The British Government and the City of London in the Twentieth Century

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The British Government and the City of London in the Twentieth Century

The relationship between the British government and the City of London has become central to debates on modern British economic, political and social life. For some the City’s financial and commercial interests have exercised a dominant influence over government economic policy, creating a preoccupation with international markets and the strength of sterling which impaired domestic industrial and social well-being. Others have argued that government seriously constricted financial markets, jeopardising Britain’s most successful economic sector. This collection of essays is the first book to address these issues over the entire twentieth century. It brings together leading financial and political historians to assess the government–City relationship from several directions and by examination of key episodes. As such, it will be indispensable not just for the study of modern British politics and finance, but also for assessment of the worldwide problem of tensions between national governments and international financial centres. The editors are professors of history at the University of Durham. Ranald Michie’s many publications in international financial history include The London and New York Stock Exchanges 1850–1914 (1987), The City of London. Continuity and Change Since 1850 (1992) and The London Stock Exchange: A History (1999). Philip Williamson is author of National Crisis and National Government. British Politics, the Economy and Empire 1926–1932 (1992), Stanley Baldwin. Conservative Leadership and National Values (1999) and articles on interwar politics and finance.

The British Government and the City of London in the Twentieth Century edited by

Ranald Michie and Philip Williamson

   Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge  , UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521827690 © Cambridge University Press 2004 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2004 - -

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Contents

Notes on contributors Acknowledgements Conventions and abbreviations Introduction

page vii x xi 1

Part I The long perspective 1 The City of London and government in modern Britain: debates and politics                2 The City of London and the British government: the changing relationship  

5

31

Part II Markets and society 3 Markets and governments           

59

4 Financial elites revisited            

76

5 The City and democratic capitalism 1950–1970  

96

Part III Government and political parties 6 The Treasury and the City .  .    

117

7 The Liberals and the City 1900–1931          

135 v

vi

List of contents

8 The Conservatives and the City . . . 

153

9 Labour party and the City 1945–1970  

174

Part IV The interwar period 10 Moral suasion, empire borrowers and the new issue market during the 1920s           

195

11 Government–City of London relations under the gold standard 1925–1931       

215

12 The City, British policy and the rise of the Third Reich 1931–1937  

236

Part V 1945–2000 13 Keynesianism, sterling convertibility, and British reconstruction 1940–1952          14 ‘Mind the gap’: politics and finance since 1950            15 Domestic monetary policy and the banking system in Britain 1945–1971        .   

257 276

298

16 The new City and the state in the 1960s          .      

322

17 The Bank of England 1970–2000  .  .  .       

340

Select bibliography Index

372 377

Notes on contributors

           is a Lecturer in Economic History at the University of Leicester. He has published several articles on Australian overseas borrowing and the London Stock Exchange.        is Senior Lecturer in International History at the London School of Economics. He is author of British Capitalism at the Crossroads, 1919–1932: A Study in Politics, Economics, and International Relations (1987) and articles on aspects of contemporary history. He is currently writing a history of the world political-economic crisis of 1927–33.            is Professor of Economic History at Cass Business School, London. He has published widely on monetary and financial history and on commercial policy. Recent publications include Capital Controls (2002) and, co-edited with G. E. Wood, Monetary Unions (2003). He is now working on the political economy of financial regulation.             is Professor of Economic History at the University Pierre Mend`es France, Grenoble, and a visiting research fellow in the Business History Unit at the London School of Economics. His many publications include City Bankers 1890–1914 (1994) and Big Business: the European Experience in the Twentieth Century (1997). He is currently working on the performance of European business and on the history of international financial centres during the last two centuries.           is Head of the Department of History, International Relations and Politics at Coventry University. His publications include Doing Business with the Nazis: Britain’s Economic and Financial Relations with Germany, 1931–39 (2000) and he is currently writing a study of how multinational enterprises managed political risk in interwar Europe.

vii

viii

Notes on contributors

 .  .         worked in the Bank of England from 1968 to 1985, becoming Chief Adviser, and returned as an external member of the Monetary Policy Committee from 1997 to 2000. He was Norman Sosnow Professor of Banking and Finance at the London School of Economics until 2002, and is now deputy director of the School’s Financial Markets Group. He has written extensively on economic and monetary history, central banking, and financial regulation.  .  .  .      is Reader in Modern British History at the University of Oxford, and a Fellow and Tutor at Magdalen College. He is the author of The Crisis of Conservatism 1880–1914 (1995) and Ideologies of Conservatism (2002). His study of Margaret Thatcher’s reputation will appear in 2005.           is Professor of Modern History at the University of East Anglia. He is the author of Free Trade and Liberal England, 1846– 1946 (1997) and several articles on the City of London and economic policy. He is currently working on the international history of free trade and globalisation since 1776.             is Professor of History at the University of Durham. His many publications in financial history include The City of London. Continuity and Change Since 1850 (1992), and The London Stock Exchange. A History (1999). He is now working on the London foreign exchange market.          is Senior Lecturer in History at Cardiff University. He has written extensively on twentieth-century British economic history and policy and is currently writing a history of the global economy from 1944 to 2000. His most recent book is Profits of Peace: the Political Economy of Appeasement (1996). .  .     is Professor of History at the University of Stirling. His publications include British Rearmament and the Treasury, 1932–1939 (1979) and The Treasury and British Public Policy, 1906–1959 (2000). He is currently working on Treasury responses to Keynes in the period 1925–46.        .    is Senior Lecturer in Economic History at the University of Glasgow, and co-editor of Financial History Review. Among his recent publications are essays in Mission Historique de la Banque de France, Politiques et Pratiques des Banques d’Emission en Europe, XVIIe–XXe si`ecle (2003), and S. Battilossi and Y. Cassis (eds.), European Banks and the American Challenge (2002).

Notes on contributors

ix

         .       is Professor of International Economic History at the University of Glasgow. She has published widely on international monetary and financial relations since 1945 including Britain and the Sterling Area: from Devaluation to Convertibility in the 1950s (1994) and Hong Kong as an International Financial Centre (2001). She is currently engaged on a project reassessing Britain’s sterling policy 1958–73.            is Senior Lecturer in the School of Management, University of Liverpool. Among his publications are The Finance of British Industry 1918–1976 (1978), The Big Bang (1986) and The Securities Markets (1989). He is currently working on the gilt-edged market in the latter half of the nineteenth century.             is Professor of Economic History at Brunel University, London. He has written widely on twentieth-century British economic history and policy. His work relating to the Labour party includes Democratic Socialism and Economic Policy. The Attlee Years, 1945–1951 (1997), and The Labour Governments 1964–1970, III: Economic Policy (2004).               is Reader in Modern History at the University of Leeds. His recent publications include The Labour Party and Taxation: Party Identity and Political Purpose in Twentieth-Century Britain (2001), and he is now interested in labour law and the nature of work.                is Professor of History at the University of Durham, and author of National Crisis and National Government. British Politics, the Economy and Empire 1926–1932 (1992), Stanley Baldwin. Conservative Leadership and National Values (1999), and articles on interwar politics and finance.

Acknowledgements

This book draws on papers submitted to a conference held in the University of Durham in 2001. The purpose of that conference was to explore the issues and allow all participants to develop their arguments. Unfortunately it was not possible to publish all the conference papers, but the editors are grateful to all the speakers and contributors to the debate. They are grateful also to the London Stock Exchange for funds which supported both the organisation of the conference and the preparation of the book, and to Christine Woodhead for her editorial assistance.

x

Conventions and abbreviations

Full names of historical individuals are given in the index. This also gives the terms of office of the Bank of England Governors, Chancellors of the Exchequer and the Prime Ministers mentioned in the text. Unless otherwise stated, the place of publication is London. BEQB BoE BT CAB CO CPA EcHR FO GATT HC Deb Kynaston, City of London

LPA PP

Bank of England Quarterly Bulletin Bank of England Archives Board of Trade papers, in the National Archives/Public Record Office Cabinet Office papers, in the National Archives/Public Record Office Colonial Office papers, in the National Archives/Public Record Office Conservative Party Archives, Bodleian Library, Oxford Economic History Review Foreign Office papers, in the National Archives/Public Record Office General Agreement on Tariffs and Trade House of Commons Debates, 5th series, with volume and column (c., cc.) numbers David Kynaston, The City of London, in 4 volumes: I A World of its Own 1815–1890 (1994) II Golden Years 1890–1914 (1995) III Illusions of Gold 1914–1945 (1999) IV A Club No More 1945–2000 (2001) Labour Party Archives, National Museum of Labour History, Manchester Parliamentary Papers

xi

xii

Conventions and abbreviations

PREM

Radcliffe Committee T Wilson Committee

Prime Minister’s private office papers, in the National Archives/Public Record Office Committee on the Working of the Monetary System, 1957–9 Treasury papers, in the National Archives/Public Record Office Committee to Review the Functioning of Financial Institutions, 1977–9

Introduction

The nature of the relationship between the government and the City of London, or more abstractly between ‘politics’ and ‘finance’, is a central issue in studies of modern Britain. The relationship is assumed to have been close and to have had wide repercussions, but thereafter disagreements have emerged. It is a problem in economic and financial history: to what extent has the relationship affected the performance and structure of the economy in general, and the development of its financial and industrial sectors in particular? It is a problem in political history and political science: have government and the City had shared or divergent interests? Which has been more powerful? Has government unduly constricted the City’s financial markets, or has the City exerted excessive influence over the policy agenda and particular decisions? For imperial historians the question has been how far did City interests shape British overseas expansion and, later, the character of decolonisation? Historians of international relations have asked how far City interests have supported or conflicted with particular government foreign policies. The relationship is also an issue in social history and sociology: was there a significant merger of personnel and interest between the City’s financial elite and the governing elites, at the expense of other socio-economic groups? This book brings together political and financial historians to investigate the government–City relationship during the twentieth century, considered from various directions and by attention to revealing episodes. In the first section, the opening chapter describes the issues as these have emerged in recent historical studies and assesses them from a political perspective, while the second chapter traces the relationship over the long-term from a financial and economic perspective. The next section of three essays then considers issues relating to the broad economic and social environments: the boundaries between markets and government, the debate over the extent to which the City generated a distinctive sociopolitical elite and, in contrast, postwar efforts to ‘democratise’ ownership of financial assets. The essays in the third section examine the perspective of the Treasury, as the department of government most in contact with 1

2

Introduction

City institutions, and then those of each of the main political parties: the Conservative party throughout, and the Liberal and Labour parties during their periods of greatest potential impact on City activities. Before 1914 government–City interactions were limited, while both world wars produced exceptional conditions, in which the state imposed detailed control over the City’s activities, with its co-operation or acquiescence. Examination of the particular character and changing nature of government–City relations is therefore best undertaken on the interwar and the post-1945 years. The section on the interwar period has chapters on the attempt to restore the pre-1914 relationship in radically changed economic and political conditions, and examples of how it operated in the spheres of two other government departments, the Colonial and Foreign Offices. The chapters in the post-1945 section examine aspects of the government–City relationship during the long period of a managed and increasingly beleaguered economy, followed by the impact of a new financial internationalism. It concludes with an overview of the relationship over the last thirty years of the century from the perspective of the Bank of England. The aim of this book has been to advance debate on the government– City relationship by adding historical depth and understanding, not to seek agreement among the contributors nor to draw general conclusions. What can be said is that the relationship is in the process of fundamental change because of the growing involvement of more players on each side. It is no longer sufficient to consider only the role of the British government, because the European Union is becoming increasingly important in determining the laws, rules and methods of all in the City of London. Nor can the City any longer be identified just with British banks and British financial institutions serving British clients, not only because it is a major participant in global financial markets but also because, with many of its major businesses now foreign-owned, it is answerable to head offices located all around the world. The debate on the relationship between the British government and the City of London is increasingly just one part of the debate on the relationship between any financial centre and its host government, between those who regulate and those who are regulated, and between national sovereignty and trans-national power at a time of financial globalisation. These are not new issues, but they have entered a new phase over the last twenty-five years.     

Part I

The long perspective

1

The City of London and government in modern Britain: debates and politics Philip Williamson

Substantial historical interest in the City of London is a recent development. Financial historians studied its main institutions, some of its leading banks and aspects of monetary policy, but it received little comment even from other economic historians and was usually ignored in more general histories. Only in the 1980s did ‘the City’, considered as a whole, become a unit of study and enter the mainstream of historical attention, and only then did it attract interest from political scientists and sociologists. Partly this reflected the contemporary prominence of the City, due to the transformations which were then taking place in the financial system and the publicity given to the fabulous incomes and conspicuous consumption of financial dealers. A larger reason was a shift in the long-running debate about the relative decline of the British economy, meaning primarily manufacturing industry. After numerous other possible ‘causes’ had been investigated, the financial sector now seemed to be the chief culprit. At first attention focused on the supposed failure of the banks and the Stock Exchange to supply industry with adequate amounts or appropriate forms of capital.1 Increasingly, however, the damage inflicted by the City seemed more wide-ranging: except during the two world wars, it had exercised the dominant influence over government economic policy. Such claims connected with work by historians in other fields, and gave the City, and indeed financial history, an entirely new salience. Soon the issue of the relationship between the British government and the City of London acquired its own momentum, as it appeared to offer cogent explanations for many features of Britain’s domestic and international experience since 1850.

The author is indebted to the British Academy for the award of a research readership, during which this chapter was completed. 1

Helpful reviews of this debate are Y. Cassis, ‘British finance: success and controversy’, in J. van Helten and Y. Cassis (eds.), Capitalism in a Mature Economy (Cheltenham, 1990), pp. 1–22, and F. Capie and M. Collins, Have the Banks Failed British Industry? (Institute of Economic Affairs, Hobart Paper 119, 1992).

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Philip Williamson

The cases made for the City’s influence over government have been challenged, and some specific claims have provoked debates. This chapter reviews the various arguments, and from a political perspective suggests ways in which the discussion might be advanced. It urges more careful specification of its leading terms, fuller consideration of the character of its main participants, particularly what is understood by ‘government’, and a wider investigation of influences on the policy process. Both ‘the City’ and ‘the government’ have been more complex and more fluid entities, and been subjected to a broader range of pressures, than is sometimes allowed. The discussion of government–City relations has had the strength of drawing together historians and social scientists from the various fields of economics, finance, sociology, government, politics and imperial relations; even so, some disciplinary barriers remain, inhibiting a more precise understanding of the extent and nature of the interactions. Debates One of the earliest historical discussions of government–City relations emerged from the debate on the causes of interwar unemployment. For Sidney Pollard, the government’s determination in the early 1920s to re-establish the gold standard was a ‘bankers’ policy’: it expressed the ‘specific self-interest’ of a narrow section of the City and its spokesman, the Bank of England, while the Treasury ‘as ever’ reflected ‘the needs of the City rather than the country’, with terrible costs for industry and employment.2 Later, this type of argument was broadened as the main issue became Britain’s relative industrial decline, regarded as a persistent problem dating from the late nineteenth century. For Pollard again, ‘industry has every time to be sacrificed on the altar of the City’s and the financial system’s primacy’, because the Bank of England and the banking community largely determined the Treasury’s priorities.3 Such conceptions also became integral to general interpretations of Britain’s long-term socio-economic and political development. At their heart was a growing realisation that notwithstanding the ‘industrial revolution’ the financial and commercial sector had always been a strong and dynamic element in the British economy, indeed arguably more important for its performance than the manufacturing sector. The general interpretations drew support from socio-economic and cultural studies which 2 3

S. Pollard, ‘Introduction’ to S. Pollard (ed.), The Gold Standard and Employment Policies between the Wars (1970), pp. 1–26. S. Pollard, The Wasting of the British Economy. British Economic Policy 1945 to the Present (1982), pp. 34–5, 73, 85–8, 150–1; also S. Pollard, Britain’s Prime and Britain’s Decline. The British Economy 1870–1914 (1989), pp. 235–56.

City and government: debates and politics

7

independently concluded that the leaders of ‘finance capital’ were more powerful than those of ‘industrial capital’, and after 1850 acquired a special relationship with the governing landed classes. William Rubinstein established that the wealth of the financial and commercial middle class of metropolitan southern England exceeded that of the industrial middle class of provincial northern Britain.4 Youssef Cassis argued that a merger of the City’s financial elite with the landed elite had produced an acceptance of City views on economic policy.5 For Martin Wiener the social and cultural absorption of new middle-class wealth by old landed wealth had produced a ‘gentrification’ of dominant values, smothering the ‘industrial spirit’.6 The earliest of the general interpretations came from the ‘new left’. Perry Anderson argued that the survival of a ‘pre-modern’ ruling class and its penetration by ‘monied interests’ explained both the conservatism of the British state and the ‘hegemonic’ position of the City.7 For Frank Longstreth the banking ‘fraction’ of capital had achieved primacy in the state system, which enabled the City to dominate economic policy and ‘the political realm’.8 Geoffrey Ingham, in a sociological challenge to these neo-Marxist interpretations, gave a different explanation. The Bank of England and the Treasury were not mere instruments of the City, but had independent sources of power and independent interests. Rather, the City’s ‘hegemony’ was the product of a ‘core institutional nexus’ of the City, the Bank and the Treasury, bound together by their one mutual interest – preserving ‘stable money forms’.9 From a different perspective, Peter Cain and Anthony Hopkins argued that prolonged alliance between the landed and financial interests had generated a ‘gentlemanly capitalism’, whose character explained the form not just of the British 4 5

6 7

8 9

W. D. Rubinstein, ‘Wealth, elites and the class structure of modern Britain’, Past and Present 76 (1977), 99–126, and W. D. Rubinstein, Men of Property (1981). Y. Cassis, City Bankers 1890–1914 (Cambridge, 1995; first edn in French, 1984), esp. ch. 8; and see similarly, reaching further into the twentieth century, M. Lisle-Williams, ‘Beyond the market: the survival of family capitalism in the English merchant banks’, and M. Lisle-Williams, ‘Merchant banking dynasties in the English class structure: ownership, solidarity and kinship in the City of London’, British Journal of Sociology 35 (1984), 241– 71, 333–62. M. Wiener, English Culture and the Decline of the Industrial Spirit 1850–1980 (Cambridge, 1981), with specific references to the City on pp. 128–9, 145. P. Anderson, ‘Origins of the present crisis’, New Left Review 23 (1964), 26–53, and P. Anderson, ‘The figures of descent’, New Left Review 161 (1987), 20–77; and see A. Gamble, Britain in Decline. Economic Policy, Political Strategy and the British State (1981), pp. 134–43. F. Longstreth, ‘The City, industry and the state’, in C. Crouch (ed.), State and Economy in Contemporary Capitalism (1979), pp. 157–90. G. Ingham, Capitalism Divided. The City and Industry in British Development (1984), esp. pp. 9–11, 37, 127–39, 178–9, 215–16, 219, 229–32.

8

Philip Williamson

state but also of the British empire. As a ‘branch of gentlemanly capitalism’ the City had a ‘disproportionate influence in British economic life and economic policy making’.10 These converging characterisations of the City’s influence over the government, especially Ingham’s concept of a City–Bank–Treasury nexus, have had considerable influence. This is evident in studies of the bimetallism controversy in the late nineteenth century and the financial crisis at the outbreak of the First World War; in Robert Boyce’s discussion of the ‘politics of economic internationalism’ under the gold standard regime of 1925–31; in an investigation of the emergence of Euromarkets in the 1950s, and in a much-noticed 1990s critique of the contemporary state.11 In Ewen Green’s review of the issues from the 1880s to 1960, the City’s lobbying power, structural links with the state and overlapping economic ideology with the Treasury ensured that, in the long run, ‘banking sector priorities were translated into government priorities’.12 For Scott Newton and Dilwyn Porter the power of the ‘core nexus’ was a leading explanation for the failure of industrial modernisation since 1900.13 In such accounts government economic policy turned upon a contest between the international interests of the City or ‘finance’ and the more national concerns of ‘industry’ or ‘production’, with the City’s interests normally prevailing. This was not simply because of its economic importance and its provision of funds to the government. It also resulted from further forms of power: an early integration of the financial and ruling landed elites; the City’s economic cohesion, geographical concentration and physical proximity to, and institutional connections with, the government. The effect was that government always tended to identify the City’s interests with the national interest. In their coherence, explanatory economy and treatment of a long timescale, these conceptualisations of government–City relations have seemed 10

11

12

13

P. J. Cain and A. G. Hopkins, ‘Gentlemanly capitalism and British expansion overseas. I. The old colonial system 1688–1850’ and ‘II. New imperialism 1850–1945’, Economic History Review 39 (1986), 501–25, and 40 (1987), 1–26; and P. J. Cain and A. G. Hopkins, British Imperialism, 2 vols. (1993; revised one-volume edn, 2001). E. H. H. Green, ‘Rentiers versus producers? The political economy of the bimetallic controversy c. 1880–1898’, English Historical Review 103 (1988), 588–612; J. Peters, ‘The British government and the City–industry divide: the case of the 1914 financial crisis’, Twentieth Century British History 4 (1993), 126–48; R. W. D. Boyce, British Capitalism at the Crossroads 1919–1932 (Cambridge, 1987), esp. ch. 1; G. Burn, ‘The state, the City and the Euromarkets’, Review of International Political Economy 6 (1999), 225–61; W. Hutton, The State We’re In (1995), pp. 22–3, 79–81, 112–36. E. H. H. Green, ‘The influence of the City over British economic policy c. 1880–1960’, in Y. Cassis (ed.), Finance and Financiers in European History 1880–1960 (Cambridge, 1992), pp. 193–218. S. Newton and D. Porter, Modernization Frustrated. The Politics of Industrial Decline in Britain since 1900 (1988): see the themes stated on pp. xi–xv.

City and government: debates and politics

9

powerful and persuasive. Yet like other general interpretations they risk becoming schematic and reductionist, establishing assumptions which foreclose further investigation and exclude alternative explanations. Such terms as ‘the City’ and ‘government’ might be given excessive force, and be presented as unitary agents capable of uniform intentions. Coincidences of outlook between the two might be mistaken for causation; opinions of particular bankers might be elevated into ‘proof’ of City domination, when quite different and more adequate explanations of government decisions could be found. There certainly seem to be difficulties with these approaches. Doubts have been expressed about the extent of the City’s cohesion, its distance from industry and its political influence.14 Episodes which appeared to be prime cases of division between ‘finance’ and ‘industry’, notably the debates on bimetallism and tariffs before 1914, have on further scrutiny been found to be less clear cut.15 The notion of an Edwardian ‘identity of views between political circles and banking circles’16 sits uneasily with the Unionist party’s adoption of tariff reform, which challenged the City’s long-standing attachment to free trade, and the Liberal government’s 1909 budget, which aroused considerable City protest for threatening capital accumulation. Against the government decision in 1925 to restore the gold standard might be set its original 1919 decision to abandon it, despite the recommendation of its own banker-dominated official committee, largely because of concerns about unemployment and the attitudes of industrial labour.17 The outcomes of the sterling and budget crises of 1931, for all the allegations of a ‘bankers’ ramp’, were more the product of party-political manoeuvres than City or Bank of England pressure.18 Nor is it difficult to find friction between the Bank of England and Treasury officials or government ministers, whether over use of the gold reserves in 1917, bank rate 14

15

16 17 18

See the important sceptical commentaries by M. Daunton: ‘ “Gentlemanly capitalism” and British industry 1820–1914’, Past and Present 122 (1989), 119–58; ‘Financial elites and British society 1880–1950’, and ‘Finance and politics: comments’, in Y. Cassis (ed.), Finance and Financiers, pp. 123–46, 283–90; and ‘Home and colonial’, Twentieth Century British History 6 (1995), 344–58. See the A. C. Howe and E. H. H. Green debate in English Historical Review 105 (1990), 377–91, 673–83; Daunton, ‘Gentlemanly capitalism’, pp. 149–51; A. C. Howe, Free Trade and Liberal England, 1846–1946 (Oxford, 1997), pp. 199–204, 233–6; E. H. H. Green’s modified analysis, ‘Gentlemanly capitalism and British economic policy 1880– 1914: the debate over bimetallism and protectionism’, in R. E. Dumett (ed.), Gentlemanly Capitalism and British Imperialism (1999), pp. 44–67, and the Howe and Green chapters 7 and 8 below. Cassis, City Bankers, p. 308. P. Cline, ‘Reopening the case of the Lloyd George Coalition and the postwar economic transition 1918–19’, Journal of British Studies 10 (1970), 162–75. P. Williamson, National Crisis and National Government. British Politics, the Economy and Empire 1926–1932 (Cambridge, 1992), chs. 8–11.

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in the 1920s, credit control in the 1950s and 1960s, or public sector expenditure in the 1960s and 1970s. Even combined Bank and Treasury advice did not necessarily prevail: in 1952 a joint plan for an immediate return to sterling convertibility (‘Robot’) was defeated by Conservative ministers. Three major government enquiries on the financial system – in 1929–31, 1957–9 and 1977–919 – attest to recurrent political doubts about City activities. More considerable still is the perspective in studies of the City of London itself. For the period after 1914 these reveal much government or Bank of England control, regulation and intervention, not only during the emergencies of the two world wars and their immediate aftermath – when it is accepted that the government overrode most City activities – but even during ‘normal’ periods of peacetime. The government’s borrowing and funding requirements, measures to support the balance of payments, taxation policies, nationalisation of utilities, credit restrictions and even labour legislation all affected, and frequently inhibited, the business and international competitiveness of City firms and markets.20 In the 1970s a common City view was that the financial community was ‘the victim of government action and was incapable of putting its case effectively in Whitehall or Westminster’.21 When after 1971, culminating in ‘Big Bang’ in 1986, the government and the Bank took measures to overcome restrictive practices within the City – practices created or encouraged by their own earlier interventions – its structures and activities were again decisively shaped by government action, even though the outcomes were often different from what had been intended. Neither particular cases of City–government tensions nor a persistent government imprint on the City are necessarily incompatible with the argument that the City had a strong influence over economic policy. The weight of particular episodes might still seem to favour the prevailing interpretations, while the effects of government within the City could have been of a different order to the City’s effects on government. Nevertheless, such counter-cases and contrary perspectives emphasise the need for caution. It may be that, as Martin Daunton has written, the ‘notion that economic policy was dominated by an alliance of the City and Treasury 19

20 21

Respectively the (Macmillan) Committee on Finance and Industry, the (Radcliffe) Committee on the Working of the Monetary System, and the (Wilson) Committee to Review the Functioning of Financial Institutions. These are leading themes in R. C. Michie, City of London. Continuity and Change Since 1850 (1992), and R. C. Michie, The London Stock Exchange. A History (Oxford, 1999). M. Moran, ‘Finance capital and pressure-group politics in Britain’, British Journal of Political Science 11 (1981), 382, 399.

