate the international money market nor, if there were, is it immediately evident by what means it could or would exercise its control.
The key word was ‘natural’; as for the lack of supervision, itself a strong attraction at this stage to many of the market’s participants, Bridge was not unduly worried: ‘There may indeed be some unsound banking here and there. Too much lending long against short borrowings. But this is where the experience and the judgement of the international banker should come in …’6
By this time, moreover, the eurodollar market – essentially an inter-bank, wholesale money market – was complemented by the newly created eurobond market, essentially a long-term capital market that was likewise based in London and was predominantly dollar-denominated. Its two main architects were George Bolton and Siegmund Warburg, but it was undoubtedly indispensable to their cause that Cromer happened to be in the governor’s chair. ‘We are sympath
etic to this proposal,’ he replied to Bolton in July 1962 after the latter (still on the Court, as a non-executive director) had set out the various initiatives in play that would help to restore London’s position as a capital market, ‘and will give it what practical support we can.’ The following summer saw not only the pioneer eurobond issues, but the US administration’s fateful Interest Equalisation Tax, doing major damage to New York as an international financial centre; and within weeks, in August 1963 after Morgan Grenfell’s Harcourt had inquired about the Bank’s attitude to a possible City of Oslo dollar issue in London, Maurice Parsons was stating explicitly that ‘we do not put any obstacle in the way of such issues on the basis that London is thereby conducting a brokerage business, which on the whole we are inclined to favour’. ‘Admittedly,’ continued that executive director, ‘we in the Bank would much prefer to see this kind of business done in sterling but unfortunately that is only possible in the case of a limited number of countries …’7
Taken together, the eurodollar and eurobond markets were central to London’s re-emergence from the 1960s as a top international player, starting to recover some of the ground it had lost since 1914. What Cromer was unable to engineer, however, was the abolition of exchange controls. ‘The restraint on the foreign exchange earning power of the City by the continuation through all these years of the Exchange control mechanism has been insidious and by no means insignificant and that has played its part in diminishing the contribution which the City makes to the “invisibles” element in the balance of payments,’ he declared in July 1961 to Selwyn Lloyd in his lengthy remonstrance shortly after becoming governor; in October 1962, in his Mansion House speech, he called for a revival of London’s ‘entrepot business in capital’; and the following spring, writing to the permanent secretary at the Treasury, Sir William Armstrong, he was adamant not only that exchange control represented ‘an infringement on the rights of the citizen, either individually or collectively, to dispose of his own property as he sees fit’, but that its continued existence (almost a quarter of a century after the start of the war) ‘proclaims to the world at large a sense of our weakness while providing the British Government of the day with a wholly unjustified feeling that in it they have a defence against the consequences of misfortune or mismanagement’. Fortunately or unfortunately, the governor did not get very far. ‘Those who think that we are not expanding as fast as we might,’ wrote Armstrong in July 1963 reflecting on why he was unable to recommend abolition or near-abolition, ‘would say that if we have sufficient resources to be able to devote them to overseas investment, we ought rather to use them for a further reduction to unemployment at home.’8 In short, the politics did not yet stack up – and would not for another decade and a half.
Till Time's Last Sand Page 54