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is a regrettable commonplace of modern British history which obscures other, and more interesting, features of policy formation’.22 ‘The City’ The contrasting histories of the City of London by Ranald Michie and David Kynaston have both shown that as an economic entity the City ‘defies easy generalisation’. It might be defined as a national and international clearing house, a collection of markets used by intermediaries in trade, money, securities and financial services. As such its essence and its strength consisted in the remarkable diversity and flexibility of its activities.23 Its markets and firms were highly specialised in their functions, types of client and geographical areas of expertise, and even within the City itself they operated in a highly competitive environment. Precisely because it was an international clearing house the City was vulnerable to sharp structural changes in the world economy – especially the two world wars and the 1929–32 depression – as was its financial sector to sudden international capital flows. Some instances of supposed ‘City’ pressure on government, notably during successive sterling crises, are more fully understood as emanating from foreign markets and institutions. Another of the City’s core businesses, providing funds for the British state, meant that from the First World War onwards many of its activities were subordinated to the demands of a massively enlarged national debt. The effect was that the City’s activities and its structure of firms changed considerably over the century – from 1914 to the 1950s losing much of its long-established commercial and international financial business and becoming increasingly concerned with domestic finance, before new forms of trans-national finance emerged during the 1960s and re-established its international pre-eminence.24 Assessments of the City of London’s long-term influence over government policy need to give careful attention to these changes in composition. Yet so diverse, fluid, competitive and prone to external pressures were its activities, and so tied to the immediate conditions and fluctuations of their specialist markets were its brokers, bankers and merchants, that the ability of the City as a whole to form a coherent policy ‘interest’ requires demonstration, rather than being taken for granted.25 It can be 22 23 24 25

M. Daunton, ‘How to pay for the war: state, society and taxation in Britain 1917–24’, English Historical Review 111 (1996), 916. Michie, City of London, pp. x, 21–3, and see the evocation of complexity and fluidity in D. Kynaston, The City of London, 4 vols. (1994–2001). See Michie, City of London, and his chapter 2 below. For further comment from various directions, see Daunton, ‘Gentlemanly capitalism’, 146–51, and Daunton, ‘Financial elites’, pp. 139–42; R. C. Michie, ‘Insiders, outsiders

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argued that the demands of its various businesses for easy access to and ready international exchange of money did create common interests – in open markets, free international trade, a stable and convertible currency, government credit-worthiness and low taxes. These were, however, very general concerns which left room for differences over extent and means; and once each was expressed as a specific policy preference, they could conflict. For example, during the Edwardian period City men were faced with a choice between free trade and low direct taxation. Most opposed Joseph Chamberlain’s tariff reform campaign when it started in 1903, but after 1906 an increasing number accepted it as preferable to the Liberal government’s tax increases.26 In practice, when historians use the term ‘the City’ they rarely mean the whole accumulation of economic activities located in the City of London. Most often it is treated as a synonym for the City-based banks, leaving aside the commodity markets, trading companies, shipping interests, and even the insurance markets and the Stock Exchange. Yet even here there are complications. This ‘City’ is usually identified with only some of the banks, and at different times with different types of bank. Before the 1930s these are the leading merchant banks, with their international businesses, but from the 1940s they become the clearing banks, whose principal concerns were domestic. Such semantic shifts in the historical literature indicate an important point about contemporary meanings. From the perspective of the government and the Bank of England, what principally constituted ‘the City’ varied, not just over time but according to what seemed most relevant for their purposes. There was ‘the City’ which rarely impinged on their concerns, and which when it did tended to be regarded as a problem or irritant. This was true of the Stock Exchange, whose interests and opinions usually carried little weight in government or with the Bank.27 There was ‘the City’ which handled the technical and normally routine business of government borrowing. Its leading bankers were important and needed to be consulted, but this business rarely gave rise to issues which can properly be termed ‘economic policy’. The ‘City’ whose views were considered significant for policy reasons might consist of a different

26 27

and the dynamics of change in the City of London since 1900’, Journal of Contemporary History 33 (1998), 547–71; M. Moran, ‘Power, policy and the City of London’, in R. King (ed.), Capital and Politics (1983), pp. 49–51; S. Checkland, ‘The mind of the City’, Oxford Economic Papers, n.s. 9 (1957), pp. 264–5, 273–4, 276–8; R. Roberts and D. Kynaston, City State. How the Markets Came to Rule Our World (2001), p. 17. See Howe’s chapter below, pp. 141–3. Michie, London Stock Exchange, pp. 186, 423–5, 601.

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set of bankers; and as economic policy objectives changed – from maintenance of the gold standard to management of the domestic economy – so the relevant types of bankers altered. Is ‘the City’ said to be important for government policy in the 1900s the same ‘City’ which seems to influence policy in the 1950s? How far can cases made for ‘the City’s’ capacity and means for influencing government in the 1900s be generalised to apply to the 1950s? ‘The City’ as a whole was not organised as a pressure group or ‘interest’. In the early part of the century, occasional petitions to senior ministers were organised by ‘the bankers and merchants of the City’, notably on the issue of the 1909 budget.28 In 1920 there was even a joint representation from the heads of the Bank of England, clearing and merchant banks, Stock Exchange and London chamber of commerce, proposing a radical solution to the problem of the postwar floating debt.29 But these were exceptional actions at the height of perceived crises, not part of sustained efforts to shape policy – and they had little or no impact on government. A ‘parliamentary committee of bankers’ had only an indistinct and transitory existence before 1914. From the 1960s some attempts were made to unite ‘finance capital’, embracing all the various financial businesses within one organisation, but without success. Particular types of bank or market members did form representative associations, such as the Accepting Houses Committee and London Discount Market Association, but compared to industrial and trade associations these were slow to develop and, like them, were concerned with self-regulation, implementation of official requirements, and technical issues of direct concern to their members, not matters of general economic policy. Some, including the Accepting Houses Committee, were also weak and for long periods practically ‘moribund’. Only during the 1970s, in response to increased government intrusion in the City, did pressure groups emerge or older associations become lobbying bodies.30 Until then such activity had seemed unnecessary, because the leading banks regarded the Bank of England as its representative and channel of communication in dealings with the government. 28 29

30

The Times, 15 May 1909, and see Kynaston, City of London, II, pp. 494–6, and below, pp. 121–2, 140. M. Daunton, Just Taxes. The Politics of Taxation in Britain, 1914–1979 (Cambridge, 2002), p. 77. For another example, of coordinated letters from leading bankers during the 1931 crisis, see Williamson, National Crisis, pp. 282, 293. Cassis, City Bankers, pp. 271–84; Moran, ‘Finance capital and pressure-group politics’, pp. 385–6, 389–93, 397–9. In a similar shift, in 1979 the Stock Exchange joined the Confederation of British Industries: Michie, London Stock Exchange, pp. 486–7.

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The Bank of England For some historians the Bank of England is part of the City, for others an instrument of the government. This reflects both an ambiguity which was always inherent in its various functions, and its changing relationship with the government during the century. In some respects the Bank obviously did act on behalf of ‘the City’, meaning those sectors of the City which it considered especially important at particular times. As its responsibilities included the stability of the financial system, it helped to reorganise markets disrupted by war or depression, and to rescue ailing banks and finance houses; indeed until the 1980s it tacitly guaranteed the solvency of all the City’s leading banks. Its expanding supervision of the banking system and later other City markets and firms became a means of protecting them from government interference. As the City’s contact with the Treasury and the elected government, it upheld or advocated policies which it believed would benefit the financial system, and protested against government measures which it considered damaging to that system or its particular parts – on occasion placing severe pressure on ministers by insisting that preservation of financial confidence should take priority over all other policies. Sometimes, as over credit restriction in the 1950s, it even obstructed government policies.31 For all these purposes, as far and as long as possible the Bank distanced, even insulated, itself from government and defended its independence as an institution and its control of monetary policy. These originally seemed to be guaranteed by its delegated powers under the gold standard, and its being in private ownership. Even after the final departure from the gold standard in 1931 transferred ultimate monetary authority to the Treasury and even after the Bank was nationalised in 1946, it still asserted its operational autonomy and right to give independent advice, even though this could contradict the government’s electoral or other public commitments.32 The Bank 31

32

J. Fforde, The Bank of England and Public Policy 1941–1958 (Cambridge, 1992), ch. 10; A. Ringe and N. Rollings, ‘Domesticating the “market animal”? The Treasury and the Bank of England 1955–60’, in R. A. W. Rhodes (ed.), Transforming British Government, I, Changing Institutions (2000), pp. 123–7. For excellent studies of these various aspects, see D. Kynaston, ‘The Bank of England and the government’ and R. Roberts, ‘The Bank of England and the City’, in R. Roberts and D. Kynaston (eds.), The Bank of England. Money, Power and Influence, 1694–1994 (Oxford, 1995), pp. 19–55, 152–184; A. Cairncross, ‘The Bank of England: relationships with the government, the civil service and Parliament’, in G. Toniolo (ed.), Central Banks’ Independence in Historical Perspective (Berlin, 1988), pp. 39–72; M. Collins and M. Baker, ‘Bank of England autonomy: a perspective’, in C.-L. Holtfrerich, J. Reis and G. Toniolo (eds.), The Emergence of Central Banking from 1918 to the Present (Aldershot, 1999), pp. 13–33; M. Moran, ‘Monetary policy and the machinery of government’, Public Administration 59 (1981), 47–61.

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was notably successful in ensuring that the nationalisation act preserved its position as the intermediary – or barrier – between government and the banking system, denying the Treasury powers of direction over the clearing banks.33 Nevertheless the Bank did not regard itself as merely the representative or voice of ‘the City’. As its deputy Governor told the Macmillan Committee in 1929, it considered its main duty to be ‘to conduct its operations in the interests of the community as a whole . . . free from the control of particular groups or interests’. While such statements were chiefly intended to justify the Bank’s political independence, they also implied a position of independence within the City and a readiness, where judged appropriate, to direct, control and discipline the activities of its firms and markets.34 In the 1930s and 1940s this could involve pressure on merchant and clearing banks to assist depressed industries or small industrial companies, against the banks’ own sense of appropriate or sound banking business.35 On a much larger scale, under the pressures of war, depression and government economic management the Bank’s responsibilities as banker to the government and guardian of the currency and the financial system obliged it to play a large part in shaping the City’s financial structures and activities. By its own operations or by ‘moral suasion’ it organised or regulated the money markets and capital issues to suit the government’s borrowing requirements and the funding of its short-term debt. Together with the Treasury it imposed exchange controls and embargos or restrictions on overseas investment in order to stabilise the currency and the exchange rate.36 From the 1940s it issued ‘requests’ – always treated as instructions – to clearing banks and other financial houses for restraint in their advances: its objections were not to the principle of credit restriction, but to Treasury views on method and 33 34

35

36

S. Howson, British Monetary Policy 1945–51 (Oxford, 1993), pp. 110–17; Fforde, Bank of England, pp. 10–13. See P. Williamson, ‘Financiers, the gold standard and British politics, 1925–1931’, in J. Turner (ed.), Businessmen and Politics. Studies of Business Activity in British Politics 1900– 1945 (1984), p. 109. For an account of this period with different emphases, see Boyce, chapter 11 below. R. S. Sayers, The Bank of England 1891–1944, 3 vols. (1976), I, ch. 14; W. R. Garside and J. I. Greaves, ‘The Bank of England and industrial intervention in interwar Britain’, Financial History Review 3 (1996), 74–9; R.Coopey and D. Clarke, 3i: Fifty Years Investing in Industry (Oxford, 1995), pp. 16–23. Among the Bank’s reasons was a desire to pre-empt government intervention in industry as well as in banking: defence of private enterprise extended beyond the City to manufacturing companies. Roberts, ‘The Bank of England and the City’, 160–76, 178–81; Sayers, Bank of England, I, chs. 9, 13, and II, ch. 19; S. Howson, Domestic Monetary Management in Britain 1919–38 (Cambridge, 1975); J. Atkin, ‘Official regulation of British overseas investment 1914– 1931’, EcHR 23 (1970), 324–35; D. Moggridge, British Monetary Policy 1924–1931. The Norman Conquest of $4.86 (Cambridge, 1972), chs. 7–9.

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degree. While these interventions were presented as being in the City’s general interest as well as the national interest, they nevertheless curtailed, redirected, or cushioned the business of particular markets and individual firms. They were also the main reason for the growth of organisation among City firms. These associations were encouraged or initiated by the Bank in order to facilitate the implementation of controls, regulations and ‘requests’. In significant respects the discount houses and leading banks became ‘unpaid agents of the state’, indeed were ‘incorporated into public policy making’.37 Of course the relationship was far from operating in one direction only. In order to ensure the banks’ co-operation, the Bank conferred privileges on them, accepted their systems of self-regulation and restrictive practices, and had to be solicitous about their interests. Yet even this tended to tie the banks to the Bank of England, as they became dependent on its assistance in preserving their cartels against unregulated competitors. As the historian of the Bank during the 1950s commented, a wider effect was that ‘civil servants and ministers came to regard the banking system as a creature to be manipulated through the Bank in the interests of short-term macro-economic policies. Despite occasional public and private protests the banking system became used to accepting such manipulation, with damage to their own efficiency and to the services provided to its customers.’38 The Stock Exchange underwent a similar process. From 1914 onwards its business was impaired by Treasury as well as Bank of England restrictions, but it learned to exploit these to strengthen itself against competitors and became so accustomed to exercising quasi-official responsibilities that it seemed almost ‘an arm of the state’.39 Although the Bank had responsibilities towards the government, plainly it was not just the instrument of government any more than it was simply the representative of City bankers. From Montagu Norman’s early governorship during the 1920s it had its own opinions not just on banking matters but also on wider domestic and international economic issues. Moreover, as the leading financial institutions and associations communicated with the government through the Bank, their concerns were liable to be filtered through its own perceptions and objectives. In practice, within government ‘City influence’ chiefly amounted to the views and interpretations of the Bank of England. These were expressed forcefully 37

38 39

Moran, ‘Finance capital and pressure-group politics’, 383, 387–8, 393–9; B. Griffiths, ‘The development of restrictive practices in the U.K. monetary system’, Manchester School 41 (1973), 3–18. Fforde, Bank of England, p. 782. Michie, London Stock Exchange, esp. pp. 182–96, 291–4, 324–5, 330, 365–7, 425–7, 545, 594, 637.

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and tenaciously, and carried weight with Treasury officials. Nevertheless after 1914 the Bank was always acutely aware of where the real power lay. Even during the 1920s, a supposed peak of its influence, it accepted that its monetary measures should take account of political considerations, so – contrary to gold standard ‘rules’ – it managed the exchange rate in order to minimise controversial bank rate increases.40 Insulation from direct government intervention, though a form of power in terms of banking affairs, from the 1940s probably became a weakness in relation to economic policy, in that the Bank was detached from the processes of demand management.41 From its perspective, assertions of independence, even including its efforts to have the gold standard restored in 1925, were less demonstrations of strength than defensive or rearguard actions against the expansion of government and against political pressures for policies it regarded as harmful. After 1931 its sphere of independence contracted by stages, as the government’s efforts to stabilise and then, from the 1940s, to manage the economy intensified. Not until 1970, however, did a Bank of England Governor state that ‘the Bank is an arm of Government in the City’ – though even then O’Brien insisted on its special advisory role and his successor, Richardson, spoke of it as having ‘independence within government’.42 Plainly enough, the keys to explaining the Bank’s relative (but until the 1990s, declining) autonomy and to assessing the extent of ‘City influence’ lie in the attitudes and actions of the Treasury and the elected government. The Treasury Even more than the Bank of England, the Treasury manifestly had its own distinctive concerns. For Ingham, this remains compatible with the City’s power because the Treasury’s institutional interests within the state bureaucracy caused it to align itself with the Bank and the wider City. Certainly the Treasury’s claims to be the chief department of government were reinforced by its connection with the Bank as the main channel for banking–government communications, and by their joint responsibility for monetary policy. It was a relationship which Treasury officials jealously guarded, on occasion co-operating with the Bank to exclude participation by other departments.43 Negatively, though, Ingham’s point has 40 41 42 43

Moggridge, British Monetary Policy, chs. 7–9; Kynaston, ‘The Bank of England and the government’, pp. 27–8. M. Moran, The Politics of Banking. The Strange Case of Competition and Credit Control (1984), p. 24; Moran, ‘Power, policy’, pp. 54–5. Kynaston, ‘The Bank of England and the government’, pp. 51–2; Moran, ‘Monetary policy’, p. 49. A good example, directed against the Board of Trade, is noted in George Peden’s chapter below, p. 131.

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an underexplored implication. Government relations with the City were not confined just to the Treasury, and investigation of other departments or government agencies with interests and responsibilities in commercial and financial affairs might complicate verdicts on the directions of City–government ‘influence’. For example, the Foreign Office had assistance before 1914 from merchant bankers ready to lubricate its diplomatic objectives with loans, and in the 1920s from the Bank of England’s ‘financial diplomacy’ in its efforts to advance European re-stabilisation.44 Between the wars the Colonial and Dominions Office resisted Treasury and Bank efforts to ration imperial capital issues.45 From the 1960s investigations emanating from the Board of Trade and Department of Trade and Industry forced the end of restrictive practices among clearing banks and in the Stock Exchange. It is also true that the Treasury’s responsibility for public finances necessarily made it attentive to the City’s financial markets. Government debt had to be made attractive to investing institutions, and these wanted to be sure of government efforts to maintain ‘sound finance’ and to resist inflation. But this did not mean that the government’s position was weak or dependent: the money markets and the banks needed the gilt-edged securities and Treasury bills, as these formed the fundamental assets and instruments for many of their activities. Nor did the Treasury require Bank or City pressure in order to balance the budget, restrain public expenditure, and check excessive public borrowing, because these were precisely its own functions. As George Peden has commented, ‘the Treasury had its own reasons for pursuing policies of “sound finance” even when these met the approval of the City’.46 It had its own reasons too for supporting sound money and open markets, because aside from their supposed economic benefits it regarded these as supplying the economic disciplines which reinforced its control of public finances. So, for example, the decisions from December 1919 to impose deflation and return to the gold standard were taken primarily on Treasury advice, reacting as much to chronic domestic budget and debt management problems as to Bank of England concerns with the City’s international position.47 Any wider ‘City influence’ was superfluous. Although Treasury officials and Chancellors of the Exchequer readily admitted their (surely inevitable) 44

45 46 47

P. Thane, ‘Financiers and the British state. The case of Sir Ernest Cassel’, Business History 28 (1986), 80–99; Sayers, Bank of England, I, chs. 8, 15; but for later tensions see Neil Forbes’s chapter 12 below. See Bernard Attard’s chapter 10 below. G. C. Peden, The Treasury and Public Policy, 1906–1959 (Oxford, 2000), pp. 12, 518; and see also his chapter 6 below. Howson, Domestic Monetary Management, pp. 12–23, 25–9, 33–43; Peden, Treasury, pp. 140–58.

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reliance on the Bank’s expertise in the financial markets,48 such statements should not be mistaken for subservience towards the Bank, still less the wider City, on broader financial and economic issues. Although it was not until the late 1940s that the Treasury developed from a public finance department into an economic ministry, George Peden, Susan Howson, Roger Middleton and Peter Clarke have shown that during the interwar years its officials were already generating their own sophisticated economic understandings, which included the bearing of monetary conditions on the broader economy.49 There seemed good reasons for regarding international financial stability and the international use of sterling as beneficial for the British economy; for considering the City’s overseas earnings and its contributions to the balance of payments and to the demand for British manufactured exports as valuable for general economic well-being; and, after the Second World War, for preserving the Sterling Area and being worried about the potential damage of the sterling liabilities and an adverse balance of payments. There seemed good reasons too for defending sterling and the credit of British banks against international financial panics or speculation, even if this meant asking for assistance from foreign central banks or the International Monetary Fund – and as already noted, Treasury reactions to such crises should not be equated in any simple way with responses to ‘City interests’.50 In themselves these Treasury attitudes do not require explanation by general notions of Bank of England or City ‘dominance’ over policy, though this is not to deny that their influence was significant in particular Treasury responses. Yet the Treasury always had to attend to far more than just Bank advice and any further City interests. Examination of particular episodes suggests not only that where it agreed with them it did so for its own purposes, but also that it was perfectly capable of rejecting their views or taking a different approach. It was ‘quite unmoved’ by the City protest over the 1909 increases in direct taxation, and despite the imposing figures behind the 1920 City plan for the floating debt – a remarkable (indeed ironic) proposal for a temporary addition to the already war-inflated rates of 48 49

50

E.g. Kynaston, ‘The Bank of England and the government’, pp. 34–5. Peden, Treasury; Howson, Domestic Monetary Management; R. Middleton, Towards the Managed Economy (1985), esp. chs. 3, 5, 8; P. Clarke, ‘The Treasury’s analytical model of the British economy between the wars’, in M. Furner and B. Supple (eds.), The State and Economic Knowledge (Cambridge, 1990), pp. 171–207. The point is well made for the mid 1960s in R. Stones, ‘Government–finance relations in Britain 1964–7: a tale of three cities’, Economy and Society 19 (1990), 36–41, 52, but it applies also to other sterling crises from 1931 to 1992; and see the distinction made in Roberts and Kynaston, City State, p. 17, between City firms and international financial markets.

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income tax and super-tax – it dismissed it as politically impossible.51 Once Treasury officials took overall charge of monetary policy after the 1931 crisis they ignored the Bank’s wish to return once again to the gold standard, and ensured that exchange rates and interest rates were stabilised at levels which assisted industrial recovery.52 While sympathetic towards the Bank’s efforts to restore market disciplines from the late 1940s, over the following decades they could not accept its views on the extent to which the balance-of-payments and inflation problems should be met by public sector cuts and incomes policies. Indeed, for much of the century the levels of public expenditure and taxation were a recurrent source of difference between them. Here the Treasury was itself usually fighting rearguard actions, under Conservative governments as well as Liberal and Labour – applying what brakes it could, but unable to arrest the long-term trend towards increased spending and an expanding public sector. It was not just that the Treasury could never wholly resist unwelcome pressures from the spending departments. Nor was it just that as part of the government it could not ignore interests other than those of the ‘City’ – those of industry, labour, welfare recipients, and taxpayers.53 The Treasury also had its own views on what constituted the best interests of the government and the nation, perceptions which were independent of particular economic interests because its responsibilities were not just economic or financial: it had also to help preserve the political stability, military security and diplomatic weight of the state. Most obviously of all, the Treasury was not a free agent. Government and policy The strongest claims for the City’s influence on government have come from economic, social or Marxist studies. For political historians these claims have surprising features. One is their socio-economic reductionism, the narrowing of explanation to economic interests, financial elites or ‘gentlemanly capitalists’ – this at a time when even social history and studies of popular movements and elections were abandoning or considerably qualifying notions of economic or social ‘determination’. Although the concept of a City–Bank–Treasury nexus does emphasise an independent role of sorts for the Treasury, it practically ignores the most public aspect of the state: the elected governments which, after all, had final responsibility for financial and economic policies. Still less does it 51 52 53

Peden, Treasury, p. 45; Daunton, Just Taxes, pp. 77–8. Howson, Domestic Monetary Management, pp. 80–95. In addition to the studies in note 49, see for a more recent period C. Thain, ‘The Treasury and Britain’s decline’, Political Studies 32 (1984), 581–95.

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encourage consideration of the further elements in the political system to which Cabinet ministers had to attend: their own political parties, the rival parties, parliament and the electorate. Politicians are very largely disregarded, as if they were puppets manipulated by the Treasury or by financial or producer interests. This effect is reinforced by the tendency of histories of policy to be based overwhelmingly on the records of officials held in the Public Record Office, perhaps supplemented by some general political histories and ministerial biographies, but failing to engage adequately or at all with the private papers and speeches of senior politicians and with the specialist literature on party and electoral politics. Two crucial dimensions of policy, those of party-political strategies and broader ‘political-cultural’ assumptions, can be entirely missed. While permanent officials manifestly could exert a considerable influence over transitory and less expert ministers, it must always be recalled that their function was to serve those ministers and, ultimately, to supply advice tailored to their concerns. As an economist with much experience as a government adviser has emphasised, policy is ‘inherently political’ and has to be politically acceptable.54 ‘Bringing the state back in’55 to the analysis – accepting that elected governments and party-political competition are autonomous, and can themselves shape economic interests, ideas and structures – has large implications for understanding government–City interactions. Politics generated its own preoccupations and imperatives, and it should not be assumed that senior politicians identified themselves with, or responded to the promptings of, a particular economic interest. For them the national interest involved not just economic assumptions but sets of political, social, moral and international concerns, while the party-political struggle turned on efforts to combine support from numerous different social groups and diverse bodies of opinion. No party, not even the Labour party, could succeed by seeming to favour one ‘economic interest’ alone. Considered in these terms, the concentration on ‘economic policy’ in discussions of City influence can be narrow and one-dimensional. It gives insufficient attention to other types of policy decision which placed pressure on economic policy and affected the context within which the City had to operate. It is salutary to take a long perspective: much of what leading City elements in the 1900s wished to defend was lost during the 54

55

A. Cairncross, Economic Ideas and Government Policy. Contributions to Economic History (1996), p. 255. As Peden, Treasury, p. 160, notes, from PRO evidence alone it is difficult to know whether or not Treasury officials were ‘writing to order’. P. Evans, D. Rueschemeyer and T. Skocpol (eds.), Bringing the State Back In (Cambridge, 1985).

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next seventy years. These ‘defeats’ – on free trade, sterling’s international status, taxation, Bank of England independence – were the outcome not just of inexorable forces of global economic change, but of government decisions and political debate. Above all there was war. The activities and prosperity of much of the City from the 1850s depended on a stable international economy: it needed peace, indeed from the 1890s some leading bankers made efforts to reduce Anglo-German tensions.56 In contrast to the government’s eighteenth-century wars which stimulated the City’s development, those of the twentieth century were hugely damaging to the City. After 1945 both Labour and Conservative governments retained great-power aspirations, which gave them their own reasons for continuing to attach importance to the international strength of sterling. In 1964 it was very much the Labour leadership’s decision to resist devaluation.57 Yet from the late 1950s there were growing Treasury and Bank doubts about the financial costs of post-imperial power politics and the viability of the sterling exchange rate, while a new financial ‘City’ was emerging which dealt in currencies other than sterling, and had little interest in its fate. In domestic policies the priority that governments gave to social and political objectives, especially following the impact of the two world wars, expansions of the electorate in 1918 and 1928 and emergence of the Labour party, had similarly transforming effects. The increased provision of social services and from 1945 the commitments to full employment, demand management and nationalisation had major implications for ‘sound finance’ and the operations of the financial system. Yet in these policy fundamentals the Bank of England had no influence. As government grew hugely in size, scope and impact on the economy, and as political faith in the efficacy of the market declined or was qualified (until the 1970s), so the significance attached to Bank of England advice and ‘City’ views on matters beyond the financial markets declined considerably. Just as the nature of the City changed during the century so, still more obviously, did that of government: verdicts about policy influence over the long term are doubly hazardous. The sources of and constraints upon economic policy have been complex, with party commitments and political manoeuvres being as important as official advice, competing economic ideas and pressure from economic interest groups. Nor have these elements been discrete: what economic groups perceive as their ‘interest’ could be shaped by past or potential government action; City bankers could be influenced 56

57

P. Thane and J. Harris, ‘British and European bankers 1880–1914: an “aristocratic bourgeoisie”?’, in P. Thane, G. Crossick and R. Floud (eds.), The Power of the Past (1984), p. 223. A. Cairncross and B. Eichengreen, Sterling in Decline (1983), pp. 160–93.

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more by their party allegiance than conventional views about their economic interests.58 The concept of ‘economic policy’ itself can be onedimensional, if it is treated as unitary rather than as a set of policies. Given the party-political concerns of ministers and the pressures upon them, these policies rarely had perfect economic coherence: their primary rationale was political, not economic. As Rob Stones has argued, overall policy was ‘the result of a fractured and fragile set of processes’, with specific policies pointing in different, even contradictory, directions as ministers attempted to achieve several objectives and to placate numerous groups at once, with the effect that the government was placed in several different relationships with any particular group such as the City bankers. His example is the Labour government in 1964–7 taking measures to preserve confidence in sterling, while simultaneously pursuing its own objective of domestic growth through credit and taxation policies which the Bank of England and City financiers intensely disliked.59 Other cases can readily be found. During the early 1930s a display of strict budgetary orthodoxy helped sustain financial confidence at a time when cheap money, managed exchange rates and tariffs were being introduced. Assessment of the presence or degree of Bank or ‘City’ influence may depend on the selection of the policy or policies being examined. Of course some, perhaps many, senior politicians took no interest in and were ignorant of banking and monetary issues, leaving themselves at the mercy of Treasury and Bank advice. Notoriously, Lord Passfield (Sidney Webb) as a former member of the 1931 Labour Cabinet declared after the suspension of the gold standard that ‘nobody even told us we could do that’.60 But too much should not be concluded from such examples. As Anthony Howe, Ewen Green and Jim Tomlinson show,61 each party had politicians who were certainly not intimidated or much impressed by Bank or even Treasury views. In contrast to the Labour ministers during the 1931 crisis, Conservative ministers in the new National Coalition government were so self-assured in their own assessments of financial confidence and so intent on their party objectives that they ignored the Bank’s direst warnings, until the Bank eventually concluded that further defence 58

59 60

61

Good instances of economic histories of policy which address its complexities, including the political dimensions, are J. Tomlinson, Public Policy and the Economy since 1900 (Oxford, 1991), and R. Middleton, Government versus the Market. The Growth of the Public Sector, Economic Management and British Economic Performance c. 1890–1979 (Cheltenham, 1996). Stones, ‘Government–finance relations in Britain’, 33 and passim. As originally noted in Dalton diary, 12 Jan. 1932, quoted in Williamson, National Crisis, p. 14. Matters had, however, been considerably more complicated than this artless statement implies: see Williamson, National Crisis, ch. 9. Chapters 7–9 below.

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of sterling was futile.62 A common politician’s view of ‘City opinion’ was that it was hopelessly irrational, fickle, self-interested, politically unrealistic, and anyway likely to be divided.63 One striking suggestion about City influence, that it could be decisive in the choice of Chancellors of the Exchequer, should be treated with scepticism: party and personal considerations were always more important.64 Nevertheless, it may seem remarkable that governments for long left the Bank of England and the financial City with substantial independence and that, with the exception of the Labour party from 1931 to 1945, the political parties did not make them subjects for political campaigns or election manifestos. Part of the explanation was the political promise, pressure or constraint of other, apparently more pressing, issues. Of greater importance were the successive forms of ‘governing’ political economy. The politics of political economy In the commonly Marxist or marxisant accounts of City ‘hegemony’ over economic policy, the British state is assumed to have been a committee for organising the affairs of the dominant socio-economic elite or alliance. There is, however, a different understanding of the state which better explains the nature of government and policy over the last two centuries. By directing attention to the political aspects of the ‘orthodox’ economic doctrines inherited from the nineteenth century, this also explains the unusual position of the Bank of England and ‘the City’ without making excessive claims about their power. The purpose of the major financial and commercial reforms from the late 1810s to the 1850s was not simply economic. Faced with severe social unrest and radical protest, the chief preoccupations of successive governments were political stabilisation, integration and legitimation.65 62 63 64

65

Williamson, National Crisis, pp. 328–30, 410–16. E.g. Thane, ‘Financiers and the British state’, pp. 89, 95; Kynaston, City of London, III, pp. 5, 62, 110; Daunton, ‘How to pay for the war’, pp. 905–8. Cf. Boyce, British Capitalism at the Crossroads, pp. 21, 72–3, 380n.64, and Peden, Treasury, pp. 12, 193, 430. There are difficulties with the evidence adduced for the cases usually cited. That for the 1919 appointment consists of speculation by the Chancellor, Austen Chamberlain, not an explanation from the Prime Minister, Lloyd George. Baldwin as Prime Minister in 1923 and 1924 did mention City opinion, but only as one factor and only in the context of trying to persuade a reluctant Neville Chamberlain to accept the chancellorship, statements unlikely to have revealed the main reasons for his choice. Horne, supposedly disliked in the City for his 1921–2 chancellorship, had nevertheless been Baldwin’s first choice in 1923, and his refusal then (and changed party circumstances) meant that there was no question of his being offered the post in 1924. The evidence for Lyttelton in 1951 is retrospective and ambiguous. For this paragraph and the next, see P. Harling and P. Mandler, ‘From “fiscal-military” state to laissez-faire state’, Journal of British Studies 32 (1993), 44–70; B. Hilton, Corn,

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Senior politicians of all parties, sharing an autonomous ethos of ‘good government’, sought to defend authority, hierarchy and property in general, more than the interests of any specific economic group or section of the propertied classes. Indeed, in order to disarm radical criticism and restore confidence in established institutions, the agreed principle was that government had to be seen to be free from dependence upon, obligation towards and pressure from particular interests – including the Bank of England and the City. Accordingly, as far as possible the state ceased to be a participant in economic activities. With the gold standard, the Bank Charter Act, free trade and balanced budgets, governments created a framework for free markets, an automatic mechanism for economic adjustments and ‘rules’ for public finance. This was the political essence of Victorian laissez-faire, later extended to that other highly sensitive area, industrial relations. A minimal, non-interventionist state that was – or was successfully presented as – impartial towards competing interests would also be a strong state, able within conventional political limits to pursue its own purposes and meeting little resistance in financing its activities. These reforms were carried against opposition from the Bank of England and City commercial interests, some of which were severely hit by the loss of ‘mercantilist’ and tariff legislation. On the other hand, the reforms assisted a new breed of merchants and financiers able to exploit the great expansion of the international and British economies from the 1850s to 1914. Government had not just exerted its supremacy over the City; however unintentionally, it had also taken a large part in reconstructing its economic activities. Although in the event new City interests were beneficiaries of the reforms, it does not follow that the gold standard, free trade and ‘sound’ public finance became their special ideological property.66 These doctrines and the associated concept of a ‘disinterested’ state continued to serve the purposes of the political parties and government officials, by excluding from ‘politics’ a range of actions which might destabilise not just the financial and economic system, but also each party’s political position and even the political system itself. These doctrines also became embedded in general political culture, because notwithstanding some challenges from the 1880s they were on balance

66

Cash, Commerce (Oxford, 1977), esp. chs. 2, 8, and conclusion; Howe, Free Trade and Liberal England, pp. 13–23, 55–64; R. McKibbin, The Ideologies of Class. Social Relations in Britain 1880–1950 (Oxford, 1990), pp. 26–32, 38; P. Thane, ‘Government and society in England and Wales, 1750–1914’, in F. M. L. Thompson (ed.), The Cambridge Social History of Britain 1750–1950, 3 vols. (Cambridge, 1990), III, esp. pp. 26–33; Daunton, ‘Home and colonial’, pp. 351–6, and Daunton, Trusting Leviathan. The Politics of Taxation in Britain 1799–1914 (Cambridge, 2001), pp. 26–7, 378, 388. Cf. Ingham, Capitalism Divided, pp. 112, 130–1; Cain and Hopkins, British Imperialism, I, p. 83.

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perceived as being to the economic and political advantage of all significant groups, including the working population, which was especially loyal to free trade as a guarantee of low living costs. For the period up to 1914 the term ‘economic policy’ is a misnomer. Governments directed their own finances without supposing this to have economic implications. They devolved monetary supervision as a purely technical issue, under gold standard conventions, to the Bank of England; and they recognised no responsibility for general economic activity, or for industry and banking. Economic life and political life were separate spheres. The Bank and ‘the City’ had independence from government, not power over its policies. Party politics was concerned with constitutional, denominational and moral issues, and to a lesser extent foreign policy and social reform. This explains why tariff reform, an attempt to change the terms of political debate – and in its inception and defeat it was always a party-political episode, not a competition between industrial and financial sectors67 – caused such party and electoral dislocation. The impact of the First World War placed economic and social issues firmly on the political agenda. Yet these new conditions made the traditional financial constraints on government seem still more essential. The wartime experience of government controls and negotiation with economic interests, the enlarged postwar electorate, and the strength and radicalism of the Labour movement increased the likelihood that partypolitical competition and pressure from economic groups would subvert public finance and the currency. The postwar inflation, occurring while the financial disciplines remained suspended, gave practical and frightening demonstration of the dangers. For the Bank of England and the Treasury the gold standard, the balanced-budget rule and a new element, the ‘Treasury view’ inhibiting public investment, now acquired still stronger political purposes. A good indication is the heightened rhetoric: that of Treasury officials when defending the Bank’s independence in setting bank rate, of the Bank in insisting on its political neutrality and of the leading government advisor, Bradbury, in famously describing the gold standard as ‘knave-proof. It could not be rigged for political or even more unworthy purposes.’68 These Bank and Treasury efforts to reinforce political checks were directed not just against the Labour party, but 67 68

Green, ‘Gentlemanly capitalism’, p. 58, suggests that the tariff reform campaign was a political attempt to construct an industrial interest. P. J. Grigg, Prejudice and Judgment (1948), p. 183, and see Moggridge, British Monetary Policy, p. 160; Williamson, ‘Financiers’, pp. 107–11; R. Middleton, ‘The Treasury in the 1930s: political and administrative constraints to acceptance of the “new” economics’, Oxford Economic Papers 34 (1982), 59–61, 63–4; Peden, Treasury, pp. 131–2, 150–1, 158, 196–7.

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against politicians of all parties; their complaints began under the Coalition government, and continued under its Conservative successors.69 In so far as the Bank and the Treasury succeeded, this was only because the same political and economic logic was accepted – ultimately – by senior government ministers themselves. As monetary and banking issues threatened to become politically as well as economically significant, Chancellors of the Exchequer took more interest in them and were particularly sensitive over increases in bank rate – but only in private. In public they upheld the Bank’s independence, just as they accepted the gold standard. They did so because they agreed that the stability of the currency and the banking system were too important to be exposed to party competition; because there were obvious advantages in governments not being responsible for ostensibly unavoidable, yet now usually unpopular, monetary decisions; and because the gold standard strengthened their own hands in imposing budget control. Although Churchill tested his advisers’ resolve over the return to gold and later regretted the decision, Keynes’s presentation of him as an economic innocent led astray by the financial authorities is misleading: in 1925 he was well versed in, and pre-disposed towards, the orthodox economic doctrines.70 When he did seriously challenge a bank rate increase, in February 1929, the Conservative Cabinet overruled him, formally resolving that the government did not control the Bank of England’s policy. Labour party politics had always been overwhelmingly focused on industrial and labour issues, and little thought was given to monetary issues: like free trade, ‘sound money’ was assumed to be a necessary condition for decent living standards among the poor and for the security of the skilled workers’ savings and trade unions’ funds. While the Labour Chancellor in 1929, Snowden, had doubts about the availability of industrial investment – hence his appointment of the Macmillan Committee – he too accepted the distinction between ‘technical’ and ‘political’ spheres, and publicly insisted that the Bank had to be free from political interference.71 Nevertheless, in practice the Bank’s policies were inhibited by political pressures, while the Conservative government was hardly more prepared than the Labour government to limit social expenditure and taxation to the levels favoured by the Bank and the wider City. Senior politicians of both major parties had imprisoned themselves within incompatible policies, adopting the 69 70 71

E.g. Kynaston, City of London, III, pp. 61, 112, 128–9; cf. Ingham, Capitalism Divided, p. 173. See P. Clarke, ‘Churchill’s economic ideas 1900–1930’, in R. Blake and W. R. Louis (eds.), Churchill (Oxford, 1993), pp. 79–95. Moggridge, British Monetary Policy, pp. 161–4; Kynaston, ‘The Bank of England and the government’, pp. 27–8.

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gold standard yet persisting with social reforms, unemployment payments and (notwithstanding the coal and general strikes) industrial conciliation to an extent which precluded the degree of deflation now required to maintain it. Even after the 1931 departure from gold, the traditional rationale for insulating monetary issues from political pressures remained strong. Past and present Chancellors of the Exchequer in the National government secured a Cabinet decision that ‘government control’ of the Bank’s policy was ‘undesirable’. By this was meant control by politicians, so the effect was to leave the final direction of monetary policy with Treasury officials.72 This was not enough for the Labour party which, having persuaded itself that it had been the victim of a ‘bankers’ ramp’, now extended socialism to embrace nationalisation of the Bank of England and the clearing banks, and creation of a National Investment Board.73 Nor was it enough for other ‘progressive-minded’ politicians: in the aftermath of the depression of 1929–32, proposals for government direction of investment were widely canvassed, even by some Conservatives. That such radical changes in the banking system were not introduced was essentially a consequence of the politicians’ acceptance of a new political economy during the 1940s. At first the 1945 Labour government thought that Bank of England nationalisation and continuation of wartime physical controls over finance made further banking nationalisations and a National Investment Board unnecessary. These seemed still less necessary after it switched towards ‘Keynesian’-style demand management, which turned attention away from monetary issues towards fiscal policy.74 This had a double effect for the Bank of England and the financial City. Because monetary issues had been relatively marginalised, the Bank, tacitly supported by Treasury officials, was able to exploit the ‘customary assumptions’75 and re-establish elements of its independence from government. Nevertheless within government the Bank’s and City’s concerns had become just one element in a wider regime of macroeconomic management, and ministers now not only accepted 72

73

74 75

Williamson, National Crisis, pp. 497–501. In similar style, tariffs and new arrangements for unemployment ‘doles’ were neutralised by being placed in the hands of ‘non-political’ agencies. S. Pollard, ‘The nationalisation of the banks: the chequered history of a socialist proposal’, in D. E. Martin and D. Rubinstein (eds.), Ideology and the Labour Movement (1990), pp. 173–80; E. Durbin, New Jerusalems. The Labour Party and the Economics of Democratic Socialism (1985), pp. 73–4, 162–8, 204–18; and S. Howson, British Monetary Policy 1945–51 (Oxford, 1993), pp. 65–73. J. Tomlinson, ‘Attlee’s inheritance and the financial system: whatever happened to the National Investment Board?’, Financial History Review 1 (1994), 139–55. The useful term in Moran, Politics of Banking, pp. 9, 22, 24.

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responsibility for monetary policy but also had alternative sources of advice on these issues, from the recruitment of professional economists into government service.76 Although the politicians had, largely by inadvertence, allowed the Bank to retain the ability to argue its case and act as a buffer between government and the banks, the larger reality was its subordination to the priorities of full employment and the welfare state. This became evident during the ‘Robot’ episode in 1952. It is significant that the Bank and some Treasury officials seized upon the change from a Labour to a Conservative government to propose what was, in essence, an attempt to impose a new form of the earlier ‘automatic’ monetary and financial disciplines on government. But it is much more significant that the scheme was rejected by a group of ministers determined to avoid the political risks not just of allowing unemployment to rise, but also of appearing to succumb to ‘City’ pressure – to what they feared would be presented as ‘Montagu Normanism’ or ‘a bankers’ ramp’.77 From the mid 1950s to the mid 1970s new pressures – balance of payments deficits, the effort to accelerate growth, persistent inflation – increasingly persuaded Chancellors of the Exchequer that for effective demand management fiscal measures were not nearly enough. Treasury involvement in monetary and banking grew, slowly but inexorably. Despite various spells of resistance, the Bank could not prevent erosion of its operational independence and its ability to deflect government interest in financial institutions.78 Thereafter, from the mid 1970s, the perceived failure of ‘Keynesian’ management and abandonment of full employment as the primary policy objective produced a complex and paradoxical situation for government relations with the Bank and the City. The new Conservative government’s encouragement of free markets helped stimulate a boom in the financial sector, but also ended the City’s restrictive practices and forced rapid changes in the ownership of many firms. The government’s ‘monetarist’ doctrines reasserted the centrality of monetary policy, but with the effect of further tightening Treasury control over the Bank’s conduct of policy.79 Yet in the new conditions of volatile international financial markets, such close political control over monetary 76 77

78 79

Cairncross, ‘Bank of England’, pp. 49–51; Collins and Baker, ‘Bank of England autonomy’, pp. 16–17; and for economic advice, Peden, Treasury, pp. 24, 372–4, 437–9. J. Bulpitt and P. Burnham, ‘Operation Robot and British political economy in the early 1950s: the politics of market strategies’, Contemporary British History 13/1 (1999), 1–3, 19, 21–3, 26–7; S. Kelly, ‘Ministers matter. Gaitskell and Butler at odds over convertibility, 1950–52’, Contemporary British History 14/4 (2000), 31–42, 45–6, and see Newton’s chapter below, pp. 269–72. Ringe and Rollings, ‘Domesticating the “market animal” ’, pp. 123–7; Moran, ‘Monetary policy’, 50–6; Stones, ‘Government–finance relations’, 42–8. Kynaston, ‘The Bank of England and the government’, pp. 31–2.

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policy weakened confidence in the government’s ultimate ability to resist inflation. The effect was that its other policies were exposed to disruptions caused by problems with sterling. In these circumstances, acceptance of the Bank of England’s independence in monetary policy once again became an attractive political strategy for senior members of both the Conservative and Labour parties. Matters had not really come full circle – conditions had changed too much since the early part of the century to be comparable – but again the motive was less subservience to the City than a determination to restore government credibility and regain greater freedom to pursue other policy objectives.

2

The City of London and the British government: the changing relationship Ranald Michie

An unchanging relationship between unchanging partners: this is how the relationship between the City of London and the British government has tended to be painted. Although this simplification aids interpretation of a long time period, it also distorts understanding. There was nothing constant about either the government or the City during the twentieth century, and so it would be remarkable if the relationship between the two did not change. Government was transformed during the century, emerging as the dominant force within British economic and social life. The City of London was also transformed as it shed its commercial and imperial past to focus on finance and Europe. Under these circumstances the relationship between the City and government could not remain static. At the same time both existed within, and had to adapt to, a global economy that forced changes as a result of two world wars, a world depression and the rise and fall of managed national economies. This chapter seeks to trace and understand the City–government relationship over the past three centuries, focusing particularly on its intensity, and on the direction and limits of influence. The origins of the relationship, 1700–1914 The City of London’s leading institutions owed their very existence to the financial needs of the British government. The Bank of England was established in 1694 in response to the government’s borrowing predicament, while the founding of the London Stock Exchange in 1802 was an attempt to create an organised market for the National Debt at a time of international conflict. The government relied on the City to provide the money required to finance its expenditure, while the City relied on the government for the business it generated. Such a mutually dependent relationship, with a high degree of self-interest on both sides, underpinned Britain’s success as a military-fiscal state until the early nineteenth century. The bankers, brokers and merchants of the City of London flourished not only through supplying the government with the money and 31

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material required for successive wars, but also by obtaining from the government the security necessary for the successful conduct of business, especially protection from the activities of foreign rivals through a strong navy. However, in other respects eighteenth-century governments were not especially helpful in furthering the City’s interests. Attempts to control the promotion of joint-stock companies and to restrict the trading of shares left the City trying either to circumvent state controls through a system of self-regulation, as with the Stock Exchange, or to provide its own remedies for gaps in the financial and monetary system resulting from government failure, as in the supply and use of money. From this perspective the dominant partner in the relationship was the government. During the nineteenth century the government–City relationship became less intense, though more ambiguous. Following the reintroduction of income tax in 1844, governments had a relatively secure source of income that increased in amount as the nation’s prosperity grew. As most governments ran balanced budgets, they had no need to borrow. The national debt ceased to grow and the proportion of government revenue required to service it fell from 54 per cent in 1830 to 11 per cent by 1913. This freed whatever political party was in power from dependence on the City. The government could even take the step in 1888 of reducing the interest paid on the national debt, even though this would displease many in the City.1 Nor is there much real evidence that in the half century before the First World War any government paid particular attention to the City’s wishes in framing domestic policy. Taxes on both high-income earners and inherited wealth were hardly City-inspired policies.2 On the other hand, the City flourished under a regime of benign neglect where finance and trade were little troubled by intervention and controls either at home or abroad. With the end of protection and abandonment of imperial preference, this was an era of ‘caveat emptor’ where the buyer and seller or investor and borrower were left to take the consequences of their own actions, and where markets and those who participated in them were self-regulated. There was no dominant City view on issues such as protection or the gold standard,3 1

2 3

R. Bonney (ed.), The Rise of the Fiscal State in Europe, c. 1200–1815 (Oxford, 1999), chs. by Ormrod, O’Brien and Hunt; D. Winch and P. K. O’Brien (eds.), The Political Economy of British Historical Experience, 1688–1914 (Oxford, 2002), chs. by O’Brien, Hoppit, Capie, Daunton, Peden. M. Daunton, Trusting Leviathan: the Politics of Taxation in Britain, 1799–1914 (Cambridge, 2001), pp. 35, 123, 187, 207, 225, 370, 388. A. C. Howe, Free Trade and Liberal England, 1846–1946 (Oxford, 1997), pp. 13–16, 232, 236; A. Marrison, British Business and Protection, 1903–1932 (Oxford, 1996), pp. 19–20, 58, 75, 112, 204, 429–31. However, for a contrasting view on the influence of City financiers on government currency policy, see T. Wilson, Battles for the Standard: Bimetallism and the Spread of the Gold Standard in the Nineteenth Century (Aldershot, 2000), pp. 20, 175–6.

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although due to the lack of an alternative source of economic expertise, bankers, brokers and financial journalists from the City provided expert individual opinion on financial, commercial and monetary matters. The one aspect of government policy with which the City has been positively identified is expansion of the Empire, and the additional opportunities this created for trade and, especially, investment. Those assumed to have been driving this were the ‘gentlemanly capitalists’ of the City, a wealthy elite combining the twin pursuits of southern landowner and London financier who, divorced from the world of the northern industrialist, turned to the Empire as an outlet for their money and their talents.4 However, it is difficult to discover much substance behind this interpretation. Since the ending of imperial preference in 1860 the City focused increasingly upon wider international trade and finance. Countries like the United States, Argentina and Germany loomed large in the City’s financial and commercial activities, while much of the recently acquired Empire was of little significance, apart from gold in South Africa and rubber in Malaya. The Empire was not an issue which produced concerted City pressure on government. In the early twentieth century the most pressing City concern was the prospect of war with Germany. The City financed much of Germany’s international trade, handled its capital exports, employed its ships and insured its mercantile marine, to such a degree that it was feared that a war would have disastrous consequences. Had the City been able to exert real influence over government policy before the First World War, then either there would have been no war with Germany, or else measures would have been taken to safeguard the City from its consequences.5 As neither was achieved, it is difficult to make a case that government policy before 1914 was particularly responsive to City influence. The disengagement between the government and the City in the nineteenth century was not just on the side of government, for the City became less dependent on the government for business. Though the Bank of England remained pre-eminent, playing a unique role as the banker’s bank, by the early twentieth century other banks came to rank alongside it in size and importance, particularly the five major joint-stock banks which from London head offices dominated banking in Britain. Numerous other smaller banks were also important in that they provided banking networks around the world or were engaged in specialised services within the City itself. The Stock Exchange no longer relied on the national debt as its 4 5

See P. J. Cain and A. G. Hopkins, British Imperialism, 2 vols. (1993). D. French, British Economic and Strategic Planning, 1905–1915 (1992), pp. 68, 92–4; P. Kennedy, Strategy and Diplomacy, 1870–1945 (1989), pp. 94–6.

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main business. Instead, much of its activity was now focused on domestic and foreign corporate securities, especially railways. Between 1853 and 1913 the national debt as a proportion of the value of securities quoted on the Stock Exchange fell from 70 to 11 per cent. As a result, direct government interests in the City were fairly low. The same was also true regarding policy. Monetary policy was devolved to the Bank of England, which operated under the requirements of the international gold standard, not at the behest of the Chancellor of the Exchequer. There were no exchange controls and capital moved in and out of the country in response to the forces of global supply and demand. There were no barriers to either exports or imports, enabling the City to occupy a position at the centre of international trade. To most in the City the actions and policies of the government were irrelevant. A relationship in flux, 1914–1939 The cost, duration and intensity of the First World War had profound consequences for both government and the City, immediately reversing the nineteenth-century trend and restoring their mutual dependence. From the very outbreak of the war government intervention in the City was required in order to prevent a financial collapse caused by a rush to withdraw savings, which would have resulted in a massive contraction in credit and widespread business failures.6 The government convened a meeting of the banks, and declared a bank holiday to allow time for emergency measures to be implemented and to inject extra liquidity into the system. As hostilities dragged on the government was forced to control more and more of the economy in order to maximise resources for the war effort, with government borrowing rising inexorably. Whereas the quoted national debt of all kinds stood at £1 billion in 1913 the figure had more than quintupled to £5.4 billion by 1920, and the government’s share of all quoted securities had risen to 32 per cent compared to the prewar level of 9 per cent. In contrast the £2.5 billion of quoted securities belonging to American railroads was almost entirely liquidated by British investors or requisitioned and sold by the government. The government’s short-term borrowing through Treasury bills also dominated the London money market both during the war itself and for long afterwards, in 6

For this episode see J. Peters, ‘The British government and the City–industry divide: the case of the 1914 financial crisis’, Twentieth Century British History 4 (1993), 126–48; T. Seabourne, ‘The summer of 1914’, in F. Capie and G. E. Wood (eds.), Financial Crises and the World Banking System (1986), pp. 77–116; also David Lloyd George, War Memoirs, I (1933), ch. entitled ‘How we saved the City’.

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contrast to the earlier importance of commercial bills financing international trade.7 However, the connection between the City and the government was far wider than that between lender and borrower. Wartime requirements created a close working relationship which extended beyond the Bank of England to other financial institutions. It was no coincidence that organisations such as the Accepting Houses Association (1914) and the British Bankers’ Association (1919) date from this period, as these were a means of coordinating the views and actions of their members in dealing with the government. Government pressures now dominated the City. The relationship was particularly close between the Treasury and the Bank of England as they had the joint responsibility of continually re-financing the national debt. In turn, that brought in the banks and the discount houses, as the government’s heavy borrowing had implications for the London money market. It also extended to the Stock Exchange as new issues there could interfere with the demand for government stock and bills. Thus, simply on the financial front the government now had a major interest in influencing what was happening in the City. In addition, the government required the help of the City to achieve other policy objectives. A return to the relative stability and prosperity of the prewar years could not be achieved either quickly or without intervention. The government could not aim for solvency and stability simply by cutting its expenditure as it had done after the Napoleonic wars. Having acquired wider social responsibilities before the First World War, such as unemployment insurance and old age pensions, the government now had to tackle the mass unemployment and economic dislocation following the end of the short postwar boom, not least because of the political and social consequences that would arise if it did not. The City–government relationship forged as a result of the First World War was not only much more intense than in the past, but also more complicated. During the 1920s the government made diverse and, at times, conflicting demands on the City, reflecting this more complex relationship. For the first time these demands extended from the purely financial to wider issues. Whether City banks continued to lend to firms in financial difficulties could affect the employment prospects of thousands of people and the prosperity of whole regions. Whether the City resumed its international lending could affect the supply and cost of finance within Britain, the demand for British exports, relations with overseas countries, 7

For the City and government during the war years see E. V. Morgan, Studies in British Financial Policy 1914–1925 (1952), and A. W. Kirkcaldy (ed.), British Finance during and after the War, 1914–21 (1921).

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and the international value of the pound. These issues were considered too important to be left to the City itself.8 Hence government inquiries relating to the City now focused much less on market abuses, as in the past, than on the problems of currency, foreign exchange, industry and trade.9 In contrast, the priority among most in the City was simply to see a return to the prewar position. A return to the gold standard in particular was regarded as having the twin benefits of stabilising the world economy and restoring external demand for Britain’s export trade, and of forcing down domestic prices and wages and making industries competitive. Return was also essential if the City were to maintain its position as a global financial centre and re-capture what had been lost to New York, as it would restore exchange-rate stability. The restoration of the gold standard in 1925, at the prewar parity to the pound, has therefore been seen as evidence of a victory for the City and a defeat for manufacturing industry and its need for a lower exchange rate in order to remain competitive. Similarly, the abandonment in the 1920s of the temporary measures taken to protect industry from foreign competition has also been interpreted as a City victory, as it favoured those involved in the organisation of international supply and demand rather than in the sale or purchase of British manufactures.10 However, neither the return to the gold standard nor the restoration of free trade was a policy which the City collectively persuaded the government to follow. A thriving foreign exchange market had developed quickly in the early 1920s, which not only generated large profits for many in the City but also provided a means of avoiding exchange risk on transactions. At the same time there was a growing number of City bankers and brokers geared towards domestic business, who could expect to profit from protection. With hindsight it has become clear that neither the gold standard nor a fixed exchange rate nor even sterling itself was essential for the City’s successful functioning as a global financial centre. However, such a 8

9

10

For the City and government between the wars see S. Howson, Domestic Monetary Management in Britain, 1919–38 (Cambridge 1975); D. E. Moggridge, British Monetary Policy, 1924–1931. The Norman Conquest of $4.86 (Cambridge, 1972); T. Balogh, Studies in Financial Organization (1947); J. M. Atkin, British Overseas Investment, 1918–1931 (New York, 1977); G. C. Peden, The Treasury and Public Policy, 1906–1959 (Oxford, 2000), chs. 4–6. (Cunliffe) Committee on Currency and Foreign Exchange after the War, Interim Report (1918), Final Report (1919); (Balfour) Committee on Trade and Industry, Final Report (1929); (Macmillan) Committee on Finance and Industry, Report (1931). There is a huge literature on this subject but see B. Eichengreen, ‘International monetary instability between the wars: structural flaws or misguided policies?’, in Y. Suzuki, J. Miyake and M. Okabe (eds.), The Evolution of the International Monetary System (Tokyo, 1990), p. 105; F. H. Capie and G. E. Wood, ‘Policy makers in crisis: a study of two devaluations’, in D. R. Hodgman and G. E. Wood (eds.), Monetary and Exchange Rate Policy (1987), p. 169.

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verdict was not clear to anyone in the 1920s, whether in the City, government or elsewhere. Consequently, restoration of the gold standard was considered inevitable, with only the timing to be decided upon. Similarly, a return to free trade was thought inevitable, as those who had opposed it had lost the debate before the war and those who supported it saw no alternative, especially for the export industries. Preserving a domestic market for manufacturing industries like cotton textiles and shipbuilding, extractive industries like coal, or services like shipping, was of little value when so much of their output was for foreign customers. As such it is very difficult to see either the gold standard or free trade as specifically City-inspired policies in the 1920s. Instead, they should be viewed as part of the attempt to restore the pre-1914 conditions which the majority of people simply assumed would re-appear in the near future. Therefore, whatever the immediate consequences the First World War had for City–government relations, it appears clear that the longer-term intention was to pursue a policy of separation between the two, as in the prewar period. Most City experts expected London to resume its key role in international short- and long-term lending, though there was a recognition of the enhanced role of New York. Throughout the City there were attempts either to revive prewar global activities, such as the finance of international trade, or to replace what had been lost with other overseas activities, such as lending to central Europe. At the very least there was always imperial lending to fall back upon, with Australia in particular re-emerging as a major borrower. There was certainly no sign in the 1920s that the City had resigned itself to a domestic role or even an imperial one. The creation of the most important foreign-exchange market in the world after 1922 was evidence of the City’s continuing global ambitions and its capacity to achieve them. The City’s influence has also been detected in the decision to leave the gold standard in 1931. There is the view that the 1929–31 Labour government was brought down by its attempts to reconcile maintenance of the gold standard, at the behest of the City, with the requisite cuts in public expenditure which it was unwilling to make at a time of high unemployment. In contrast, the National government that replaced it abandoned the link to gold without the disastrous consequences for the country that had been predicted in the City. In retrospect it appears clear that no government between the wars, whether Labour or Conservative, was willing to take the domestic measures necessary to maintain the international value of sterling.11 The collapse of the gold standard in 1931 was not 11

S. V. O. Clarke, Central Bank Co-operation, 1924–31 (New York, 1967), p. 201. For the political and policy aspects, see P. Williamson, National Crisis and National Government. British Politics, the Economy and Empire, 1926–1932 (Cambridge, 1992), chs. 8–11.

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engineered by the City but was forced on the government by the international economic situation and a self-fulfilling collapse of confidence in sterling. With the pound long regarded as overvalued and evidence appearing that the Bank of England lacked the resources to defend it, it was only a matter of time before Britain abandoned the gold standard and the fixed rates of exchange this required. It is impossible to see the sterling crisis of 1931 as anything another than a defeat for the City, or at least for the internationally orientated element of it that had been so prominent before the First World War. It resulted in an even closer relationship between the government and the City. Through protection, imperial preference, and currency intervention the government was now in a strong position to influence the City’s international connections, while the size and character of the national debt continued to give it a powerful voice in domestic financial markets. However, the government did not take on responsibility for the management of the economy, government borrowing remained low, budgets were balanced, and the management of the exchange rate was given to a quasi-autonomous department in a still independent Bank of England. Consequently, the government was neither in a position to direct the City’s banks and markets nor did it want to do so. What had changed was the relationship with the Bank of England, which increasingly became an arm of the state rather than the representative of the City. The Governor of the Bank had become a permanent official, rather than a senior person seconded from the City for two years, while the Deputy Governor was now drawn from among the staff of the Bank.12 Apart from the Bank of England, and those areas of the City closely involved in government finance such as the discount market, much of the rest of the City did not come under the control of the state. At the same time City firms adjusted their business to the new conditions. A growing number of merchants, banks and brokers now serviced areas of the domestic economy that benefited from protection or imperial preference.13 Though a focus on traditional industries like textiles and shipbuilding has suggested a fundamental City–industry divide in terms of finance, evidence for such a structural problem is largely absent in the 1930s. Understandable caution was exercised by banks that had lost money through poorly performing loans to industrial companies in the 1920s, although they had little choice but to continue lending to such customers as there were few alternative borrowers. At the same time investment banks and stock-broking firms were eager to make money by issuing 12 13

P. Arnold, The Bankers of London (1938), pp. 14–15. Howe, Free Trade, pp. 286–8; Marrison, British Business and Protection, p. 403.

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shares for businesses in expanding areas. Nevertheless, the 1930s were a difficult period for the City, with the decline of international trade, finance and services only partly compensated for by lending to such sectors as domestic house-building, retailing and consumer electrical goods or the growth of new activities like motor insurance and instalment credit.14 Generally for the 1930s there is a lack of evidence suggesting much direct influence of the City over government policy, whether foreign or domestic, while the apparent immunity of the City to economic conditions was but an illusion. The era of government ascendancy, 1939–1979 The real transformation of City–government relations came in the aftermath of the Second World War, when it mattered not only what policies the government followed, as these now had profound implications for economic and social life, but also whether the Conservatives or Labour were in power, as each pursued a different agenda and were influenced by different pressure groups. The Second World War itself had much the same immediate implications for City–government relations as the First. As the government sought to mobilise and monopolise all resources for its own ends, so the markets of the City were either closed or marginalized, banks were converted into collecting agencies for government funds, and City personnel either volunteered for or were directed into war work. With the direction of labour, rationing of essential food and clothing, compulsory savings, state control of production, rigid supervision of international transactions through ministries, boards and other government bodies, the planned economy came into being. The City was largely superseded. The government was now responsible for national distribution and savings and external commercial and financial relations. Whereas previously the government had acted through the City to obtain what it wanted, during the Second World War it set up its own systems, though drawing upon City expertise and contacts in the process. A crude measure of this transformation is the fact that the share of public expenditure in total national expenditure doubled during the war, rising from 28 to 56 per cent.15 When the war ended in 1945 the wartime apparatus of state was not immediately dismantled. Unlike the period after the First World War 14

15

For the City at this time see R. Roberts, ‘The City of London as a financial centre in the era of the Depression, the Second World War and post-war official controls’, in A. Gorst, L. Johnman and W. S. Lucas (eds.), Contemporary British History, 1931–61 (1991). R. Middleton, Government versus the Market. The Growth of the Public Sector, Economic Management and British Economic Performance, c. 1890–1979 (Cheltenham, 1996), p. 418.

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there was no prewar era of stability and prosperity to try to revive. A repeat of the mass unemployment and international tension of the 1930s was highly unattractive. What appealed to most was the planning that had brought success in the war and could now be applied to a peacetime economy. A rational economic underpinning of such a philosophy lay in the writings of Keynes, who argued that a greater degree of government control over the economy produced a better outcome for all than if it was left entirely to the market. There was also the social programme outlined by Beveridge, promising to deliver a better future to the victorious British people. The Labour party’s own agenda included a large extension of public ownership and state direction of the economy. This was a potent mixture, and with the election of a Labour government in 1945 a majority of the British public expressed its support for the package of measures on offer. Nevertheless, a complete takeover by the state of all private enterprise and private wealth was not proposed. There remained a role for the City of London. In implementing its programme, the postwar Labour government relied increasingly on the advice of professional economists rather than the practising bankers and brokers of the City.16 Wartime controls such as rationing were retained, and the power of the state was progressively extended through nationalisation. The Bank of England became an arm of government in 1946 while the railways, coal mining, gas, electricity, water and, eventually, iron and steel were all nationalised, giving the government a direct voice in financial and monetary matters. Taken with the wholesale disposal of foreign securities during and shortly after the war, much of what the London capital market had formerly been engaged in was now lost, leaving little beyond the issue of and trading in the national debt in all its forms. A similar situation prevailed in the money market where meeting the short-term needs of government through the issue of Treasury bills was now totally dominant. In the late 1940s the government consolidated its wartime power to take full control over the economy. In terms of its external relations there was the maintenance of exchange and trade controls, imperial preference, the sterling area and intergovernment financial flows. In terms of the domestic economy the government now owned large parts of it and was in a position to direct the rest. The City had little alternative but to accept the position and work within it, conscious that the government could easily extend its nationalisation programme to the major banks and insurance companies or even take direct control of institutions like the Stock Exchange.17 Nevertheless, some parts of the 16 17

See A. Cairncross, Economic Ideas and Government Policy. Contributions to Economic History (1996), ch. 2. For a contemporary assessment see D. Sachs, ‘Survey of the financial institutions of the City of London’, in Institute of Bankers, Current Financial Problems and the City of

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City still prospered, such as City accountants and solicitors involved in the nationalisation programme, or the Lloyds insurance market, which retained an international business. With the election of the Conservatives in 1951 the relationship between the City and the government again became more complex. The Conservatives abandoned many of the controls introduced by the preceding Labour government, as with the ending of rationing in 1954. This coincided with a growing liberalisation in global trade and finance that gradually restored a role to markets in the pricing and movement of goods and money. The result was a City revival on both the domestic and international fronts. Moreover, the greatly increased involvement of the government in economic and financial matters during the 1940s had inevitably worked in favour of financial institutions and businesses located in London, and against those in previously important financial and commercial centres like Liverpool and Glasgow. Many provincially based businesses had become large nationalised industries run from London and tapping London’s financial and commercial markets and services. They were followed by the private sector where large public companies absorbed numerous local concerns through mergers and acquisitions, leading them to switch their fund-raising activities to the City. The consequence was that in the 1950s the City of London acquired a prominence within the British economy that it had never previously possessed, largely courtesy of the government. There is no evidence that this outcome was intended by either party. It was simply an accidental by-product of government action which encouraged the centralisation of so much economic decision-making in London. In addition the City still remained a financial centre of major importance within the world economy, though now eclipsed by New York. The continued existence of both the British empire and the sterling area helped to direct commercial and financial flows to London. Potential rival centres in Europe, such as Paris, Berlin and Amsterdam, had all been badly damaged during the war or, in the case of Zurich, had not yet developed sufficiently really to challenge London. British governments were therefore faced with an internationally powerful financial centre and one that was in a strong position within the domestic economy. Such a situation was of significance for the government because, despite the change of political party in power, it was still committed to managing the economy. The Conservatives did not dismantle the apparatus of state ownership and control established by Labour in the postwar London (1949). See also J. Fforde, The Bank of England and Public Policy, 1941–1958 (Cambridge, 1992); it is no accident that Fforde’s title includes the words ‘and public policy’.

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years. With a few exceptions like steel, those industries nationalised by Labour remained so under successive Conservative governments from 1951 to 1964. Similarly, the Conservatives kept monetary and fiscal controls inherited from Labour. Public expenditure as a share of national expenditure, which stood at 37.5 per cent when Labour lost power in 1951, was 38.9 per cent in 1964, the year Labour returned to power.18 The Conservative government maintained exchange and import controls, which protected British manufacturing and agriculture from foreign competition, but which also restricted British investors and British banks to placing their funds with domestic borrowers like the government itself or the growing number of companies tapping the London capital market. Large swathes of the economy remained under state ownership, the Bank of England could tighten or ease credit whenever the government required, and the freedom of the capital market to operate globally was circumscribed by exchange controls.19 Under these circumstances City financiers began to map out a new future designed to meet the financial needs of the British government and British business within the limits set by government. The London clearing banks co-operated in controlling the supply of credit and in return gained official support for their interest-rate cartel. The discount houses enjoyed a stable business as intermediaries in the market for short- and longterm government debt. The Stock Exchange became the quasi-official regulator of the securities market and its members were able to charge fixed commissions with impunity. During the 1950s a significant part of the City therefore became dependent upon either government business or protection for its livelihood.20 The government decided what was in the national interest and expected the City to adhere to its agenda. As a result, relations between the Conservative government and the City were not always amicable. In 1960 the Prime Minister, Macmillan, lamented ‘the very unsatisfactory relations between the Treasury, the Bank, and what is roughly called the City, especially the Clearing Banks’.21 Nevertheless, in the 1950s there appears to have been a high degree of co-operation, an almost unwritten pact, between the City and the government. The City delivered the control over the money and capital markets required by the government, and received in return general stability and a guarantee of income not normally existing under volatile or competitive trading conditions. Such a pact was the product not of 18 19 20 21

Middleton, Government versus the Market, p. 91. For this era see Roberts, ‘City of London’. M. Moran, The Politics of Banking. The Strange Case of Competition and Credit Control (1984), pp. 16–23. Quoted in Kynaston, City of London, IV, p. 251.

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City influence over a Conservative government but rather of mutual selfinterest.22 However, domestically, this government–City pact extended only as far as the major banks and discount houses, marshalled by the Bank of England, and the major brokers and dealers of the securities market, controlled by the Stock Exchange. Other individuals and businesses who were not subjected to controls or not members of any cartel were eager to gain at their expense. The provincially based building societies are the classic example, as they were able to offer more competitive rates than the banks and so attracted a growing share of deposits.23 The mechanisms of control that had worked during and immediately after a world war were increasingly ineffective when what was needed was the ability to respond to a rapidly changing market place, requiring not a centralised bureaucracy but a devolved customer-focused strategy.24 This was also true internationally. To succeed in managing the economy the government had to ensure that Britain remained relatively isolated from the rest of the world, otherwise the markets both for goods and services and for money and capital would be responsive not to the wishes of the British government but to global supply and demand. The moves towards liberalisation in world trade and finance which took place in the 1950s jeopardised the effectiveness of the government’s own controls, requiring it to become more interventionist in order to achieve its objectives. Government restrictions on the use of sterling in the finance of world trade, as well as in the issuing of foreign loans in London, imposed to protect an internationally weak currency, hampered the City’s re-emergence as a global financial centre. The need to intervene in the domestic financial markets, in order to support the external value of sterling, hampered business in the City. There is a historical belief that the future of the City as a financial centre was tied to the value of sterling and that it was therefore the City above all that opposed devaluation, which could have improved the international competitiveness of British manufacturing industry.25 However, if any particular group in the City had influence over government policy in the 1950s it was those leading commercial bankers, merchant bankers and stockbrokers whose interests were largely focused on domestic business. In contrast the international bankers in the 22

23 24 25

For a contemporary overview of the City in the 1950s see P. Bareau, ‘The financial institutions of the City of London’, in Institute of Bankers, The City of London as a Centre of International Trade and Finance (1961). For this and other aspects of money and banking see the authoritative account, M. Collins, Money and Banking in the United Kingdom: a History (1988). See G. Morgan and A. Sturdy, Beyond Organizational Change: Structure, Discourse and Power in UK Financial Services (2000), pp. 80–2. See S. Pollard, The Wasting of the British Economy. British Economic Policy 1945 to the Present (1982), pp. 35, 71–3, 85–6, 185.

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City possessed little influence, even being excluded from membership of the British Bankers’ Association until 1972.26 Detailed examination of the policy-making process leading to the Conservative government’s commitment to maintain the external value of sterling between 1951 and 1964 has recently revealed how marginal was City influence as compared to that of politicians and civil servants. The policy was tied up not only with the maintenance of the sterling area, but also with relations with the Commonwealth, Britain’s international position, prestige among the world community and numerous other disparate beliefs and interests. To see the commitment to sterling as driven solely by City interests can no longer be sustained in the face of the mounting evidence otherwise.27 Consequently, by the early 1960s many in the City saw limited benefits in abiding by the controls imposed through the Bank of England or the Stock Exchange. Inevitably, this produced tensions with the government, and the unwritten pact began to break down even before the Labour election victory of 1964. Changes in the composition of the City also weakened government ability to make its policies effective. From 1960 onwards, restrictions imposed by the government of the United States on its banks and financial markets in order to protect the external value of the dollar drove international business abroad, with London becoming the preferred location of most because of ties of language, law and convenience. Increasingly the City was populated by foreign banks and brokerage houses over which neither the Bank of England nor the Stock Exchange had any authority. The Bank saw no problem with this development as its focus was on the domestic financial system and on sterling, and these firms, though based in the City, conducted their business in US dollars on behalf of non-British clients. The government even saw benefits in terms of jobs and taxes.28 Hence it was underlying changes within the City itself that led to its difficult relationship with the new Labour government, rather than simple opposition to a socialist government or a traditional antagonism between a right-leaning City and a left-leaning government.29 Until the 1966 general election the Labour party did not possess a sufficient majority in 26

27

28 29

V. Sandelson, ‘The confidence trick’, in H. Thomas, The Establishment (1959), pp. 117–18, 126–8, 131, 134–6; A. Gleeson, London Enriched: the Development of the Foreign Banking Community in the City over Five Decades (1997), pp. 29, 48, 82, 108, 116. G. Krozewski, Money and the End of Empire: British International Economic Policy and the Colonies, 1947–58 (Basingstoke, 2001), pp. 160–5; Kynaston, City of London, IV, pp. 300–1. For these years see S. Battilosssi and Y. Cassis (eds.), European Banks and the American Challenge: European Banking under Bretton Woods (Oxford 2002). E.g. A. Sampson, The Anatomy of Britain Today (1965), p. 395, for the City’s mood having ‘degenerated into a selfish and destructive sulk’.

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Parliament to follow any different policy regarding the City. Even with a large majority thereafter, little changed. There was no wholesale policy of nationalisation. The relatively modest devaluation of sterling in 1967 did not represent any major shift in the government–City relationship akin to the departure from the gold standard in 1931. Rather, in the 1960s there increasingly existed two Cities. A new City was developing in response to the growing international Eurodollar and Eurobond markets located in London because of the restrictions placed on New York. It was heavily dominated by foreign banks, with those from the United States rapidly joined by others from Japan and continental Europe. Some British firms were involved, such as the Midland Bank and Warburgs, but business was largely driven by those from abroad. This part of the City was closely integrated into the international financial system and was concerned with the domestic situation in Britain only in a tangential way, through the consequences of government policy for Britain’s standing in international markets and on exchange and interest rates.30 To this part of the City the whole issue of sterling or Britain’s balance of payments crises was a sideshow. It was little interested in British government policy as long as business was not harmed. In contrast the older City remained more directly concerned with British government policy for management of the economy and with the consequences for inflation, corporate profits, interest rates, and taxation of income and capital. The liquidation of foreign investments combined with restrictions on overseas business by post-1945 governments had forced many in the City to orientate their entire business towards the issue of securities on behalf of British companies, organising mergers between these companies, and trading and investing in their stocks and shares. However, little evidence has been produced to suggest that this part of the City either tried to influence policy-making or was successful in doing so. Despite the continuing fear, especially with a Labour government in power, that resistance would be followed by even more intrusive measures, even nationalisation, the Bank of England and the City managed to preserve their self-regulatory, autonomous, status. As financial business of all kinds flourished, the City had little reason to oppose the government or seriously resist its policies in the 1960s. By the beginning of the 1970s a new City of London had therefore emerged. The externally orientated, foreign-owned component was well established and flourished as long it was left alone by the authorities. Its currency was increasingly the US dollar rather than the British pound. 30

For this see C. R. Schenk, ‘The origins of the Eurodollar market in London, 1955–1963’, Explorations in Economic History 35 (1998), 221–38; R. Fry (ed.), A Banker’s World: the Revival of the City, 1957–1970 (1970).

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No longer did the fate of sterling as an international currency and that of the City of London as an international financial centre appear to be inextricably linked. The City had little reason to try and influence the government in favour of maintaining the external value of sterling, long before the attempt was finally abandoned in the 1970s.31 The Labour government chose not to intervene in the City, not through any City pressure but because events on the international financial front appeared to have little relevance to the domestic situation. For example, the Eurodollar market emerged ‘out of a non-regulatory vacuum in the City’.32 In the 1970s, both Labour and Conservative governments recognised that it was not the City itself that determined the external value of sterling but the reaction of global markets to British balance-of-payments crises, budget deficits, industrial unrest or political instability. Intervention was ineffectual and unnecessary. The Bank of England was left to supervise and monitor these new developments without regard to a political agenda.33 The arm’s-length supervisory system proved a major advantage for Britain at a time when bankers and brokers from across the world were trying to escape the clutches of national authorities and to relocate where the rules of orderly market behaviour would be both respected and enforced. The evolved City of London was thus ideally placed to profit from the international financial instability of the 1970s. It was able to provide the money and capital markets required after the collapse of coordinated central bank control. As a financial centre with extensive international connections and well-established financial systems it was able to respond to such global financial problems as the need to recycle surplus funds from oil-rich countries to those with large deficits. For the City to emerge as the premier international financial centre it was necessary only for the British government not to impose new controls and restrictions that would drive potential business elsewhere. Even had the Government been inclined to take such action, its freedom to do so internationally was circumscribed by past agreements on the liberalisation of global trade and finance and then by accession to the European Economic Community in 1973.34 Nevertheless, this did not mean that the Government–City relationship had become merely regulatory, conducted through the mediation of the Bank of England. Both Labour and Conservative governments in 31 32 33 34

Kynaston, City of London, IV, pp. 361, 395–6. G. Burn, ‘The state, the City and the Euromarkets’, Review of International Political Economy 6 (1999), 236. R. Shaw, ‘London as a financial centre’, repr. in R. C. Michie (ed.), The Development of London as a Financial Centre, 4 vols. (2000), IV, pp. 131–2. For this period see S. F. Frowen (ed.), A Framework of International Banking (1979); also R. Roberts and D. Kynaston, City State. How the Markets Came to Rule Our World (2001).

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the 1970s remained committed to managing the British economy, to a lesser or greater degree, and that meant exercising control over the City. In turn those in the City undertaking domestic business had a vested interest in trying to influence government policy. In 1970 the new Conservative government was keen to introduce more effective controls over the banking system to contain the growth of fringe banks, hire-purchase companies and alternative money markets. At the same time the restrictive practices operated by the major banks, especially on interest rates, had attracted the scrutiny of such bodies as the National Board for Prices and Incomes and the Monopolies Commission. The ‘competition and credit control’ policy introduced in 1971 aimed simultaneously to encourage competition among all types of banks and to control the availability and cost of credit. In retrospect this appears an impossible task, particularly in a period of growing inflation and industrial unrest in Britain and of international financial instability related especially to the weakness of the dollar and the price of oil. The result was a rapid monetary expansion in Britain culminating in a financial crisis in 1974. The Bank of England had to intervene in order to prevent a massive financial collapse, forcing the major banks to support the rescue of a large number of fringe banks, who had been their competitors. By March 1975 a total of £1.2 billion had been provided. Credit controls were re-imposed and the Bank took a more interventionist attitude towards banking supervision, as it could no longer rely upon a close relationship with the major banks to restrict the availability of credit. The Banking Act of 1979 established more formal supervision of the entire banking sector, including for the first time the numerous foreign banks located in London. Illustrating the complexity of the task the Bank of England faced was the fact that 538 firms applied to become either recognised banks or licensed deposit takers – in contrast to previous recognition of merely the five major British retail banks.35 The primary concern of both the government and the City in the 1970s was the state of the public finances. As government borrowing escalated in the mid 1970s, as a result of worsening domestic economic problems and ballooning inflation, the Labour government of 1974–9 faced real difficulties in obtaining sufficient funds to finance its budget deficits. A budget surplus in 1970 equivalent to 3.4 per cent of GNP had become a deficit of 3 per cent of GNP in 1973. That deficit then rose to a peak of 5.4 per cent of GNP in 1976 and, though it fell thereafter, the government never managed to balance its finances for rest of the decade. Almost for the first time, there appeared to be a lack of confidence among potential 35

For this episode see Moran, Politics of Banking. The figure of £1.2 billion comes from Morgan and Sturdy, Beyond Organizational Change, p. 84.

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lenders in the British government’s ability to service its debts. Although the government was always able to raise the required funds, it had to pay higher rates of interest than previously and tailor its borrowing more to the needs of potential lenders and investors.36 During the 1970s the quoted National Debt rose by £53 billion in nominal terms – although the rise in the market value was only £45 billion, indicating the suspicion of institutional investors at home and abroad. In 1976 the Labour government had to seek assistance from the International Monetary Fund and accept the conditions attached, so perilous was its financial position.37 In many ways these years represented a watershed in the post-Second World War government–City relationship. Prior to the mid 1970s a working relationship had existed from which, on the whole, both sides gained. Despite some unhappiness with the direction of policy and level of taxation, many in the City worked with successive governments, helping them to achieve their policy ambitions. However, in the 1974 Labour government they faced an antagonistic administration unable to deliver either stable finances or a steady growth in prosperity. Long-standing frustrations with government policy, whether Labour or Conservative, came to the fore particularly in that part of the City which relied almost entirely upon the British economy for its business and was suffering as a result of unstable economic, financial and monetary conditions.38 In the financial crisis of 1974 many in the City not only experienced falling incomes but also lost their livelihood. There was a contraction of over 4000, or 31 per cent, in the number of staff employed by London-based members of the Stock Exchange during that year. In contrast, that part of the City that largely conducted its business abroad faced little in the way of controls and prospered in the volatile international conditions of the time.39 The number of foreign banks with London branches expanded rapidly as did turnover in a wide range of financial markets. The very difficulties experienced by British industry and the resurgence of activity in the City of London were connected, but not to each other. Rather, they were both consequences of the collapse of the golden age of the world economy.40 36

37 38 39 40

C. Goodhart, ‘Monetary policy and debt management in the United Kingdom: some historical viewpoints’, in K. A. Chrystal (ed.), Government Debt Structure and Monetary Conditions (Bank of England 1999), pp. 60–1 and Annex 2. Kynaston, City of London, IV, ch. 17; R. C. Michie, The London Stock Exchange. A History (Oxford, 1999), ch. 11. For a notably outspoken attack on government interference and lack of direction, see London Stock Exchange, Council Minutes, July 1975. Gleeson, London Enriched, pp. 82–91. See R. Pringle, ‘Financial markets versus governments’, in T. Banuli and J. S. Schor (eds.), Financial Openness and National Autonomy: Opportunities and Constraints (Oxford, 1992), pp. 89–101.

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The government still expected the Bank of England both to regulate and control British banks, and the Stock Exchange to do the same for the securities market, although it could not guarantee the privileges expected in return, such as a monopoly of the domestic market. This was prevented by the increasingly competitive nature of the financial markets and by attacks on restrictive practices and price-fixing cartels from the government’s own creations – the Monopolies Commission, the Office of Fair Trading and the Restrictive Practices Court. In the 1970s, these bodies had already forced changes in the way banks operated, creating a much more competitive environment. Now their attention, and that of a hostile press, switched increasingly to the restrictive practices of the Stock Exchange. Even in the City the Stock Exchange was under pressure because many institutional investors regarded the charges levied by its members as excessive, while the Bank of England feared that lack of change in the Stock Exchange would hamper London’s competitive position as an international financial centre.41 Consequently, the benefits to the City from any relationship with the government appeared to be fading during the 1970s. Many blamed the City for Britain’s economic difficulties, identifying it with the international money and capital markets. Consequently in 1977 the Labour government appointed a committee to examine the working of the whole British financial system, to be conducted by the ex-Labour Prime Minister, Harold Wilson, who was known for his anti-City views.42 It was with relief that the City saw the defeat of Labour in the general election of 1979, and its replacement with a Conservative government under Margaret Thatcher. The end of the affair: City and government since 1979 One of the first acts of the new Conservative government was to abandon exchange controls. This was unexpected and does not appear to have been a result of any City pressure. There was now no division between domestic and international business as long as it was sufficiently large to attract an international provider. Lending and borrowing, buying and selling, merging and acquiring could be undertaken not only by a foreign bank or broker located in London but also routed via a foreign financial centre like New York or Paris. City institutions which under the exchange controls had been able to monopolise domestic business and impose charges and uncompetitive practices now found themselves in the same position as British industry, which had been progressively exposed to foreign 41 42

See Michie, London Stock Exchange, ch. 11. Committee to Review the Functioning of Financial Institutions.

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competition under successive rounds of GATT negotiations and then by membership of the European Economic Community. Such a move was a boon to that part of the City which serviced the world economy, but in the domestic market British firms now had to compete on the same terms as rival foreign banks and brokers located in London. This move was a pragmatic response by government to the impossibility of policing exchange control effectively, without any real appreciation of the consequences for the City. It destroyed the separation that had existed since the 1960s between that part of the City conducting an external business and that which conducted an internal business.43 As the banks and the money market had already been forced to make adjustments in order to survive in this more competitive environment, it was the Stock Exchange which found itself most exposed as a result. Whereas exchange controls had enabled the members of the Stock Exchange to monopolise the business generated by British investors buying and selling the domestic securities issued by British companies, they could not do so in international securities, even if issued by British companies. Instead, that market developed separately from the London Stock Exchange and had by the late 1970s become extremely active, with no fixed charges or controls on participation. In addition to these newly unleashed competitive pressures was the unresolved issue of the case against the Stock Exchange by the Restrictive Practices Court, which had been in progress since the early 1970s. Despite expectations that the Thatcher government would drop the case, this did not happen. The Conservatives proved equally unwilling to grant the Stock Exchange the immunity from prosecution necessary to safeguard its restrictive practices. The case therefore dragged on until after the Conservative victory in the 1983 election, when the government and the Stock Exchange eventually reached agreement that restrictive practices would be abandoned. The only concession that the Council of the Stock Exchange gained was the time to prepare for this more competitive future. It was given until 1986, and the event known as ‘Big Bang’.44 ‘Big Bang’ indicates two central aspects of government–City relations at the time. The first is that the Conservative government gave a higher priority to making the economy, including the financial services sector, more competitive than it did to bolstering restrictive practices, even though these were integral to the way that government itself exerted control over 43 44

For the City in the 1980s see Bank of England, ‘London as an international financial centre’, Bank of England Quarterly Review 29 (1989). By this, the Stock Exchange lost its power to fix the charges levied by its members, to regulate the way they conducted their business, and to exclude the participation of both British banks and foreign firms.

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the City. In future, that control would be exercised through legislation and statutory bodies. The cosy relationship forged in the heat of war and reconstruction in the 1940s was now at an end. The second aspect is the attitude of those in the City to the government of the day, irrespective of whether it was Conservative or Labour. Despite disappointment with government policy among many members of the Stock Exchange, they were minded to accept the 1983 deal rather than continue lobbying or take their chances with the Restrictive Practices Court.45 Such was the complexity and speed of financial markets that the worst possible outcome for the City was one where politicians could interfere in their daily operation. Preventing this was the absolute priority of virtually all in the City, and it overrode any other consideration or divisions between them. Some in the City saw ‘Big Bang’ as an act of betrayal by the Conservative government because it led to the takeover of British-owned financial firms by foreign banks, running counter to the once legitimate expectation that the British government would favour national over foreign firms in the City of London.46 The City’s development as an international financial centre from the 1960s meant that towards the end of the century around one third of City employment was in branches of the foreign banks and other financial firms located there, while much of the activity in British firms was also externally focused, whether through City lawyers and accountants or banks, brokers and fund managers. Under these circumstances a policy of discrimination by the government would have resulted simply in the migration of foreign firms to other locations, if the situation became intolerable, resulting in the loss of employment and income for the British economy. Such a scenario was increasingly recognised by the government.47 Instead, what the British government could do was to provide the regulatory framework within which the City operated. The Bank of England had long been developing closer working relationships with the foreign banks located in the City. As early as 1947 the Bank was involved in the creation of a Foreign Bankers’ Association in London, which acted as a conduit for its dealings with these banks. The Banking Act of 1979 gave the Bank of England the statutory power to authorise, or not, foreign banks wanting to establish a London branch. In 1981, in response to demands to be treated the same as domestic banks in all respects, foreign banks were given the same re-discounting facilities at the Bank of 45 46 47

London Stock Exchange, Council Minutes, 21–22 July 1983. See also Michie, London Stock Exchange, ch. 12. See, for example, the merchant banker P. Augar, The Death of Gentlemanly Capitalism. The Rise and Fall of London’s Investment Banks (2000), p. 312. N. Buck (ed.), Working Capital: Life and Labour in Contemporary London (2002), p. 112.

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England.48 What changed more radically in the 1980s was the extension of statutory regulation to other aspects of the City. Accompanying ‘Big Bang’, for example, was a replacement of the Stock Exchange as the regulatory authority for the securities market by the Securities and Investment Board. This recognised that the financial activities taking place in the City now extended far beyond banking, supervised by the Bank of England, and investment, over which the Stock Exchange had authority. Trading in securities now encompassed the growing Eurobond market over which the Stock Exchange had no control. Thus in the 1980s the City– government relationship became a technical one between a regulator and the regulated. As the government had no need to borrow at this time, with tax income boosted by privatisation receipts, and interest and exchange rates largely left to market forces, there was much less need for it to try and control the City. Conversely, the City was so much more international in terms of ownership and business that what the British government did was largely irrelevant, unless it had a direct impact through high personal taxes or excessive regulation. Moreover, institutions were more vulnerable to the demands of their shareholders than to those of government, making it increasingly unlikely that they would readily co-operate.49 Recognition that the City and government were operating in a very different financial world was underlined when the Labour party returned to power in 1997. As one of its first acts the Blair government gave independence to the Bank of England in setting interest rates, a move considered but not implemented by the Conservatives. Henceforth the setting of interest rates and the control of inflation were determined by an independent monetary policy committee rather than by the political or economic judgement of the Chancellor of the Exchequer. This move by the Labour government, undertaken not because of City pressure but for political reasons, represented a further transformation in the balance of power between the City and the government. As long as the government retained the power to set interest rates it could exert a direct influence over the money and capital markets, which made its actions important to the City, and thus encouraged it to try and exert political influence. Once that power was given away, the government’s direct influence evaporated. Instead, its power over the City now rested with the regulatory framework under which the City operated. With the creation of the Financial Services Authority, which became the single regulator for the whole financial services sector in December 2001, the Labour government entrusted that power to a statutory body operating independently from government. 48 49

Gleeson, London Enriched, pp. 37–9, 88–91, 116, 122. Morgan and Sturdy, Beyond Organizational Change, p. 102.

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Though the City might complain about the costs and complexities of regulation, it could be confident that regulation was being conducted impartially and provided an orderly and stable environment.50 Though the government was still able to affect the City of London through legislation and taxes, it no longer possessed the power to determine the lending policies of banks or the conduct of the Stock Exchange. All that the government retained for itself was an emergency power to intervene in the City, including the ability to run banks and markets, in the event of a national crisis such as might result from a terrorist attack. This reflected prudence rather than a desire for control. By then all recognised that the City of London was too valuable a resource to lose, for whatever cause.51 That is not to say that the relationship between the City and the government was now simply a technical one, focusing on regulation and tax. Questions continued to be raised about the extent and direction of influence. The unexpected re-nationalisation of Railtrack without consultation or compensation in October 2001 could be seen as a defeat for City interests, suggesting that they possessed little real power.52 Conversely, the extraction of £7–8 billion in compensation from the government in March 2003, after prolonged private and public lobbying by institutional investors, suggested that the anonymous fund managers in the City were not without power.53 Given that the government’s costs of borrowing in financial markets had risen because of the Railtrack episode, as state guarantees were now in doubt, the government had little alternative but to negotiate a settlement and reduce the perceived risk if it wanted to borrow more cheaply in the future. Either way the City coped with the situation it found itself in.54 In the case of Railtrack the City was able to force the government to change its policy by exerting influence through the market, and with the government needing to borrow or sell state assets it could not ignore this pressure. Conversely, in areas where the City could not exert any such influence the government was able to ignore City pressure. Such was the case with the annual City campaign to have the stamp duty on share dealings reduced or abolished. As such a step was likely to cost the government around £3–4 billion in tax revenues, and there was no obvious or immediate gain, apart from that to the international competitiveness of the Stock Exchange, City pressure proved fruitless.55

50 52 53 54 55

51 Ibid., 26 Feb. 2003. Financial Times, 30 Nov. 2001. Ibid., passim for Oct. 2001. Ibid., 25 March 2002. For the background see ibid., 26 March 2002. Ibid., 7 March 2002. Ibid., 22 Oct. 2001, 8 Feb. 2003. See also Michie, London Stock Exchange.

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On wider economic and political issues it is difficult to identify either a ‘City view’ or any concerted City pressure to achieve a particular end. This can be seen most clearly on the important question of whether or not Britain should join the single European currency, even though, by any measure or calculation, replacing sterling with the euro appears to be in the interests of the City. Though the creation of the euro has had no discernible impact on the City of London as a financial centre, the threat existed that if Britain did not join the single European currency, financial activity within Europe would gravitate elsewhere, such as Frankfurt or Paris, and non-European business would then follow. However, neither the Labour government since 1997, nor the Conservative opposition, has expressed any commitment to take Britain into the euro. The interests of the City were clearly peripheral to both parties, as compared to the wider political and economic considerations which determined the decisions taken by government. Conversely, within the City, such was the global nature of business and the importance of the dollar in so many transactions, that the debate on the euro was of rather marginal significance. What mattered in the City was the freedom to operate in any currency and in any market in the ways that best suited the participants. The City was becoming less concerned with the actions of the British government and more with those of foreign governments on decisions regarding such matters as banking solvency and market regulations. Under these circumstances the British government emerged as a defender of the interests of the City of London in competition with other financial centres, each supported by the interests of their own governments. This was not the product of City influence over government policy, but was driven by simple national self-interest.56 Whereas for much of the twentieth century governments interpreted self-interest as meaning using the institutions and markets of the City to manage the economy and support manufacturing, by the end of the century there was a general recognition that the City was a major industry in its own right, and needed protection against unfair foreign competition. Conclusion By the end of the twentieth century governments of all political persuasions had come to recognise the difficulty, even impossibility, of controlling international financial markets.57 In some ways, this situation was reminiscent of that at the beginning of the century, with the 56 57

Financial Times, 3 May, 10 June, 25 June 2003. Kynaston, City of London, IV, p. 791.

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interests of national governments circumscribed through the power of global markets, as represented by the City of London. The history of government–City relations in the twentieth century suggests that in the debate over whether markets or governments served the interests of people best the matter is far too complicated to be reduced to a simple answer in favour of one or the other. At times it was absolutely essential for the government to intervene in the City, as with the outbreak of the First World War and during the 1940s. There were also times when greater intervention was necessary, as in the aftermath of the First World War and the world economic collapse of 1929–32. Conversely, there were other times when government intervention did not prove helpful, distorting the economy and producing a sub-optimal solution. This was true in the return to the gold standard in 1925 and the controls over the financial system in place between 1950 and 1979. Though British politicians may have succeeded in persuading their public that responsibility for the country’s economic failure rested with the City of London, the slow unravelling of the historical record produces a somewhat different conclusion, and one that is not particularly favourable to government. Only when all the evidence is to hand on how the government reached its decisions, and why, is it possible to distribute responsibility. Even then it is vital to understand the concerns of both the government and the City, recognising that neither was wholly united in their aims and that these aims changed enormously over time.

Part II

Markets and society

3

Markets and governments Forrest Capie

There is a danger that the title of this chapter will be read as ‘markets versus governments’. There is also a risk that any hint that the writer favours markets will result in his being placed firmly in one camp, while any hint to the contrary will place him equally firmly in the interventionist camp. But there is certainly at least one reasonable intermediate position, that which allows regulation to play a positive part in promoting the market, and governments to play an essential role in providing the setting within which markets can work most effectively. While for some this role might be limited to an effective legal system, others would extend it further, and some much further. The problem then becomes where to stop. How much regulation should there be, and how much freedom? There is the story of the Soviet military parade with weapons of increasing potential for mass destruction processing past the leaders. Finally, there came a small van with a few men in suits. ‘Who are they?’ asked a guest. ‘Economists’ was the reply. ‘Why?’ ‘You should see the havoc and destruction they can cause.’ In our discussion we can substitute ‘regulators’ or ‘free-marketeers’, according to taste. This essay sets out some perspectives and summary statements on markets, governments, and the City during the twentieth century. It outlines briefly the economic case for and against the market in general, and for the City in particular. The economic case for markets may not have been the one that dominated in political decision-making, but it is nevertheless useful to hold it in view. Indeed, the fact that there appears to be a fashion in these matters, one that is international, suggests that neither economics nor politics plays the proximate part in change. Rather, their effect is diffused over a period and difficult to trace. Some illustration of the ebb and flow of intervention in City affairs follows, before some conclusions are drawn. Perspective on the twentieth century The case for markets came to be much more widely, though certainly not universally, accepted in the closing decades of the twentieth century. This 59

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was not always the case. In the 1960s the opposite view was reflected in most writing on the subject, conventional wisdom being that the market was imperfect and could be left to itself under very few circumstances. Governments were necessary to ensure its proper working. Only a few argued for the merits of the market. Anyone arguing this case was in danger of being regarded as a crank at best, and certainly someone who did not appreciate the complexities of modern capitalism. Indeed there was a danger that holding such ideas was inappropriate in academic life. Some early suggestions for privatisation (which later came about) were dismissed at the time as ‘lunatic’. The wildest excesses of unbridled capitalism were seen as having come to an end or been tamed in the closing years of the nineteenth century. Other moves came in the First World War when the state, of necessity, entered the economy on a large scale. After the war, although there were many calls for a return to business as usual – that is to the pre-1914 world – it was recognised that something remarkable had been achieved in the war, much of it under the direction of government. Many saw the future in the central planning of the newly formed Soviet Union. Calls for economic management by the state began to be heard. During and after the depression of the 1930s the worst features of capitalism were identified and chief among these was its inherent instability. Something had to be done to correct this. Clearly, the state needed to be involved on a much larger scale. There were many admirers of the Soviet Union as a model. In the 1930s, Sidney and Beatrice Webb entitled their eulogy of the state Soviet Communism: a New Civilization? In the second edition their confidence was such that they removed the question mark. After the Second World War central planning took hold as an idea and even in most of the West, planning agencies were set up. French planning was much admired, as was the particular interventionist approach of the Japanese. Industrial strategies were widely believed to be necessary. The evidence in support of all this can readily be seen in the huge increase in the share of governments in total output. Before 1914 the typical share in western European countries was around 5 or 6 per cent of GDP. By the middle of the twentieth century, that share had soared to closer to 50 per cent. The numbers of people directly employed by government also rose dramatically. For example, in Britain the numbers employed in the 1970s were roughly 7.5 million, though after the privatisations of the 1980s and in the 1990s they fell to under 6 million. The performance of centrally planned economies or those with heavy interventionist approaches sometimes appeared superior to other economies. There may have been some truth in this, but planning itself was not necessarily the cause. In many cases the economic statistics lied.

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Most people seemed to believe the extravagant figures put out by the United Nations and other agencies that showed, for example, that the Soviet Union was richer than Britain by the early 1960s. Lovett gives figures (based on the UN and OECD statistics) that show GNP per head in the Soviet Union still higher than Britain in 1970.1 Even in the late 1980s, British academic historians were presenting figures which showed that East Germany compared favorably with Britain in terms of income per head.2 For those intent on believing these figures the conclusions could be silly: ‘Britain will [by c. 2012] have to settle down to being the poorest country in Europe, with the possible exception of Albania.’3 Much of this was false, and the claims bogus. Not only were some east European countries in dire economic straits, they also suffered from all kinds of other problems such as greater pollution and corruption, quite apart from the lack of personal freedom. With the great collapse of the planned economies at the end of the 1980s the case for the market economy began to be heard more confidently again. But one need not present the picture as a stark contrast between unfettered markets and central planning. An acceptance that markets are superior and should be dominant still leaves the question of how much intervention should there be, and where should it take place. What should the relationship be between governments and markets? There used to be common acceptance of the view that the British economy had declined relentlessly from the late nineteenth century onwards, and that the research task was to identify the culprit. There were many candidates but the City and the banks were usually among the top few. What is worth bearing in mind, however, is that while Britain had lost an empire and its international role, in economic terms it had done well over the long term. At the present time Britain is on a par in per capita income terms with the rest of the rich countries of western Europe. That being the case, there is surely much less need to find a culprit. And given the huge growth of government whatever fault needed to be found might just as easily be found there. The case for markets The argument for free markets was spelled out with great clarity in the eighteenth century by Adam Smith. To reduce it to its barest bones, when individuals were left to their own devices, to pursue their own 1 2 3

W. Lovett, World Trade Rivalry. Trade Equity and Competing Industrial Policies (Lexington, Mass., 1987), p. xix, table P–2. V. R. Berghahn, Modern Germany: Society, Economy, and Politics in the Twentieth Century (Cambridge, 1987), p. 232. S. Pollard, The Wasting of the British Economy (1982), p. 6.

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interests – even if these were selfish – the best aggregate results were produced. When producers were left to respond to the effective demands of the consumer, the most efficient allocation of resources was achieved. Not only did such an untrammelled market place deliver the most efficient economic outcome; it was also morally superior and allowed the individual the greatest personal freedom. Smith was seen as a reformer at the time, advocating the overthrow of restrictive legislation and institutions. Many attacks have been made on this case, the most important of which will be discussed below. But even those who are sympathetic to the basic case sometimes argue that the market cannot do everything on its own. It requires other elements. For example, some argue that the market depends on the presence of virtues such as trust and forgiveness, and that these virtues are generated outside the market – often in the JudaeoChristian culture within which the market prospered in the eighteenth and nineteenth centuries.4 In other words, the market is parasitic on that culture, and therefore religion played a substantial part in the explanation of properly functioning markets. It might be argued that Smith was writing with this implicit assumption in mind. However, a response to this line of argument is that the market is capable of generating these elements on its own. With the development of game theory in the middle of the twentieth century the first results suggested that oligopolistic structures produced sub-optimal outcomes. But with the advance of computer games in the 1980s – in particular a game such as ‘Tit for Tat’ – the results that emerged strongly suggested that virtues such as forgiveness were learned after a large number of experiences. Other institutions have also been regarded as essential prerequisites for the working of the market. For example, the work of North and others has emphasised that the optimising assumption of classical economics must be supported by well-defined and enforceable property rights.5 This has given rise to a huge amount of research on the nature and extent of such rights and their relationship to economic performance, leading others to examine more closely the case for the rule of law. Different legal systems have been found to be more-or-less conducive to economic growth, stimulating studies measuring the impact of freedom and democracy on economic performance. Countries that have the greatest freedoms are said 4 5

J. Sacks, Morals and Markets (Institute of Economic Affairs occasional paper 108, 1999). E.g. D. North and R. P. Thomas, The Rise of the Western World (Cambridge, 1977); D. North and B. Weingast, ‘Constitutions and commitment; the evolution of institutions governing public choice in seventeenth-century England’, Journal of Economic History 4 (1984), 803–32.

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to perform better than others. Olson recently argued that democracies are more conducive to wealth creation than non-democratic systems, although he had previously shown that where coalitions were allowed to flourish in democracies these could become damaging to growth.6 Sen points out that there has been no substantial famine in a democratic country no matter how poor.7 This debate was quiescent for much of the twentieth century, because there was at least one great power emerging – the Soviet Union – that was centrally planned and controlled, and was reportedly making huge economic leaps forward. States such as Yugoslavia followed slightly different models but nevertheless were planned economies. Others elsewhere continued to emphasise government intervention. The role of the state in OECD countries was long debated. Even in the field of banking in western Europe, Gerschenkron, whose liberal credentials were generally impeccable, saw a big role for the state in promoting activity in countries catching up.8 Great claims are currently made for freedom and democracy. The Heritage Foundation publishes an annual index of freedom and analyses the relationship between this measure of freedom and the level of economic performance. The index covers ten factors, including trade policy, government intervention, property rights and regulation. Correlations are far from ideal on numbers arrived at subjectively, but there is nevertheless a strong case to be made for this position, which in the last decade or so has been taken up by leading economists such as Barro.9 The idea is not exactly new. It lay behind Smith’s Wealth of Nations, and was also part of Arnold Toynbee’s explanation for British success in the eighteenth century, as given in his 1883 Lectures: ‘On the moral side, our political institutions, being favorable to liberty, have developed individual energy and industry in a degree unknown in any other country’.10 More explicit and intensive investigations have been carried out recently. Some try to ‘measure’ democracy, and then establish the nature of the relationship with economic performance. The direction of causation is not clear, as perhaps most historians could have suggested in advance. Is it prosperity that promotes democracy, or does the reverse? 6 7 8 9

10

M. Olson, Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (New York, 2000). A. Sen, Development as Freedom (1993). A. Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, Mass., 1962). R. Barro, ‘Rule of law, democracy and economic performance’, in G. P. O’Driscoll, K. R. Holmes and M. Kirkpatrick (eds.), 2000 Index of Economic Freedom (Heritage Foundation and Wall Street Journal, 2000). A. Toynbee, Lectures on the Industrial Revolution in England (1884; 1969 edn), p. 121.

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Does it matter what the extent of democracy and the level of development are? Interestingly, Barro concludes his study with the view that ‘the extent of democracy has little relation to subsequent economic performance’.11 It might seem at first glance a slightly awkward fact for the freedom/ democracy school that the industrial revolution took place when there was little political representation or ‘democracy’ in Britain and that what there was, was declining over the course of the eighteenth century. The prevailing philosophy was mercantilism, which encouraged what was primarily a protectionist or regulatory climate with its focus on the supremacy and centralisation of the state. However, mercantilism existed in different forms and had different effects in different territories. It was a relative matter, and England suffered less from regulation than did others. Further, regulation was frequently ignored, leading some to remark that Smith’s views were in this sense out of date at the time of publication. But in any case Smith railed against the protectionist policies mercantilism encouraged, and this argument found a ready response in the country, one which was already opening up the economy to competition. The nature of protection and regulation varies hugely across capitalist and mixed economies. Clearly, there are still large differences among the economies of the West. The focus of the present collection of essays is on the twentieth century. Much of the period was the age of neo-mercantilism (that ran from roughly the 1870s to the 1970s), a clear return to intervention in many areas of the economy. This particular statism came from Liberals and Conservatives first. It was within this period, in 1893, that the first socialist party (the Independent Labour Party) was founded. Labour-party hostility to the market was clear in the 1930s; socialist legislation began to be passed after 1945. All of this then provided the climate within which policy was made and regulation imposed. Here it is worth considering further the argument that prosperity stimulates tolerance and concern and widens democracy, and that in part this period reflects all that. Ben Friedman argues that there is a systematic impact of economic growth on the ‘moral character of society’. The direction of social change reflects either improvement or stagnation in living standards. This is not a business-cycle phenomenon but something longer – he has in mind periods of ten or twelve years – and presents social change as a consequence of economic performance. Reasonable periods of prosperity generate a growing concern over social conditions and an increasing desire to alleviate social hardship. Tolerance increases. Social reform follows, bringing increased regulation which attempts to improve working and 11

Barro, ‘Rule of law, democracy and economic performance’, p. 47.

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other conditions. Against this, periods of stagnation lead to reversals in social policy and less tolerance for minorities and the deprived, and deregulation of the system in attempts to improve economic performance.12 There are problems with Friedman’s thesis, not least the fact that it does not fit either the great depression in the United States or many episodes in the British experience. However, there is at least some semblance of it in the British experience from the late nineteenth-century Fabianism onwards. For example, some have seen the 1930s as the real beginning of the Labour Party’s ideological commitment to planning and hostility to the market. Fabian hostility to the market was rooted in what they considered to be the waste created by competition. The central challenge was Smith’s invisible hand. One way around this problem was that offered by Tawney, the economic historian and political writer, influential in the Labour party: that the doctrine was outdated, because the joint-stock company divorced ownership from control.13 But this did not really hold up in Britain in the interwar years when the bulk of economic activity was still carried out by closely held firms. Market failure in general Be all that as it may, the issue largely comes down to that of how markets fail, and to what is meant by market failure. In the middle decades of the twentieth century market failure of many kinds was found. To some extent this was the fault of economics itself. The ideal in economics is perfect competition. This delivers the most efficient allocation of resources at the lowest price to the consumer. Such circumstances seldom prevail, and the danger then is of regarding any deviation from the perfectly competitive ideal as ‘failure’. On that view there would be widespread failure. However, on the more restricted view of failing to achieve a Pareto optimum, there are three principal kinds of market failure: externalities, monopoly and public goods. An externality is a cost or benefit that results from some particular activity but falls on parties who were not part of the activity. The most commonly cited example is that of the chemical factory that spills waste into the adjoining river. The company imposes part of its costs on others, which means that the social-marginal cost exceeds the private-marginal cost of the producer. There is no denying that such externalities exist: the question is, what to do about them? One view is that they result 12 13

B. M. Friedman, Democracy and Economic Performance (forthcoming). J. Tomlinson, ‘The limits of Tawney’s ethical socialism. A historical perspective on the Labour party and the market’, Contemporary British History 16/4 (2002), 1–16.

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from inadequately defined and allocated property rights, to which the answer would be to correct for such inadequacies and thereafter leave government out of the solution. However, it is not always easy, or without significant costs, to achieve the appropriate allocation. The two principal alternative means of dealing with the externality are either by tax or subsidy policy, or by regulation. The relative respective merits of these depend in part on the nature of the externality. The second main area of concern is monopoly. It is sometimes asserted that monopoly is evidence, or at least another instance, of market failure. The competitive outcome is the ideal (most efficient) allocation of resources, and monopoly deviates from this ideal. But it is not immediately clear why monopoly should always be regarded in this way. If the cost curves of a firm are such as to allow for only one firm in the market – the result of economies of scale – then in relation to demand a natural monopoly may be created. Whether or not this constitutes a problem depends on a number of factors, not least on the extent of international competition. The likelihood is that if there is free trade such a firm is still exposed to competition. But in any case these monopolies were much rarer than was sometimes supposed. Schumpeter argued this many years ago: ‘pure cases of long-term monopoly must be of the rarest occurrence and . . . even tolerable approximations to the requirements of the concept must be still rarer than are cases of perfect competition. The power to exploit at pleasure a given pattern of demand . . . can under the conditions of intact capitalism hardly persist for a period long enough to matter for the analysis of total output, unless buttressed by public authority, for instance, in the case of fiscal monopolies.’14 Even if at any one point a monopoly was identified, it is unlikely that it would last very long if left exposed to changing technology and other conditions. If there is failure of this kind – monopoly – then again the question is, what action should be taken? One solution is for the government to replace the market and carry out the activity itself. However, that may not be optimal. Just because the market has been found to have a fault does not mean that the answer is to replace it with government. In fact, as has been the experience of the postwar world, government intervention has frequently produced a worse situation.15 Nationalisation proved a failure in almost every sphere in which it was tried. Yet it took some countries a long time to accept this, as shown for example by the French return 14

15

J. A. Schumpeter, Capitalism, Socialism, and Democracy (1943; New York, 1987 edn), p. 99; and see S. C. Littlechild, Privatisation, Competition, and Regulation (Institute of Economic Affairs, 2000). H. Demsetz, ‘Information and efficiency: another viewpoint’, Journal of Law and Economics 12 (1969), 1–22.

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to nationalisation of the banks in the 1980s. The British had a long list of nationalised industries extending far beyond what were thought of as monopolies, usually in the utilities, railways, airways, communications, cars, and so on. The principal ways of coping with monopoly were to regulate, or to tax or subsidize the activity. Regulation was beset with all kinds of problems, not least those associated with the strong desire of producers to regulate as a means of restricting entry – ‘regulatory capture’. But even where there was a natural monopoly and something closer to a competitive price was deemed to be desirable, it has not proved easy to specify how this might be achieved. All manner of means of estimating costs work to obfuscate the issue. In some countries governments were led into setting up a competing firm; in New Zealand, for example, these appeared in insurance, banking, mortgage provision, etc. The third area of market failure is said to lie in public goods. A public good is one whose consumption can be enjoyed by everyone without any individual’s consumption being damaged by any other. An example commonly given is that of street lighting as compared, say, with an ice cream. But how many public goods are there? An instance that used to be given in textbooks was that of the lighthouse. Yet even here, as Coase demonstrated in a famous article, lighthouses were formerly privately owned and operated successfully. There were doubtless free-riders but the private lighthouses were nevertheless successful.16 Even supposing there were market failures of the kinds described, the question is: what should be done about them? The usual immediate solution has been to substitute government for the market. But is this an improvement? After all, governments fail too. How serious are such government failures? Are they greater or less than the ‘market failures’ they replace? The implicit assumption has often been of perfect government: in other words, as Demsetz put it, the market is being compared unfairly with nirvana.17 Market failure in the financial sector Finance usually features when questions of market failure are discussed. Finance used to be dismissed by many as essentially parasitic on the rest of the economy, but the importance of financial intermediation is now widely accepted as being of key importance in the process of economic 16 17

R. H. Coase, ‘The lighthouse in economics’, Journal of Law and Economics 17 (1974), 357–76. Demsetz, ‘Information and efficiency’, p. 21.

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growth. In fact this notion that finance has a role in economic development goes back a long way. Most writers point to Schumpeter as the modern source. He argued that scarcity of finance was a serious obstacle, and that the banking system was one of two key agents of growth, the contribution coming essentially from deposit creation. A long list of contributions to this literature followed. Hicks set out the view clearly when discussing the mercantile economy: ‘The basic need, on which the whole of this financial development is based, is the need for widening the circle of credit-worthy borrowers.’18 He went on to argue that it was the appearance of banking, which he maintained came before the Reformation, that allowed capitalism to develop. Recent contributions to this discussion have indicated that the initial degree of financial depth significantly predicted subsequent growth. Wachtel and Rousseau on the USA, Canada, and Britain from 1871 onwards concluded that it was financial development that caused growth.19 It does seem to be the case that the financial system develops early and matures in the early stages of economic development, and thereafter remains stable. So while there was once a debate about whether finance followed growth or perhaps accompanied it, with only a few economists and historians making a case for it preceding growth, the consensus has now moved in favour of the latter. It is accepted that financial intermediation raises welfare, and allows the firm or individual to choose between present and future consumption according to differential prices (interest rates) prevailing between the firm and the market. There is no doubt that finance is important – so important, some would have it, that it cannot be allowed to operate on its own without the guiding hand of the state. For it is prone to failure. There are two main sources of market failure said to be threatening in the area of finance. One is an externality, and the other, a more recent addition to the attack, is asymmetric information. The externality is a potentially serious problem. In a commercial banking fractional-reserve system there exists the possibility of a loss of confidence and concomitant run on the banks. This can happen even in the best-behaved systems. It does not require reckless lending. The externality is that if this does happen, there is a threat to the money stock; and in modern economies with sticky wages that would produce a fall in 18 19

J. Hicks, A Theory of Economic Growth (Oxford, 1969), p. 77. P. Wachtel and P. Rousseau, ‘Financial intermediation and economic growth: a historical comparison of the United States, United Kingdom, and Canada’, in M. Bordo and R. Sylla (eds.), Anglo-American Financial Systems. Institutions and Markets in the Twentieth Century (Burr Ridge, Illinois, 1995).

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output – a depression. There is no room here to develop the argument over the likely superiority of a completely free, unregulated banking system such as was once in place in Scotland. It is sufficient to state that there is evidence to suggest that perfectly competitive banking systems could produce the necessary stability without any external interference. But in any case with our current institutions there is a ready solution to this particular case of externality. Indeed, institutions evolved to cope with the problem. The solution is for the central bank or other comparable agency to act as a lender of last resort: to provide the market with all the liquidity required. Where this is done properly it escapes the problems often cited – problems of moral hazard, the difficulty of distinguishing between insolvency and illiquidity, the problem of too big to fail and so on. It is better if the financial system has learned prudence and been allowed to evolve to a well-diversified structure. The other problem area for finance is said to lie in asymmetric information. In all the models of competition used by economists, information is assumed to be free. But there are costs, sometimes quite large costs, in acquiring information. Asymmetric information is everywhere. When I go to my local wine shop there is asymmetric information – at least I hope there is! However, I am happy that with sufficient wine shops available, the competition will ensure that the seller does not take advantage of me but rather demonstrates his expertise and persuades me to stay with him as a customer. Yet the issue of asymmetric information is said to be of more importance in financial markets than in others. In financial markets asset prices do more than balance supply and demand. They provide signals to many other differently informed market participants. If sellers have better information than buyers about quality, there is the possibility that the sellers of high-quality assets will subsidise other sellers – leading to ‘lemons’ being traded. The issuers of new claims to raise funds generally have informational advantages over the providers of funds. The lenders might therefore be over cautious, and so some worthwhile ventures may not get funds or get them at higher rates than they should. The same answer still holds. Competition will encourage fuller flow of information (and this could be supplemented with requirements for fuller information). Furthermore, search will continue until the marginal benefit of the information is equal to the marginal cost of acquisition. Illustrations Two areas of activity that are at the heart of the City of London’s business illustrate some of the tensions that have featured in the

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twentieth-century government–market relationship. These are central banking, and financial intermediation as carried out in the commercial banking sector. The central bank need not be located in a state’s capital city, but is likely to be in the financial centre. Every central bank’s operations impinge directly on the financial markets, and it has obligations and responsibilities to these markets. In turn, its every action is scrutinised by the markets and interpreted by all the leading financial institutions. Its freedom of action is therefore important. How free of political interference is it? The economy requires both monetary and financial stability to allow it to achieve the optimum outcome. It is generally regarded as the central bank’s task to produce monetary stability and contribute to financial stability. And yet the history of most of the twentieth century was of greater monetary instability (and consequent price and financial instability) than had been the case in the preceding century. What had gone wrong? The most commonly accepted answer is government intervention. Take first the part played by the central bank. What matters is its freedom to pursue policies that will deliver monetary and hence price stability. It may operate within a rule such as the gold standard (decided on by government), or be left to find its own way. The extent of interference from government is never easy to pin down. For example, in the nineteenth century there was all the appearance of independence with the Bank of England, a privately owned joint-stock company. It has been argued that such was the social milieu that the idea of independence was less than it seemed, and pressure on the Bank was easily brought to bear.20 But this was less important when the gold standard was the rule under which the Bank operated. Even in 1914 when government had to take control of monetary policy and the gold standard was effectively abandoned (though not formally so until 1919), the Bank was allowed to retain the appearance of at least a modicum of independence. After the First World War there was a belief that the inflation generated across many countries was a direct consequence of the abandonment of the gold standard and the free printing of money by governments seeking greater power over resources. The mood at that time was therefore to restore the previous independence of central banks and to resort to sound money. However, the upheavals of the following decade culminating in the great depression of 1929–33 were widely diagnosed as being a failure of banking, and particularly of central banking. It is in the 1930s therefore that the real beginnings of the loss of central bank independence can be 20

F. Fetter, The Development of British Monetary Orthodoxy, 1797–1875 (1965; Fairfield, New Jesey, 1978 edn).

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found. That threat increased with the Second World War, and after that war the capture of central banks by governments was common. Governments believed that central banks could be used to promote economic growth – and there was a failure of economic thinking involved in this. The experience of inflation that followed the final break with gold was a direct consequence of the lack of any anchor in the system by the end of the 1960s. Inflation worsened – rose to higher and higher levels, and at the same time became more variable – until a point was reached when it was recognised that a restoration of sound money was essential. There had been one or two exceptions to the general case, such as that of the Deutsche Bundesbank. Where there was acceptance of and desire for sound money, greater central bank independence tended to prevail and nations experienced superior price performance. Thus it was that the best results were achieved by giving central banks the single task of delivering a specified inflation rate. In Britain there may have been less independence than appeared to be the case in the nineteenth century and even into the interwar years. In the late 1930s Montagu Norman, Governor of the Bank of England, said ‘I am an instrument of the Treasury.’ However, the extent of Bank independence went the other way too. For example, when the Bank was nationalised in 1946, this was a less dramatic change than has often been asserted. That said, there is no doubt that government dictated, and monetary policy was completely politicised. It was also misguidedly used for purposes for which it was not appropriate. What, of course, should also be borne in mind is that almost coincident with nationalisation of the Bank came the Bretton Woods monetary arrangements. These meant that Britain largely lost control of monetary policy for the period from around 1950 to the late 1960s. But for the twenty years after the collapse of Bretton Woods in the early 1970s and the restoration of an independent but government-controlled monetary policy, monetary stability was poor. Interestingly, in the late 1990s it was a Labour government that granted a certain freedom of action again to the Bank of England – operational independence. To some extent this relative freedom was damaged by transferring the Bank’s supervisory and regulatory roles to the new institution, the Financial Services Authority. Nevertheless, the move was seen as a bold and unanticipated one. Labour’s constituency was not seen as particularly inclined to non-inflationary policies, whereas the Conservative’s might have been. The move looks rather to have been the triumph of ideas rather than of interest groups. There was no lobbying. There was, though, a need for New Labour to gain credibility in these markets. And there had been at least a decade of discussion in policy circles on

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the issue of independence. It seems to have been a combination of these elements.21 For most of the second half of the twentieth century the government attempted to control monetary policy. How then was financial intermediation affected? Financial intermediation is important to the efficient functioning of the whole economy. Banks are central in the process, and for most of the twentieth century have been by far the largest intermediary. Their efficient working is therefore important, and the question is: how can that best be achieved? Is it best left to competition, as suggested by conventional economic theory? Or are there reasons in the case of banking for regulation to keep it from deviating to a dangerous path? English banking was in its earliest phase relatively lightly regulated, and then slowly regulated even less; and it moved from being prone to crisis in the eighteenth century to being extremely stable in the late nineteenth and twentieth centuries. Although the financial system grew rapidly and prospered through the eighteenth century, it was nevertheless dogged by repeated financial distress. The constraints placed on the banks prevented them from taking many of the courses they otherwise would, and contributed to this instability. In the course of the nineteenth century English and British banking (the two effectively came together with the Bank Charter Act of 1844 and the Joint Stock Banking Act) followed a path of lessening regulation. First there was the allowance of joint-stock banking – initially outside London but then slightly later within London – then the relaxation and removal of the usury laws, a clearer definition of the gold standard, the coming of limited liability, and easier access of the discount houses to the Bank of England. This story should not be overdone, but that was certainly the general direction. One important move occurred in the opposite direction. In 1844 the Bank of England was given the sole right of note issue. But this was phased in. No new bank could issue its own notes, and where a bank was acquired by another bank, as was increasingly the case, it lost the right of issue. By the 1870s the extent of private issue was tiny in relation to the total note issue. Also, whereas in the eighteenth century English banking was made up of a large number of small units – in about 1800 there were approximately 800 – as these were allowed the freedom to grow during the nineteenth century they became increasingly large. Mergers of all kinds took place: between two private banks; between two joint-stock banks; the acquisition of a private bank by a joint-stock bank; on occasion the acquisition of 21

M. King, ‘The new Lady of Threadneedle Street: the triumph of ideas over interests?’, Central Banking 12 (2002).

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a joint-stock bank by a private bank. The main point is that this increasingly concentrated system was thoroughly diversified and brought great stability. It has been accused of being overly conservative and denying funds to certain parts of the economy; in other words there was said to have been an efficiency/stability trade-off. This is possible, though the available evidence was never convincing and the argument has recently been drifting in the other direction.22 But it is difficult to put a value on the stability to which their behaviour in large measure contributed. The British financial system from the 1870s was generally one of selfregulation. Retail banking was distinct and separate from wholesale banking and from the discount market. Thus the Accepting Houses Committee attended to the affairs of the wholesale banking sector, the merchant banks. The London Discount Market Association looked after that part of the market; and the Committee of the London and Scottish Clearing Bankers took responsibility for retail banking. These were in effect ‘clubs’. Clubs generally worked to control all the affairs of their members, from entry into the business itself to the everyday behaviour of the member. To an extent they limited competition, and by so doing the public paid a higher price for the product than they otherwise would. In banking there was no formal restriction of entry into the system, and many banks were formed and some closed with every year that passed. But without access to the clearing house it was impossible for a new entrant to provide the same service at the same price as did existing banks. The conclusion most commonly reached is that while the banks maintained good behaviour and orderly business, the sector may not have been as dynamic as was desirable. Within this institutional context the Bank became a true lender of last resort. It was able to act quickly and decisively as the accepted arrangement with government was established – a letter suspending the 1844 Act was always available, and indeed was offered to and rejected by the Bank in 1878 and 1890. In the century after 1870 there is ample demonstration that the British financial, and particularly banking, system was enormously stable. That stability was due in some part to the operations of the Bank of England; in part to structure; and in part to self-regulation. The value of the currency was maintained, apart from wartime experience, for most of that period. More significantly, there were no financial crises, that is no threat to the payments system. There were individual failures among financial institutions and exchange-rate difficulties, but no financial crises properly defined. 22

F. Capie and M. Collins, Have The Banks Failed British Industry? (Institute of Economic Affairs, Hobart paper 119, 1992).

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Although banking around the world has generally been more highly regulated than other parts of the economy, the difference between the two was perhaps less in evidence in Britain, at least until the latter part of the twentieth century. It may be attributable to the early start and the long learning process that produced a stable system by the late nineteenth century. However, in line with moves elsewhere after the Second World War a growing number of controls was introduced. These ranged from instructions on to whom to lend, through the imposition of cash and liquidity ratios, to ceilings on lending. These characterise the 1950s and 1960s. The likelihood is that it was regulation that brought the difficulties experienced by banking in the 1970s. But as ever these difficulties gave rise to new regulation, and since that time regulation has increased in a period when there was more generally increasing liberalisation of economies. And where the system was once enormously stable it clearly became less so. In the closing years of the century the regulation of finance was growing rapidly and becoming extremely onerous.

Conclusion The basic task of the City is the transmission of funds from savers to borrowers. In the institutional structure inherited from the nineteenth century it is the job of government to provide monetary stability – either through a rule such as the gold standard, or by some other means – so that financial intermediation can proceed in its most efficient way. This requires in the first instance financial stability. This in turn requires prudent institutions backed by a lender of last resort. In Britain all of this was learned in the nineteenth century, and in the twentieth century the system did what it was supposed to do. However, from early in the century government intervention began to increase. This started not unnaturally in the First World War, grew in the 1930s with exchange controls, and was extended further, again not surprisingly, in the Second World War. But after that, instead of government retreating, it advanced. An array of measures including direct controls on banking, a preoccupation with the defence of sterling and a general desire for control characterised the period. As we have noted, the economy did remarkably well in spite of all the supposed faults. The City of London has been accused of conservatism and relying on personal contact and trust. That is of course a very efficient framework within which to work. With trust there is no need for contracts, and codes of law and so costs are reduced.

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In terms of the themes and questions of this book, it is interesting to note that there was little in the way of lobbying on any issue in the City across the century (unless it can be detected at some very subtle level). Even in the late twentieth century on the issue of central bank independence which could have been seen to benefit financial institutions of all kinds, there was no evidence of such pressure. This relative scarcity of lobbying in Britain led Friedman to make the suggestion that Britain had institutions that ‘produced a largely incorruptible civil service, with limited scope for action, but with great powers of decision within those limits. It also produced a law-obedient citizenry that was responsive to the elected officials operating in turn under the influence of the civil service.’23 He went on to contrast this with the absence of such a tradition in the United States. He believed that it was nineteenth-century laissezfaire policies that produced these institutions. This could help explain the lack of ‘capture’ in the regulatory process in Britain for most of the twentieth century. There will always be attacks on the market. Currently, the line of attack is that corporations have responsibilities other than to their owners, to a range of ‘stakeholders’ – employees, customers, and so on. But surely it should be obvious that firms should treat their employees well in order to get the best from them over the long run. Equally, it should be obvious that the way to maximise profits is to respond to customer needs. Yet these two categories have now been labelled ‘stakeholders’ and are said to deserve some other kind of consideration. Furthermore, the corporation is now said to have social and environmental responsibilities. A recent book has addressed all these questions, but this will not prevent the arguments rolling on.24 23 24

M. Friedman, ‘John Maynard Keynes’, Federal Reserve Bank of Richmond Quarterly Review 83 (1996), 22. D. Henderson, Misguided Virtue. False Notions of Corporate Social Responsibility (Wellington, New Zealand, 2001).

4

Financial elites revisited Youssef Cassis

Throughout the twentieth century the issue of financial elites has been present in the debates over the relationship between the British government and the City of London, from J. A. Hobson’s Imperialism (1902) to Will Hutton’s The State We’re In (1995). Admittedly these two works, and others in the intervening period, are more generally concerned with financial power, with the City’s pervasive influence at the economic, social and political levels, and with its ability to promote its own interests. Yet this power has been embodied by a group of people – the merchants, bankers, financiers, stockbrokers and other business people in charge of the major financial institutions operating in the Square Mile, in other words the financial elites. Assessing these two aspects involves a difference in genre. It is one thing to analyse the political influence of the City of London, even as expressed by its leading protagonists. It is another to conduct a social analysis of the main characteristics displayed by this group, in terms of background, education, network of relationships, business interests, political leanings, and cultural values.1 Both approaches have been combined to a greater or lesser extent in a number of studies. Nevertheless, social analysis of an elite group does not automatically translate into an explanation of its power to influence. This discrepancy must be borne in mind, given both the general questions raised in this volume and the fact that financial elites will be considered in this essay from a social point of view. In the first two parts, I will review the major landmarks in the discussion of financial elites during the twentieth century, highlighting in particular the thematic standpoints and methodological approaches. In the third part, I will discuss the major changes in the composition and social status of the financial elites that took place in the course of the twentieth century. The fourth part will consider the peculiarities of the British financial elites in a European comparative perspective. Finally, I will conclude by returning to the question of the political influence of financial elites. 1

One could also talk of a sociological or a prosopographical analysis, the latter having been undertaken mainly for earlier, pre-1914 periods.

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The origins of intercorporate analysis To the extent that financial elites have had the power to influence government policy, this power has rested on a specific combination of economic, social and political assets. The position deriving from such a combination has primarily been approached in terms of interpersonal and intercorporate relationships. In the last two or three decades, this has become a major field of research in the social sciences, developed mostly by sociologists and political scientists, who have given it various labels such as ‘social network analysis’ or the ‘structural analysis of business’.2 This type of socio-political study of the business world is based mainly on the analysis of interlocking directorships. Britain has featured fairly strongly in such studies, as a result both of the increased concentration of the British economy and of the development of this specific field of inquiry as an academic sub-discipline, especially in the United States. To what extent are these analyses rooted in earlier studies published in the first half of the twentieth century? There have been some great inspirational studies, such as Hobson’s Imperialism, or Hilferding’s Finanzkapital.3 Some lesser works have been either acknowledged or simply ignored in academic publications; others have understandably been forgotten. According to John Scott, the first analysis of ‘interlocks’ to be carried out in Britain was Hobson’s analysis of overlapping interests between City financiers and South African mining enterprises in his Evolution of Modern Capitalism (1906).4 This, however, consisted of just two pages and one table. Only one other reference to a pre-Second World War work appears in the modern academic literature on the subject: Simon Haxey’s Tory M.P. (1939). This book traces a number of family and business connections of Conservative MPs, but is not concerned primarily with the City elites, and remains largely impressionistic despite its wide use of tables and diagrams. So far as I am aware, the very first analysis of the interpersonal and intercorporate relationships of the City banking elite was undertaken by Percy Arnold in a little book published in 1938, The Bankers of London.5 One would expect to see this routinely quoted in subsequent publications on the subject, yet it seems to have passed totally unnoticed. Given its position in the development of this particular literary and academic 2 3 4 5

See for example M. S. Mizruchi and M. Schwartz (eds.), Intercorporate Relations. The Structural Analysis of Business (Cambridge, 1987). R. Hilferding, Das Finanzkapital (1910; Frankfurt, 1968); English translation: Finance Capital. A Study of the Latest Phase of Capitalist Development (1981). J. Scott, Corporate Business and Capitalist Classes (Oxford, 1997), p. 116. P. Arnold, The Bankers of London (1938).

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genre, this work and its author deserve some attention. Percy Arnold was a journalist, though of the ‘academic’ type, having taken a degree in economics, as an evening student, at the London School of Economics in 1932.6 He joined London General Press after a commercial apprenticeship and at the time of writing the book was assistant editor of Branch Banking: the Practical Journal of Branch Bankers Throughout the World. He was also a member of the New Fabian Research Bureau, a think tank, to use the modern terminology, formed in 1931 by G. D. H. Cole,7 and was involved in the Bureau’s working party on banking. Arnold was therefore not an isolated or marginal figure. He was at the heart of Labour thinking on banking and monetary matters. His publisher, the Hogarth Press, established by Leonard and Virginia Woolf in 1917, was prestigious and influential.8 Leonard Woolf personally gave his assent to the publication of The Bankers of London, after taking Counsel’s opinion regarding the possibility of libel.9 Arnold’s purpose was ambitious: in the letter submitting his manuscript he claimed, borrowing Woolf’s words, that his book was ‘a study of the matrix of the City of London’.10 By today’s standards, Arnold’s method appears fairly elementary. It consists mainly of establishing lists of the directors of the five sets of banking institutions considered in the book11 who simultaneously held directorships of other financial institutions. Arnold’s focus of attention is on the individuals holding multiple directorships, whose names are always given, rather than on the links between institutions established through these people, as has become more common in recent academic studies. In that respect, Arnold does not attempt to draw any form of diagram of interconnectedness between City institutions. His conclusions might also appear simplistic, for example that ‘many bankers were directors of more than one bank and not a few of insurance companies’; or that ‘acting through the mechanism of banks and finance houses those who direct the policy of the different institutions are very often the same men’. But they are based on the first systematic analysis of interlocking directorships12 ever undertaken in Britain. From this perspective, Arnold was primarily 6 7

8 9 10 11 12

London School of Economics register, 1895–1932. G. D. H. Cole, one of the major intellectuals of the Labour movement, had been head of the Fabian Research Department, but had grown impatient at the Fabian Society’s failure to offer concrete solutions to the depression. J. H. Willis, Leonard and Virginia Woolf as Publishers: the Hogarth Press 1917–1941 (Charlottesville, 1992). Woolf to Arnold, 15 July 1938, Hogarth press archives 5, University of Reading Library. Ibid., Arnold to Woolf, 4 May 1938. The Bank of England, the merchant banks, the largest private bank (Glyn, Mills & Co.), the discount houses, and the ‘Big Five’ commercial banks. Arnold actually uses the word ‘interlock’ in the book, p. 108.

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interested in the concentration of financial power rather than in the relationships between City and industry. Other variables usually considered in sociological analyses of business leaders, such as education or family connections, are dealt with in an impressionistic rather than a systematic way. The Bankers of London has obviously had a very limited impact. There are several reasons for this. In the first place, this slim book (108 pages) fell somewhat short of its objectives. Whatever its insights about the questions raised by modern socio-political analysis (what we would today call the structure of interests and the governance of City institutions), it remained more descriptive than analytical, with no real conclusions being drawn from the data. Secondly, and more importantly, it fell between two stools, being neither a political pamphlet (despite an implicit political agenda) nor a proper academic study (despite an attempted conceptual framework). Arnold himself worked between the world of banking (as editor of a banking journal) and the world of politics (through his Fabian connections). Thirdly, the political climate in the interwar years was not really propitious for the reception of this type of analysis, despite the controversies about the return to the gold standard in 1925, the denunciation of a ‘bankers’ ramp’ in 1931, and the debates about the nationalisation of the Bank of England in the late 1930s. This was the opposite of what was happening in France where the conspiracy theory of the ‘200 families’ enjoyed great popular success, even though the country’s ruling class was far less homogenous than its British counterpart. For future students of intercorporate relationships, The Bankers of London could stand neither as a book of polemical politics nor as a pioneering work of structural analysis. Yet for all its shortcomings, it should be included in any historiographical study of the subject. The analysis of interpersonal and intercorporate relationships, whether in popular, political or academic form, did not really start before the mid 1950s. In 1955, Sam Aaronovitch published Monopoly. A Study of British Monopoly Capitalism, an analysis of British big business from a Marxist–Leninist point of view relying partly on interlocking directorships. Aaronovitch continued his analysis in subsequent works, including his best-known book, The Ruling Class (1961), but his work was not primarily concerned with the specific role of banking and finance in British capitalism. The first socio-political analysis of the City of London is usually considered to be the article published in 1959 in The Manchester School by two sociologists, Tom Lupton and C. Shirley Wilson, entitled ‘The social background and connections of “top decision makers”’. Significantly, this academic inquiry was related to a political debate, the so-called Bank

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Rate Tribunal of 1957, which investigated whether there was any truth in the allegations that information about the raising of the Bank Rate was improperly disclosed. The aim of the authors was ‘to enquire whether the persons whose names appeared in the Tribunal evidence were linked to each other by relationships of friendship, kinship, affinity, common membership of associations, and so on’. Their method consisted in the by now well-tested exercise of gathering and processing data on the education (both school and university), club membership, and kinship connections of six categories of ‘top decision makers’: cabinet ministers, senior civil servants, directors of the Bank of England, directors of the ‘Big Five’, directors of ‘City firms’ (i.e. mainly merchant banks), and directors of insurance companies. Unlike previous studies, that of Lupton and Wilson is not based on interlocking directorships; indeed, this line of inquiry is not even included in the analysis. On the other hand, they provide the first systematic analysis of the social and educational background of the City elite, which was to be developed in later studies. The Bank Tribunal and Lupton and Wilson’s findings were echoed in popular books, such as Paul Ferris’s The City (1961), and Anthony Sampson’s more famous Anatomy of Britain (1962). However, in terms of paternity, the articles by Lupton and Wilson and by Arnold form the two bases – social background and connections, and interlocking directorships – on which have rested the modern sociological and historical studies of financial elites. Several academic investigations followed from the late 1960s onwards, as the ‘structural analysis of business’ established itself as an academic discipline, with more emphasis being put on intercorporate than on interpersonal relationships. An epistemological discussion of the development of this field is far beyond the scope of this chapter, the more so as it has covered the entire business spectrum rather than the financial world per se. However, some studies deserve a special mention. One is Richard Whitley’s contribution on the City and industry to Philip Stanworth and Anthony Giddens’s influential volume on Elites and Power in British Society (1974).13 Whitley questioned whether the traditional opposition between City and industry had disappeared with the rise of giant companies, concluding (through an analysis of educational background, social relationships, kinship links, and interlocking directorships) that the ‘City’ and ‘Industry’ were in fact very close. This view tended to be dominant in the 1960s and 1970s, with giant industrial companies facing a still more inward- than outward-looking City of London. In the same volume, Stanworth and Giddens provided a demographic profile (including social origins, educational background, career patterns, and political and judicial 13

R. Whitley, ‘The City and industry: the directors of large companies, their characteristics and connections’, in P. Stanworth and A. Giddens (eds.), Elites and Power in British Society (Cambridge, 1974), pp. 65–80.

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posts) of company chairmen, an ‘elite within the elite’, within which the banking sector remained ahead of most other groups.14 The issue of business and politics was tackled more directly by Michael Useem who argued a decade later that ‘a politicized leading edge of the leadership of a number of major corporations has come to play a major role in defining and promoting the shared needs of large corporations in two of the industrial democracies, the United States and the United Kingdom . . . This politically active group of directors and top managers gives coherence and direction to the politics of business.’15 His analysis is mostly, though not exclusively, based on interlocking directorships, with no particular emphasis on the role of financial elites. The most prolific British writer on the subject, however, has undoubtedly been the sociologist John Scott, perhaps best known for his Corporations, Classes and Capitalism, a discussion of ownership and control of the large corporations in the industrialised world, first published in 1979 and re-issued several times since.16 Scott also carried out empirical research on interlocking directorships in British industry and contributed to the methodological development of the so-called ‘social network analysis’. It should be noted that all these socio-political studies, conducted by social scientists rather than historians, have tended to be cautious in their conclusions regarding the ‘power to influence’ of the City elites, though with probably more emphasis on its relative strength in more recent works. The historical approach Historical studies have been less numerous and followed rather than run parallel to those of social scientists. When historians started being interested in the City of London about a quarter of a century ago, one main concern dominated the agenda: the City and industry. This was a broad and multifaceted theme, which should not be reduced to the muchdebated question of the provision of funds to manufacturing industry. It included the equally debated issue of Britain’s economic policy during much of the twentieth century, in particular the alleged priority given to financial interests over industrial interests. In the early 1980s, this questioning appeared especially relevant in view of the respective fortunes of the two sectors: a booming City which had recovered its position as one of the world’s leading financial centres sharply contrasted with a desolate 14 15 16

P. Stanworth and A. Giddens, ‘An economic elite: a demographic profile of company chairmen’, in Stanworth and Giddens (eds.), Elites and Power, pp. 81–101. M. Useem, The Inner Circle. Large Corporations and the Rise of Business Political Activity in the US and the UK (Oxford, 1984), p. 3. The latest edition was published under the title Corporate Business and Capitalist Classes (Oxford, 1997).

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industrial sector epitomising the country’s long-term relative economic decline. All this meant, however, that unlike social and political scientists before them, historians have been little concerned with issues such as monopoly capitalism and finance capital. One area of research was to ascertain to what extent bankers, financiers and other City men had formed a distinct economic elite and what had been their links with other elite groups, in particular the political elite. Another area of investigation concerned the factors which could explain such a strong financial performance, and the fact that this sector had apparently been immune to the type of entrepreneurial failure observable elsewhere. So far as socio-historical analyses of elites are concerned, such works as William Rubinstein’s analysis of the very wealthy in Britain, Michael Lisle-Williams’s study of merchant banking dynasties, or my own work on City bankers, addressed these issues, albeit in very different ways.17 Rubinstein’s work cannot be considered a socio-historical analysis of specifically financial elites. However, by emphasising the high proportion of bankers and financiers among the very wealthy, he contributed decisively to the launch of the debate on the role of the City in the British economy and the position of these elites in the structure of the English middle and upper classes in the nineteenth and twentieth centuries. Lisle-Williams’s questioning is more characteristic of the sociologist’s than of the historian’s approach, in particular his use of social theory to account for the social status of merchant bankers and the survival of their firms under family ownership well until the 1960s. My own study of bankers in the golden age of the City of London was a global study of this socio-professional group, encompassing its economic, social, political and cultural aspects, though it only covered the twenty-five years preceding the First World War. Few historical studies have provided a social ‘radiography’ of other segments of the financial world in the last two centuries.18 However, the concept of ‘gentlemanly capitalism’, coined by Peter Cain and Anthony Hopkins in the mid 1980s, provides a useful synthesis of the research 17

18

W. D. Rubinstein, Men of Property. The Very Wealthy in Britain since the Industrial Revolution (1981); M. Lisle-Williams, ‘Beyond the market: the survival of family capitalism in the English merchant banks’, and ‘Merchant banking dynasties in the English class structure: ownership, solidarity and kinship in the City of London, 1850–1960’, British Journal of Sociology 35 (1984), 241–71, 353–62; Y. Cassis, City Bankers, 1890–1914 (Cambridge, 1994; French edn 1984). The more significant contributions include J. Harris and P. Thane, ‘British and European bankers, 1880–1914: an “aristocratic bourgeoisie”?’, in P. Thane, G. Crossick and R. Floud (eds.), The Power of the Past: Essays for Eric Hobsbawm (Cambridge, 1984), pp. 215–34; and A. Howe, ‘From “old corruption” to “new probity”: the Bank of England and its directors in the age of reform’, Financial History Review 1 (1994), 23–41.

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undertaken in the field in the previous two decades.19 Cain and Hopkins were primarily concerned with explaining British imperial expansion, but in order to do so they brought together a vast array of works emanating from all historical specialisms, as well as other social sciences, which had emphasised the decisive importance in the British past of the financial sector, and more generally of the service industries, based in the south east. The concept of ‘gentlemanly capitalism’ can be used at several analytical levels. As far as financial elites are concerned, it encapsulates most of the characteristics of this particular group, whether in social terms (closeness to landed interests, understood in the broad sense of the word) or in professional terms (wealth and status); it makes it possible to identify the group and to distinguish it from other economic elites both in Britain and in other industrialised countries. It is thus a highly operative concept for the purpose of social analysis. This is not to say that there has been a unanimous view of the matter. The composition of the financial elites (and more generally of the ‘gentlemanly capitalists’), their degree of openness to a new meritocracy, their links with the old aristocracy, the distance which has separated them from the industrial elite, both in terms of wealth and social status – all these issues have given rise to lively controversies, and warnings against the emergence of a new orthodoxy.20 Once again, a distinction should be made between analysing the social structure of a socio-professional group on the one hand, and its political influence on the other. The question of the political influence of financial elites has remained fairly contentious; but disagreements about the social characteristics of financial elites have mostly been a matter of emphasis, and a broad consensus has emerged about their particular place in British economy and society, a consensus reflected in many respects in David Kynaston’s impressionistic but powerful portrait of the group.21 This is not the place to rehearse these 19

20

21

P. J. Cain and A. G. Hopkins, British Imperialism: Innovation and Expansion 1688–1914 and British Imperialism: Crisis and Deconstruction 1914–1990 (both 1993). The concept of ‘gentlemanly capitalism’ first appeared in Cain and Hopkins’s two articles: ‘Gentlemanly capitalism and British expansion overseas, I. The old colonial system, 1688–1850’, EcHR 39 (1986), 501–25 and ‘Gentlemanly capitalism and British expansion overseas, II. New imperialism, 1850–1945’, EcHR 40 (1987), 1–26. Among the numerous publications on these issues, see S. D. Chapman, ‘Aristocracy and meritocracy in merchant banking’, British Journal of Sociology 37 (1986), 180–93; Y. Cassis, ‘Merchant bankers and City aristocracy’, and S. D. Chapman, ‘Reply to Youssef Cassis’, British Journal of Sociology 39 (1988), 114–20, 121–6; M. J. Daunton, ‘ “Gentlemanly capitalism” and British industry, 1820–1914’, Past and Present 122 (1989), 119–58; W. D. Rubinstein and M. J. Daunton, ‘Debate: “Gentlemanly capitalism” and British industry’, Past and Present 132 (1991), 150–70, 170–87; R. E. Dumett (ed.), Gentlemanly Capitalism and British Imperialism: the New Debate on Empire (1999). Kynaston, City of London.

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well-known debates but rather to wonder whether they could be the likely starting point of historical research undertaken in the early years of the twenty-first century. Revisiting financial elites, it is not surprising to find that the climate of debate has changed in the last twenty to thirty years. In the first place, the controversies surrounding the division between City and industry have, if not entirely disappeared, certainly lost much of their intensity. There are many reasons for this. Some have to do with the progress of historical research, which has dispelled a number of myths, for example the lack of adequate provision of funds to industrial companies.22 More importantly, the very nature of industry and its role in advanced societies has profoundly altered in the age of the third industrial revolution. Whether one takes the view that industry hardly matters any more, or that the frontiers between manufacturing and services have become increasingly blurred, the fact is that the terms of the old debate have become markedly less relevant to current concerns. Secondly, the very success of British finance can today be questioned in a way that would not have been thinkable some twenty years ago. The City might be enjoying a position reminiscent of its pre-1914 glory days,23 but what about the performance of British financial institutions within this context? One of the objectives of the ‘Big Bang’ in 1986 was to allow the emergence of a few British global players in the field of investment banking; and during the run-up to ‘Big Bang’ several clearing banks (especially Barclays and Natwest) and merchant banks (in the first place Warburg, Kleinwort and Morgan Grenfell) clearly showed that this was their intention. So far, the result is far from having met the expectations. The clearing banks have retreated from investment banking, and two of them (Midland and Natwest) lost their independence in the 1990s. The fate of the merchant banks, once the flower of the City, has been ever more dramatic, with virtually all the leading houses being taken over by foreign banks. Again, this is not the place to discuss the long-term consequences of the so-called ‘Wimbledonisation’ of the City of London, but it cannot be denied that the retrenchment or loss of independence of British financial institutions has been a mark of entrepreneurial or managerial failure rather than success.24 To what extent this might lead to reconsideration of financial elites in a different light remains to be ascertained. 22

23 24

There is a huge literature on the subject. For a survey of the most recent contributions to the debate, see Y. Cassis, ‘Banque et industrie en Angleterre, 1870–1950: mythes et r´ealit´e’, in P. Marguerat, L. Tissot and Y. Froidevaux (eds.), Banques et entreprises industrielles en Europe de l’Ouest, XIXe–XXe si`ecles: aspects nationaux et r´egionaux (Neuchˆatel, 2000), pp. 17–28. For a recent account, see R. Roberts and D. Kynaston, City State. How the Markets Came to Rule Our World (2001). See P. Augar, The Death of Gentlemanly Capitalism. The Rise and Fall of London’s Investment Banks (2000).

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Thirdly, there have been changes in the historiographical context. After decades of neglect by social historians whose paramount interest lay with labour history, the history of elites gathered momentum in the 1970s, reached a peak in the late 1980s and has since then been losing some ground. This relative decline can be attributed partly to our greatly improved knowledge of the subject. With many gaps having been filled, research interests have tended to move to other areas.25 The same can be said about methodology: the prosopographical approach in particular, though still a powerful instrument, has produced results which do not need to be repeated indefinitely. This has coincided with the rise of ‘cultural history’, which in many respects has encroached on what has traditionally been the preserve of ‘social history’. Even though the two specialisms should in no way be seen as antagonistic or mutually exclusive, the study of ‘representations’ has tended to overshadow the ‘collective biography’ approach, based on the statistical analysis of social indicators. At the other end of the spectrum, business history, as an academic specialism, has grown closer to the field of management studies, including business leaders in its approach. These are not entirely new developments nor do they contradict or invalidate the social history of financial elites. There remain huge gaps in our knowledge of the City financial elites. Yet few attempts at filling them have been made in recent years, whether by sociologists or historians. The latest studies have been more interested in representations than in social structure, as witnessed for example by the ‘City Lives’ project, consisting of a series of interviews conducted by Cathy Courtney and Paul Thompson,26 which tried to capture ‘how the financial City works, its everyday culture, and the background and attitudes of the people who run it’.27 On a grander scale and spanning a far longer historical period (and thus requiring the use of personal papers as well as interviews), this has also been one of the hallmarks of David Kynaston’s historical approach. Future studies of financial elites, from both the business and cultural sides, will have to address these trends. The changing nature of financial elites A history of Britain’s financial elites in the twentieth century thus remains to be written. What can be attempted in the current state of historical 25 26 27

This has, for example, been the case in Germany with the long-standing debate about the role of the bourgeoisie in German historical development. C. Courtney and P. Thompson, City Lives (1996). P. Thompson, ‘The pyrrhic victory of gentlemanly capitalism: the financial elite of the City of London, 1945–90’ (two parts), Journal of Contemporary History 33 (1997), 283–304, 427–40.

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research is a discussion of the composition of these elites and in particular of the changing nature of their social characteristics. If the power to influence derives in any way from a specific set of social attributes, then this should surely be the precondition of any reflection on the matter. Financial elites have been made up of three main groups: the partners of the private banks, and the directors and the senior managers of the joint-stock banks. The respective position of each group has of course altered since the beginning of the nineteenth century, though not as radically as could be expected given the economic and social changes which have taken place in the last 150 years. Three main turning points can be detected. The first took place in the 1880s and 1890s, with the advent of the corporate economy; the second in the 1960s, with the professionalisation of the financial elites; and the third in the 1990s, with the internationalisation of the City of London. Until the last quarter of the nineteenth century, the dominant group was undoubtedly the private bankers, principally the partners in private deposit banks. As Walter Bagehot wrote: ‘the name “London banker” had especially a charmed value. He was supposed to represent, and often did represent, a certain union of pecuniary sagacity and educated refinement which was scarcely to be found in any other part of society.’28 The amalgamation movement in English banking, which gathered pace from the 1880s, sounded the death knell of private banks. Nearly all of them were taken over by the joint-stock banks and by 1914 only one (Glyn, Mills, Currie & Co.) was still a member of the London Clearing House. Yet this did not fundamentally alter the characteristic of the financial elites, where the ‘private’ element remained dominant. This was due to two main reasons. The first was the rise of a new elite of private bankers – the merchant bankers. A few of them (especially Rothschilds and Barings) had been rich and powerful since the early nineteenth century. But as a group, they enjoyed a real golden age between 1870 and 1914, as London became the undisputed financial centre of the world. Both their number and the volume of their operations increased during this period, and they became an integral part of the English banking system as the inland bill of exchange was replaced by the international bill of exchange. In particular, merchant bankers were able to maintain their hold on two financial activities, which were at the very heart of London’s role as the world’s financial centre: the acceptance business and the issuing business. They survived the First World War and the world economic depression, turned their attention to domestic finance in the 1930s, and re-emerged 28

W. Bagehot, Lombard Street. A Description of the Money Market (1873; 2nd edn 1910), p. 270.

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after the Second World War in control of another central activity of the City: corporate finance. The second reason was the persistence of private interests within the joint-stock banks well into the 1950s. On the one hand, several dynasties of private (deposit) bankers were able to survive the disappearance of the private banks. Barclays Bank is of course the ultimate example of a leading joint-stock bank remaining in private hands; but members of other families, such as the Smiths, adapted to the new banking structures and emerged at the head of joint-stock banks while retaining outside interests. On the other hand, the boards of directors of the London-based jointstock banks were mostly made up of partners of merchant houses and merchant banks, as well as former private bankers. There was thus a great deal of overlap between two of the groups making up the City financial elites, the directors of the joint-stock banks and the partners of private firms. Together, these ‘private’ interests, where merchant bankers had clearly become the dominant force, maintained an overall control over the financial side of the City. In particular, they were massively represented on the boards of directors of the major financial institutions (clearing banks, overseas banks, insurance companies, investment trusts and other finance companies) as well as on the Court of directors of the Bank of England. Paradoxically, the advent of the corporate economy did not coincide with the rise of a new managerial elite within the world of British finance. Throughout this period, senior managers remained, as a group, in the shadow of the two other components of the financial elites, especially further down the hierarchical ladder. This raises the question of the degree of seniority required for consideration as a member of the elite. The answer can only be empirical or even intuitive. Taking status and power as the main attributes of an elite position, this would reduce those eligible either to a single general manager or, as the banks expanded in size, to a team of three or four people bearing the title of general manager, chief general manager or managing director. Senior managers were not automatically members of the board of directors so there was little overlap between these two groups. All this seems to confirm the well-known separation between ‘gentlemen and players’ within British business. However, the leading figures in the clearing banks tended to be professional bankers who were appointed executive chairmen of their bank, such as Holden at the Midland before 1914 or Goodenough at Barclays Bank in the interwar years. This structure, which was put in place around the turn of the century, only began to alter in the 1960s, with the professionalisation of the financial elites. The main change was the gradual weakening of the ‘private’

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element within these elites. On the one hand, the merchant banks lost their private banking character. Most of them had converted into limited companies after the war and recruited a growing number of their directors from outside the founding families as their business expanded and the number of their directors increased significantly. At Schroders, for example, the number of directors rose from twenty to thirty-three between 1962 and 1973.29 On the other hand, the representation of ‘private interests’ on the board of the major financial institutions decreased substantially. The number of merchant bankers amongst the directors of the Bank of England fell from thirteen to seven (out of twenty-five) between 1920 and 1940 and then to four (out of eighteen) in 1960 and 1980. The board of directors of the clearing banks included a greater number of representatives of leading British companies (for example BAC, Redland, British Steel, ICI, Hawker Siddeley, W. H. Smith, Fisons, and BAT at Lloyds in 1972). At the same time, a greater proportion of senior managers had seats on the board (for example two former chief executives, the current chief executive and his deputy, as well as the general managers for domestic banking, management service, and personnel at Natwest in 1972). These two groups made up the bulk of the boards of directors of the clearing banks, with only a handful of seats left for merchant bankers whose representation tended to become akin to that of any other financial company. There was thus a homogenisation of the financial elites, a convergence of its various components towards a single group: the directors of leading financial institutions. Yet differences lingered. The distinction between ‘gentlemen’ and ‘players’ had not entirely disappeared and was compounded by the ‘cultural’ differences between merchant banking and commercial banking, in particular as far as working patterns, risk taking and remuneration were concerned. There is no doubt that a ‘private’ even an ‘individualistic’ tradition lived on in the City, not only through merchant banking but also through other groups which could be considered as being on the fringes of the financial elites, above all stockbrokers. The last turning point, which occurred during the 1990s with the everincreasing internationalisation of the City of London, is still difficult to appreciate from a historical perspective. However, three points can be clearly established. The first is the acceleration of the trend described earlier towards the homogenisation of the financial elites, especially as competition intensified after the Big Bang in 1986. The second point is the growing presence of foreign banks in London and, in the last few years, the virtual disappearance of a domestically owned investment banking industry whose leaders formed a specific component of the British 29

R. Roberts, Schroders. Merchants and Bankers (1992), p. 426.

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financial elite. The obvious question that arises is to what extent the leaders of foreign-owned institutions can be considered as part of this elite. The attitude of the Bank of England is worth noting. During the second Baring crisis, in February 1995, discussions were held in the City as to whether Barings should be saved. As David Kynaston rightly points out: ‘Significantly “the City” still meant, in the eyes of the Bank of England, which convened the emergency meetings, only the British banks, with the American, European and Japanese banks all excluded.’30 The third point concerns the remuneration awarded to a section of the City, with an estimated 1,000 millionaires working in the Square Mile in the late 1990s.31 However, not all of them held a position which would qualify them as members of the financial elites, i.e. director of a major financial institution. This raises the question of the boundaries of the financial elites (should lower ranks, such as associate director or director of subsidiary companies be included?) and that of the relationships between wealth and status. Has the social status of financial elites changed accordingly? The conclusions I reached regarding City bankers in the Edwardian age were threefold. Firstly, an aristocracy of the City – made up of the leading merchants, merchant bankers and former private bankers – can be clearly identified. Secondly, this City aristocracy merged on equal terms with the landed aristocracy to form a renewed elite which added the financial power of the City of London to the prestige of the old aristocracy. And thirdly, this elite did not, on the whole, include industrialists from the north of the country. This City aristocracy broadly corresponds to the ‘private interests’ referred to above, and its unique social status was clearly related to the status enjoyed by the landed aristocracy in English society until the First World War. A turning point took place in the 1920s. It was partly the result of the decline of the landed aristocracy, which accelerated after the war. More importantly, the 1920s witnessed the gradual integration of top industrialists into the social elite. British business became more centralised, with several large companies moving their head office to London or, especially in the new industries, settling from the start in the capital. Such major companies as BP, Courtaulds, GEC, GKN, ICI, Shell, Unilever, and Vickers all had their head office in London. Top industrialists were now much closer to the country’s social and political heart, including a residence in London or the Home Counties and membership of a London club. Education remains a useful indicator of social status: the percentage 30 31

Kynaston, City of London, IV, p. 762. D. Hobson, The National Wealth. Who Gets What in Britain (1999), p. 536.

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of public-school educated heads of industrial companies rose from 18 per cent in 1907 to 37 per cent in 1929, and stabilised thereafter.32 There is no doubt that the financial elites remained more solidly entrenched in the Establishment, as witnessed by percentages of attendance at major public schools, membership of London clubs, and other social indicators, including kinship. However, the main social cleavage within the business world was no longer between finance and industry, but rather between the leading City institutions (especially the ‘big five’ and the top merchant banks) and a group of London-based major industrial companies on the one hand, and provincial industry together with the lower echelons of commerce and finance on the other. Within the financial elites, a social divide continued to separate the representatives of the ‘private interests’ from the salaried managers, with the directors of the joint-stock banks in between, though much closer to the former. Here, a turning point took place in the 1960s and coincided with the professionalisation of the financial elites discussed earlier. However, social distinctions persisted despite the greater homogeneity created at professional level by the increase in the number of executive directors. Merchant bankers, even when recruited from outside the founding families, still came from a different world (middle- to upper-middle-class background, public-school education often followed by Oxbridge) than the chief executives of the clearing banks (lower-middle to middle class, grammar school, beginning at the bank at eighteen). However, the degree of convergence that inevitably takes place at the top remains to be properly ascertained. In addition, the old merchant-banking families who kept control of their firm retained a social exclusiveness denied to other members of the upper echelons of the City, though the significance of this social cachet in the closing decades of the twentieth century should not be overestimated. The homogenisation process seems to have continued in the 1990s, with the demise of the old merchant banking dynasties and the higher formal qualifications of the clearing banks’ chief executives.33 Nevertheless, with the recruitment policy of the leading investment banks (high-fliers from top universities), the sky-high remuneration packages, and the importance of personal connections within the world of high finance, there is little sign of the financial elites losing their privileged social position within the British class system. 32 33

Y. Cassis, Big Business. The European Experience in the Twentieth Century (Oxford, 1997), p. 217. Derek Wanless, director and chief executive of Natwest between 1992 and 1999, was educated at Cambridge and Martin Taylor, his counterpart at Barclays between 1994 and 1998, at Eton and Oxford.

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Financial elites in European comparative perspective An important aspect of the debate surrounding the City elites is concerned with their peculiarity. Have they really enjoyed a unique position in terms of economic power, social prestige and political influence? And if so, has this position contributed to the long-term success of the City as an international financial centre? Or has it been responsible for the divide between finance and industry and the triumph of the City’s ethos? Arguments about both views are usually developed within a national context, in particular by considering the links between financiers and other elite groups. International comparisons should help put the matter in perspective, to distinguish more clearly what has been particular to the British financial elites. Yet such comparisons are not entirely unbiased. There is always a temptation either to lump or to split, depending on the point of view one wishes to defend. Even though the comparative method has often been used to destroy myths about a country’s peculiarities, it could be argued that, in several important respects, the British financial elites differed from their European counterparts, in particular in France and Germany. Differences were not so important as far as education and training, and more generally professionalism, are concerned. English bankers were not more or less competent than their continental counterparts. Figures available for the pre-1914 years suggest that they had a higher level of education than their German counterparts (37.6 per cent were university educated, as against 29.2 per cent in Germany).34 The percentage was probably higher in France, in line with the high level of education of the French business elites as a whole, though only by a narrow margin in the case of banking.35 It is true that for most of the twentieth century virtually all senior managers of the British clearing banks started their careers between the ages of sixteen and eighteen and were trained on the job. However, the apprenticeship tradition remained strong in banking, especially in Germany, where some of the biggest names in the profession, including Hermann Abs, the legendary leader of the Deutsche Bank 34 35

Cassis, City Bankers; M. Reitmayer, Bankers im Kaiserreich. Sozialprofil un Habitus der deutschen Hochfinanz (Gottingen, ¨ 1999), p. 126. According to Chantal Belot-Ronzon, ‘Banquiers de la Belle e´ poque. Les dirigeants des trois grands e´ tablissements de cr´edit en France au tournant du XX`eme si`ecle’ (unpubl. doctoral dissertation, University of Paris X-Nanterre, 2000), p. 271, 56 per cent of the directors and senior managers of the French large commercial banks were university educated. However, this percentage only takes into account those whose details of education are known. The same calculation would raise the percentage of university-educated English bankers to almost exactly the same level, i.e. 55.8 per cent.

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in the 1950s and 1960s, followed such a route.36 It is also true that an elite of professional bankers emerged earlier in Germany and to a lesser extent in France than in Britain.37 Nevertheless, there can be no question about the professionalism of English bank managers whatever the distance separating them from the board members. It was the long-lasting prominence of private bankers, the main characteristic of the English financial elites, which set them apart from their counterparts in continental Europe. Until the 1880s, private bankers were everywhere in a privileged position in terms of wealth and status. Stendhal called them the aristocracy of the bourgeoisie and, more recently, the concept of ‘aristocratic bourgeoisie’ has been used to analyse their social position in Europe in the late nineteenth century.38 Thereafter, their position differed markedly. Briefly stated, there was no equivalent to the banking aristocracy – to the ‘private interests’ who dominated the City between the 1880s and 1960s – elsewhere in Europe, with the possible exception, on a miniature scale, of the canton of Geneva. With the rise of the big banks, the Parisian haute banque as well as the leading private banks in Berlin, Frankfurt, Hamburg and Cologne became increasingly marginalised within the French and German banking systems. In Paris, many private bankers remained highly influential, but their firms had to surrender their control over international financial operations to the large e´tablissements de cr´edit and especially the banques d’affaires, led by the Banque de Paris et des Pays Bas. From the turn of the century, they confined most of their activities to private portfolio management. Members of the Parisian haute banque were strongly represented on the boards of the major railway companies, insurance companies and investment banks, as well as the Banque de France.39 However, this fell short of the type of collective control exerted by the ‘private interests’ in the City of London, and it ended with the reform of the statutes of the Banque de France in 1936 and the nationalisation of the deposit banks in 1945. German private bankers, for their part, faced competition from the new universal banks in all fields of banking activity, from the provision of credit to industrial customers and the financing of foreign trade to the issue of securities on behalf of foreign companies and governments. They were able to exploit a niche, by offering a more personalised service, highly 36 37 38 39

L. Gall, ‘Hermann Josef Abs and the Third Reich: “A man for all seasons”?’, Financial History Review 6 (1999), 147–202, at 152. Y. Cassis, ‘Financial elites in three European centres: London, Paris, Berlin, 1880s– 1930s’, Business History, 33/3 (1991), 53–71. Harris and Thane, ‘British and European bankers’. E. Kaufmann, La banque en France (Paris, 1914); A. Plessis, ‘Bankers in French society, 1880s–1960s’, in Y. Cassis (ed.), Finance and Financiers in European History (Cambridge, 1992), pp. 147–60.

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valued by industrial companies, and retained a high degree of influence, visible through their presence on the supervisory boards of the country’s largest industrial companies.40 In the 1930s, the leading German private banks were victims of the ‘Aryanisation’ policy of the Nazi regime and did not re-emerge after the Second World War. Everywhere in Europe, private bankers enjoyed great wealth and an undeniable social cachet. However, unlike in Britain, they were not at the very heart of a new unified single upper class, or ruling class, to use Raymond Aron’s terminology,41 even in the United States, where private investment banks remained powerful well into the twentieth century. How should the success of the private banking element within British economy and society be explained? At the economic level, merchant bankers benefited from the extreme specialisation of the English banking system, which enabled them to remain in control of vital parts of the mechanism of the City. More generally, the survival of the City aristocracy was dependent on the division of labour within the British financial sector, with the international operations of the private firms being as it were fuelled by the financial resources of the large financial institutions. This division of labour was reflected, at the socio-professional level, by the distinction between gentlemen and players.42 The links between City aristocracy and landed aristocracy had deep historical roots. The closer integration which took place in the second half of the nineteenth century can partly be explained by the fact that the City aristocracy was not primarily composed of members of religious minorities, unlike the Parisian haute banque (which was predominantly though not entirely Protestant and Jewish) and the leading German private bankers (who were virtually all Jewish).43 Socio-political structure and political influence What does this tell us about the relationship between financial elites and political power? If one looks for visible, formal channels of political influence, such as the representation of financial interests in Parliament or the 40

41 42 43

H. Wixforth and D. Ziegler, ‘The niche in the universal banking system: the role and significance of private bankers within German industry, 1900–1933’, Financial History Review 1 (1994), 99–120. R. Aron, ‘Social class, political class, ruling class’, European Journal of Sociology 1 (1960), 1–30. Y. Cassis, ‘Management and strategy in the English joint stock banks, 1890–1914’, Business History 27/3 (1985), 301–15. Y. Cassis, ‘Financial elites in three European centres’ and ‘Aspects of the Jewish business elite in Britain and Germany’, in M. Brenner, R. Liedtke and D. Rechter (eds.), Two Nations. British and German Jews in Comparative Perspective (Tubingen, ¨ 1999), pp. 279–89.

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recruitment of bank directors from the higher ranks of the civil service, then the evidence does not appear particularly strong. For the period 1890–1914, for example, 9 per cent of the directors of the leading jointstock banks were politicians and former civil servants.44 This is not a particularly high percentage. We lack figures for other sectors and other periods, but it is unlikely that there was much difference between companies of similar size. Such structural links between financial elites and state elites – to use Christophe Charle’s terminology which includes both politicians and civil servants45 – have been much stronger in France, where the top executives of the big banks have been systematically recruited among senior civil servants, especially the inspecteurs des finances. Such passages from the public to the private sector have of course occurred in England, with some very high profile cases such as McKenna at the Midland Bank in the interwar years, but they remained the exception rather than the rule. In addition, there are, of course, the informal links, of both a professional and a social nature. There is ample evidence of bankers acting as advisers to ministers, notably Chancellors of the Exchequer and senior Treasury officials. The role of leading private bankers (Rothschild, Revelstoke, Cassel) was particularly prominent in the pre-1914 years, and continued in the 1920s as a result of the complexity of the economic and monetary problems inherited from the war and early postwar years, and the club-like atmosphere and emphasis on personal relationships favoured by Norman, the Governor of the Bank of England.46 The political connections of financial elites also derived from the position of certain individuals at the heart of the establishment: club membership, old boys’ networks, personal friendships and so on. The networks of family relationships between bankers and politicians have been highlighted by a number of studies, including my own. How much did they matter? The answer is not straightforward. Firstly, such links have weakened in the course of the twentieth century and are clearly characteristic of the period when ‘private interests’ were dominant in the City. Secondly, it would be naive to assume that they were not part of the ‘power to influence’ of the City of London. And thirdly, this part can only be properly 44 45

46

Cassis, City Bankers, p. 53. C. Charle, ‘Les e´ lites e´ tatiques en France aux XIXe et XXe si`ecles’, in B. Th´eret (ed.), L’Etat, la finance et le social. Souverainet´e nationale et construction europ´eenne (Paris, 1995), pp. 106–25. Cassis, City Bankers, pp. 290–6; H. Clay, Lord Norman (1957); P. L. Cottrell, ‘Norman, Strakosch and the development of central banking: from conception to practice, 1919– 1924’, in P. L. Cottrell (ed.), Rebuilding the Financial System in Central and Eastern Europe, 1918–1994 (Aldershot, 1997), pp. 29–73.

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assessed on a case-by-case basis, and from a political rather than from a social and economic history perspective. In the end, the contribution of the socio-economic analysis of financial elites to the debate about the relationship between the British government and the City of London revolves around the question of how exceptional were the City and the British financial elites in the twentieth century. The position of the City as the financial centre of the world was indeed exceptional in the years 1870–1914, when compared to other financial centres. But this position, and its continuation in the interwar years, was not extraordinary given Britain’s role in the world economy. During these years, the dominant force was the City aristocracy, a combination of various private financial interests enjoying a position at the heart of the British Establishment which was exceptional in comparison to other economic elites in Britain and financial elites elsewhere in the world. But again this must be understood in the context of Britain’s world predominance and is well expressed in the concept of ‘gentlemanly capitalism’. After a short eclipse, the position of the City since the 1960s has again become exceptional, this time both in comparison to other financial centres, especially in Europe, and with respect to Britain’s economic status. Financial elites, on the other hand, have become more ordinary, resembling in many respects both their counterparts in other industrialised countries and the other components of the British business elites. It would be surprising if these developments were not reflected, in one way or another, in the interactions between the British government and the City of London.

5

The City and democratic capitalism 1950–1970 Richard Whiting

The City and democracy make an unlikely combination, but in this essay they are at the heart of efforts to make post-1945 capitalism more popular and better understood. That is what is meant by ‘democratic capitalism’: an economic system which distributes its benefits widely, and whose logic is understood by the people. The mechanism for achieving a popular capitalism was to be ‘wider share ownership’. Both the Conservative and Labour parties at various times supported the idea of encouraging more people to buy shares. Although there was some success in the Thatcher period, the idea failed to take root. Most people participate indirectly in the stock market through pension funds and insurance companies. Given the volatility of the stock market, and the fact that few low- to middleincome people have the resources to live with these fluctuations, such an arm’s length connection would seem the most practicable relationship with the City. However, even if this essay deals with a project that failed, it explores some key themes: the value of the City for government and its role in the wider society; the working-class economy and its priorities; the nature of capitalism and sources of support for it. The broad conclusion is twofold. First, the wider share ownership campaigns had identified a real issue about popular support for capitalism; but second, the features of capitalism that the stock market revealed, namely dynamic and volatile growth, were precisely those to which workers were already exposed and from which they sought relief. Even if greater participation in the stock market had been achieved, it might have merely underwritten rather than assuaged the suspicions about the unpredictability of the economic system. Popular capitalism The premiss of this essay is to take seriously the view that capitalism, though successful, has never been especially popular. Lawson, the outstanding minister of the Thatcher governments, certainly felt, even in the 96

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1990s, that capitalism’s success had not brought it the popular regard it deserved: There is nothing particularly surprising about the unrivalled practical success of market capitalism . . . What is surprising is that, despite all this, and the important events of the past decade, which have led even the British Labour Party to reconsider its commitment to socialist egalitarianism and hostility to the market economy, the ‘atmosphere of hostility to capitalism’ which Schumpeter remarked upon some 50 years ago is still so pervasive. And the reason for this is clear. While its material success, and its demonstrable superiority over all known alternative economic systems, is no longer open to question, capitalism is still seen as morally suspect.1

Examination of popular equity investment as a means of removing ‘the hostility to capitalism’ which Lawson commented upon has to be prefaced by some comments on consumption. Why has consumption failed to legitimatise capitalism? Capitalism thrives on mass markets; indeed, as Schumpeter pointed out, they are its essence: ‘the capitalist engine is first and last an engine of mass production, which unavoidably means also production for the masses’.2 The ability to spend money has also been a powerful solvent of social distinctions. Indeed, particular significance has been attached to a burst of popular consumption from the 1950s through to the mid 1970s, for reviving conservatism and market capitalism by offering a compelling alternative to planning and state ownership for the mass of the population. This enthusiasm for consumer goods was in sharp contrast to the lack of interest in share ownership. But it would be wrong to exaggerate the significance of consumption for cementing the tie to capitalism; in fact, the reverse might be true. Although the proponents of the ‘consumption’ thesis argue for the qualitative development involved in the quantitative increase in consumption – the move from necessities to indulgences – this can be pushed too far. For social groups aggressively trying to improve their living standards, the most that the affluent economy did was to increase the prizes on offer, rather than satisfy aspirations and expectations.3 It is not surprising that industrial relations deteriorated rather than improved as the 1950s gave way to the 1960s.4 Indeed, Barry Supple has argued that, far from consumption trends making the population more at ease with its economic system, the preoccupation with national decline was driven by ever-rising 1 2 3 4

N. Lawson, ‘Some reflections on morality and capitalism’, in S. Brittan and A. Hamlin (eds.), Market Capitalism and Moral Values (Aldershot, 1995), p. 36. J. A. Schumpeter, Capitalism, Socialism and Democracy (1943; 1994 edn), p. 67. R. Currie, Industrial Politics (Oxford, 1979), p. 180. B. C. Roberts, ‘Industrial relations’, in M. Ginsberg (ed.), Law and Opinion in England in the Twentieth Century (1959), p. 369.

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expectations and aspirations which outstripped the economy’s resources to meet them.5 Because consumers’ expectations were shaped by standards and visions supplied by other economies – especially America – they were not ‘rationally’ adjusted to what might reasonably have been expected of the British economy. Indeed, the competing claims of consumption and investment have provided one of the most fundamental divisions of interest within the modern industrial economy. Capitalism therefore requires the restraint of consumption as much as its fulfilment. So while the aspirations and standards of the affluent society are a worthy topic for investigation, the significance of those trends for the stability and acceptability of capitalism should not be misinterpreted. It might be argued that affluence, instead of reinforcing the message about capitalism’s success, intensified the demands upon it. It produced an impatient focus on the short term, rather than a realistic assessment of the great improvements made in the longer term. And it made people less willing to accept restraint today in the interests of growth tomorrow. Wider share ownership was intended to address these problems by developing the democratic potential of capitalism while replacing the impatience of consumption with the recognition of the longer-term gains that came from investment. While the value of affluence in dissolving social distinctions was occasionally recognised, it left untouched inequalities in capital ownership. Owning some form of property gave a certain amount of security and freedom from dependence on earnings alone. Share ownership for the ordinary person therefore fulfilled aspirations to equality. It brought into reach far higher returns than were possible from savings accounts in building societies or the post office. But there was an additional dimension: to hold this property in the form of shares would give a greater interest in the economic system that had produced those earnings. As Nicholas Davenport, the left-leaning city editor of The Spectator, suggested, ‘what a change it would make to our own ignorant society if the average worker was more interested in the futures of equity shares than in the pools’.6 Conditions in the late 1950s and 1960s gave the plan for wider share ownership a particular urgency. Two linked problems caused anxiety: the first was that affluence had done little to narrow the gap between the working class and the rest of society in terms of wealth ownership and style of life; the second was that this division caused poor industrial relations and the sullen unwillingness of labour to embrace change. 5 6

B. Supple, ‘Fear of failing: economic history and the decline of Britain’, EcHR 47 (1994), p. 456. N. Davenport, ‘The vogue of the equity share’, The Spectator, 7 Nov. 1958.

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This context generated a different relationship between the City and industry to that conventionally understood. Often, the City and industry have been seen as having different or opposed interests. In the 1950s and 1960s maintaining the value of sterling seemed a constraint upon industrial growth, while the key decisions affecting company performance appeared to take place in the boardrooms rather than in the Stock Exchange. The City therefore appeared to be less strategic than industry for economic recovery. However, the wider share ownership movement connected rather than separated both sectors, because the Stock Exchange was to be employed as an instrument to support economic modernisation by changing attitudes towards industry. Share ownership and party politics Share ownership drew support from both main parties. This cross-party interest is initially surprising given the status of the City as a peculiarly elitist institution within the capitalist framework. As such, it has been linked much more closely with the Conservatives than with Labour. As Keith Middlemas has commented, ‘In determining Conservative values, merchant bankers, the Stock Exchange, and agriculture have usually done best’.7 Property ownership had long been a part of an anti-socialist strategy, and to apply this to industry made an appealing alternative to Labour’s interest in nationalisation. But share purchase would do something that home ownership could not achieve: as a party committee argued, it would widen understanding of free enterprise and establish a closer identity of interest between capital and labour.8 Those, like Edward du Cann, who were closely involved in developing unit trusts, also saw value in share ownership spreading wealth and encouraging personal responsibility.9 It was the growth of the unit trusts that allowed Iain Macleod to stress the virtues of a capital-owning democracy at the Conservative Party conference in 1965. However, it is salutary to recognise that political parties respond essentially to voters and not to interests, and therefore attitudes to the City were 7 8

9

K. Middlemas, ‘Party, industry and the City’, in A. Seldon and S. Ball (eds.), Conservative Century. The Conservative Party since 1900 (Oxford, 1994), p. 496. ‘Report of committee on share ownership’, Dec. 1958, Conservative Party Archives [CPA], Bodleian Library, Oxford, ACP, 3, 12 (59), 67. For an American example, see the comment by Charles Merrill, the founder of Merrill Lynch, in 1953, quoted in Edwin J. Perkins, From Wall Street to Main Street. Charles Merrill and Middle Class Investors (Cambridge, 1999), p. 221: ‘I can think of nothing that would build a stronger democratic capitalism, nothing which would provide a stronger defense against the threat of communism, than the wider ownership of stocks in this country.’ E. du Cann, Investing Simplified (1959), p. 11.

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less clear-cut than the nature of party identities suggest they ought to have been. The political agenda in Britain that by the later 1950s centred on the revival of the economy and the modernisation of industry was given a broad interpretation. An important theme was the way in which industry had to be both fair and dynamic. The Conservatives and Labour thus occupied the same terrain, involving tax measures to deal with inequalities of income and wealth. Both governments also broke new ground with the introduction of positive legal rights for workers over length of notice and redundancy.10 At a general level these were intended to reassure workers that inequalities in the wider society would be moderated and that their own length of service in employment would be recognised if their jobs came to an end. The intended outcome was that workers would be more willing to accept change with fairer conditions in society and at work. More specifically, these devices were intended to gain trade union support for pay restraint. For the Conservatives, such policy imperatives qualified their rapport with the City. Conservatives were always concerned about how far the City betrayed rather than enhanced the capitalist values it was keen to propagate. Efforts to show that capitalism could treat workers fairly were undermined by rumours of speculation and scandal that the Stock Exchange occasionally fuelled. As its historian has commented, ‘the image of the stock exchange as either irrelevant or the centre of harmful speculation continued to persist in the 1950s’.11 It is perhaps more of a surprise to find support for share ownership among some of the more powerful figures in the Labour Party. Labour’s traditions were built upon a distrust of the moral quality of capitalism: it was vulgar, wasteful, and failed to provide an outlet for man’s true nature. Moreover, the Stock Exchange was perhaps the worst of capitalism’s institutions; it did not actually produce anything tangible, and merely traded on the work of others. The City itself was often cast as the subverter of Labour governments, especially in 1931, or at least as a shackle upon the Party’s plans to socialise the economy. The City managed to be both mysterious and also threatening in Labour’s own version of its history. However, Labour was influenced by the same context that guided the Conservatives. Any popular interest in share purchase was hard for the party to ignore. Labour was very aware in the late 1950s that it was 10

11

P. Davies and M. Freedland, Labour Legislation and Public Policy. A Contemporary History (Oxford, 1994) pp. 152–61. The tax thinking of the Conservative and Labour parties in this period is treated incisively in M. Daunton, Just Taxes. The Politics of Taxation in Britain (Cambridge, 2002), chs. 9 and 10. R. C. Michie, A History of the Stock Exchange (Oxford, 1998), p. 371.

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losing votes of well-paid skilled workers to the Conservatives. If the City succeeded in switching some of the affluent workers’ earnings into shares then there was a danger that they would become even more Conservativeminded. Once Conservatives had advertised their own interest in the late 1950s, electoral considerations suggested Labour ought to respond.12 As a defensive strategy, Labour therefore needed to come up with its own scheme. Some Labour MPs were in fact more positive than reactive. There had always been those in the Labour party who rejected traditional ‘clause four’ solutions to the economy, but who did want to provide a better deal for workers under capitalism. Douglas Jay, in his book Socialism in the New Society (1962), had a chapter entitled ‘A property-owning democracy’, in which he emphasised the benefits of some form of property ownership and savings in shares as a source of freedom and greater equality. These would not only reduce the gap between rich and poor, but would also allow greater independence from the state.13 He went further in an article in the Financial Times in 1968, where he saw share ownership as softening the bitter conflicts in industrial relations.14 Harold Lever, the Manchester MP, was another enthusiast. In 1965 he had become vicechairman of the Wider Share Ownership Society which had been founded in 1958 by the Conservative Maurice Macmillan. Lever saw working-class investment in the stock market as completely consistent with the Labour movement: The aim of the Labour Movement is to raise the standard of life of the working people and the poor people, and we should be proud to think that, largely through their political pressure and achievement, working people in this country are able and have the means to invest in all forms of investment in the same way as others who are better off.15

What convinced Labour people that wider share ownership was practicable were the sums regularly spent on the main forms of working-class gambling. Joel Barnett, a friend of Lever’s, recommended ‘the transfer of funds from bingo halls and betting shops to better forms of investment in unit trusts, which would provide both a gain to the holders and a gain for the country.’16 If some of these resources going to gambling could be redirected, then workers would benefit. Traditional labour distrust of the City also had to be replaced by belief in its efficiency and trustworthiness. 12

13 14 16

D. Jay, ‘Equity shares and the small saver’, Labour Party Archives [LPA], National Museum of Labour History, Manchester, Finance and Economic Policy sub-committee, Re. 480/Jan. 1959. D. Jay, Socialism in the New Society (1962), pp. 290–4. 15 HC Deb 713, c. 1293, 31 May 1965. Financial Times, 15 Oct. 1968. HC Deb 711, c. 1092, 4 May 1965, oral answers to parliamentary questions.

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In Lever’s opinion there was ‘no country in the world which has a comparable organisation of the austere integrity and reputation of the City of London and its institutions’.17 Jay also thought it admirable that ‘the City’s highly efficient investment mechanisms be mobilised in the service of a far wider section of the community’.18 Investment, saving and the working class However positive the views towards the City, some intermediary was needed in order to make share ownership remotely practicable for the small investor. The Stock Exchange was a remote and mysterious institution in the 1950s. One of the consistent findings of opinion surveys was the almost complete ignorance of, and lack of interest in, its workings.19 The Stock Exchange was not attuned to giving advice to the small investor.20 If one explanation for this was the lack of incentive for the broker, there were also good reasons why his limited resources made it difficult for the small investor to follow some obvious strategies. Meeting the inevitable risks of investing in equities required spreading the investment over a range of companies. Also, for the same reason, such investment was normally only undertaken when the financial requirements for dayto-day living had been satisfied: ‘No-one who is an investor should run the risk of being placed in a position where he may be a forced seller of his investment.’21 Unit trusts had seemed a step in the right direction for the small investor. They removed the barriers of diversification and expertise that had been a bar to the small investor operating directly in the Stock Exchange. Unit trust prices have generally been more stable than those of shares in individual companies. They allowed numbers of small sums to be pooled and invested under expert direction. They offered a regular means of saving, the higher risk being compensated for by the possibility of higher returns than could be gained from either building society or deposit accounts. It was also intended to link life assurance with unit trusts, by using the latter as a home for premiums paid for the former, and by linking the benefits paid to the value of the shares in which 17 19

20

21

18 Financial Times, 15 Oct. 1968. HC Deb 713, c. 1297, 31 May 1965. See the Gallup survey reported in ‘Do you know how to set about buying some shares?’, News Chronicle, 4 May 1960, and also Wider Share Ownership Committee, Savings and Attitudes to Share Owning (1962), p. 7. ‘The stock exchange has never catered for the small man (or woman), and still does not do so; broker advice for the small investor is totally inadequate’: P. N. Wise, ‘The unit trusts’, The Spectator, 31 Jan. 1958. Du Cann, Investing Simplified, p. 2.

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the trust had invested. The key figure in this was the Conservative MP for Taunton, Du Cann. He was initially depressed at the unenthusiastic response from bankers, but with help from Peter Walker, MP for Worcester, launched the Unicorn Trust in 1957 and later the Falcon Trust.22 The growth of unit trusts was affected by longstanding concerns about aggressive selling of shares to low-income individuals. The background of a fear of fraud in connection with unit trusts had begun to frustrate their managers by the time of the Jenkins committee on company law in 1960. As they pointed out in their evidence, managers of unit trusts have ever since been particularly resentful of having to operate under an Act with the discouraging title of the Prevention of Fraud (Investments) Act [of 1939] . . . a movement which is designed to encourage personal savings and which has been singularly free from fraud, is entitled to be administered by an Act with a more helpful and appropriate name.23

The anxiety about selling shares to people who, it was assumed, might be more gullible than the average investor from the middle classes, showed itself in the attitude of the Board of Trade to the selling of unit trust shares and the charges which could be made by their managements. Du Cann’s Unicorn Trust project wanted to sell units far more aggressively than was the case with ordinary shares aimed at the conventional investor, but the Board of Trade, which licensed unit trusts, used its control over the fees charged by trusts to try and head off the danger of shares being pushed on to ignorant workers. The lower the fees unit trusts could charge, the more this made ‘active’ selling unprofitable. So only allowing low management charges limited the scope for active selling.24 As Walker put it, ‘Board of Trade restrictions on commissions were so tight that you lost money if you expanded.’25 Du Cann found this late 1950s period frustrating: 22

23

24 25

Oliver Stutchbury, managing director of the Save and Prosper group, but also a contributor to Labour party policy discussions, recalled that in the 1950s ‘The unit trust industry was undergoing a transformation which had been sparked off by Edward Du Cann when he launched his Unicorn Trust. The years 1959 to 1962 were years of unprecedented growth’: O. Stutchbury, Too Much Government? A Political Aeneid (1977), p. 28. See also E. Du Cann, Two Lives: The Political and Business Careers of Edward du Cann (Malvern, 1995), pp. 61–3; P. Walker, Staying Power: An Autobiography (1991), pp. 60–2. Memorandum of evidence from the Association of Unit Trust Managers to the Company Law Committee (Jenkins), para. 30, filed in TUC archive, MSS. 292B/340.2/1, Modern Records Centre, University of Warwick. ‘Prevention of fraud. Manager or trustee under an authorised unit trust scheme’, note by H. Osborne, 14 Aug. 1958, BT 298/72. Walker, Staying Power, pp. 60–1, reporting a meeting with a ‘depressed’ du Cann.

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I went to see officials at the Board of Trade to argue the case for relaxation [of the restrictions on charges]. I put to them and to Conservative ministers the need to popularise share ownership and I argued as fiercely as I could. There was neither help nor encouragement from that quarter.26

The Board was eventually persuaded to allow selling agents to charge an additional fee. Du Cann set up his own agency, Dillon Walker, and so the pressure of low charges was eased.27 Du Cann’s trust was a success, as was a later version, the Falcon Trust, in which Peter Walker was involved. Of the opening offer to investors, Walker recalled: We received more than seven million pounds. Not only did it break all records, it created a sensation. It was also sensational to handle. I remember using a shovel to put cheques into a bag to be taken around to a bank.28

Although unit trusts had grown strongly from 1959 – the number of trusts doubled, the number of holdings more than doubled, but the average holding remained constant – there were still problems with them as a magnet for working-class investors. Even their enthusiasts had to admit that there were few incentives for a trust to handle small deposits. But those on the Labour side keen on wider share ownership had a solution denied Conservatives, namely a government unit trust selling units through the post office. The post office was familiar territory for the working-class saver, and could provide an over-the-counter service, rather than relying on advertising in the press. Brendon Sewill, a key member of the Conservatives’ research department, had been impressed with over-the-counter selling of shares in America, but commented There is, however, in this country a great toffee-nosed tradition against the ‘bucket shop’, but I am sure that if we want to get what Iain Macleod calls a ‘capitalowning democracy’ we must make share purchasing something less of a solemn mystery understood only by top people.29

This was the obstacle that a post-office-based plan was intended to overcome. Unfortunately, although there was plenty of support for a government unit trust the Wilson governments took the idea no further. Labour gave two reasons why a government-run unit trust was a bad idea. If successful, it would switch money out of National Savings – which went to the government – into private industry. Further, if the scheme was launched at a high point in the index, and there was a subsequent fall, then the 26 27 28 29

Du Cann, Two Lives, p. 67. C. Raw, Slater Walker. An Investigation of a Financial Phenomenon (1977), pp. 28–39. Walker, Staying Power, p. 62. Sewill to Maurice Macmillan, 23 Oct. 1968, Working party on savings, CPA, CRD 3/7/22–1.

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government would get the blame.30 According to The Statist, ‘people are not going to get any fonder of capitalism if they burn their fingers at the first attempt’.31 Because the scheme was never implemented, it is impossible to tell whether or not the obstacle to working-class share ownership was on the supply side or the demand side. Certainly the post-office dimension was accepted as a vital method for attracting the working-class investor. Moreover, while some of the opinion surveys uncovered a good deal of ignorance about how to go about share purchase and a straightforward lack of interest, there were some indications of encouragement in the attitudes which such surveys revealed. Amongst the skilled manual workers, Labour’s problematic voting group, there was strong support for saving for house purchase, children’s education and retirement, alongside more obvious consumption items like holidays. They were also as strongly of the opinion as mainstream Conservative voters that ordinary people should invest in shares.32 In addition, the general virtues of owning shares and their value as a hedge against inflation were also accepted by those who did not own shares as strongly as by those who did.33 Could these aspirations have been tapped by solving the unfamiliarity of share purchase through a post-office-based unit trust? There were formidable obstacles against wider share ownership. Labour supporters had seen the potential for it in the diversion of money spent on pools or bingo into a more lucrative form of saving. In fact, it was swapping one form of gambling for another. Over a third of the respondents of the Gallup survey reported in the News Chronicle bought shares to take a gamble.34 However, others saw it in the same light as saving. The Midlands car worker was one of the personifications of the workingclass investor able to put aside perhaps 10 shillings a week in a unit trust savings plan. He was described by Geoffrey Lloyd, Conservative MP and president of the Midlands branch of the Wider Share Ownership Council thus: the prosperous car worker, earning £20 to £25 per week, or even more, a man who in his own phrase is now topping up his investment, who probably has something in the Post Office Savings Bank, or, if he is in Birmingham, in the Municipal Bank, and who feels he would be better off with a type of industrial investment.35 30 31 32 33 34 35

‘Government unit trust policy’, report of working party, pp. 7ff, Treasury papers T 326/471. ‘Shares through the supermarket’, The Statist, 5 July 1963, pp. 15–16. ‘Attitudes towards savings’, Feb. 1969, CPA, CCO/180/9/9/1. Wider Share Ownership Committee, ‘Savings and attitudes to share owning’, p. 28. ‘Do you know how to set about buying some shares?’, News Chronicle, 4 May 1960. HC Deb, 713, cc. 55–6, 24 May 1965.

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Once the focus was on saving, rather than the money going on pools or bingo, the outlook was less encouraging. Some existing level of savings – between perhaps £250 and £500 – was regarded as essential before people embarked on share ownership. Most opinion surveys discovered how few respondents had such levels of savings. In fact, many were actively dipping into what savings they had in order to maintain consumption.36 By the mid 1960s those still outside the ambit of the rapidly expanding commercial unit trusts probably had very small amounts of savings. A further obstacle was the reluctance of the working-class investor to accept risk, especially when shares were seen as an extension of saving. In the attitude surveys, the non-shareholder broke company with the shareowner over the reluctance to accept risk.37 Many of the enquiries to finance pages in the popular press showed an obsession with investments guaranteeing security of capital. There was considerable doubt whether fluctuations in share values or unit prices would be readily tolerated as an inevitable part of investment. The Daily Mirror recommended purchase of units in a particular trust only for the value to fall almost immediately, to a large volume of criticism.38 People had invested money that they had hoped to draw upon in the near future, which was not the way most shareowners operated. A particularly telling finding from the opinion surveys concerned the possible investment of windfalls or lump sums. The surveys reported a disappointing percentage for those willing to consider investing such monies in shares or unit trusts.39 The difficulty of saving from income is well known. Much greater choice comes with the arrival of unanticipated lump sums of cash. The fact that relatively few were willing to consider shares as a home for such money was a sign of how slight was the penetration of industrial investment. So while it was accepted that a post office unit trust might reach more people, it was not necessarily the case that they were the ones who ought to have been enticed into such a scheme.40 By the later 1960s interest in wider share ownership had given way to pressure to raise the savings rate more generally. Consumption was proving difficult to restrain, and some sort of savings strategy was seen as a counterpart to incomes policy as a means of containing demand. An idea for linking a contractual savings scheme with equity funds kept the share ownership theme in play, but it was now admitted to be only a 36 37 38 39 40

‘Attitudes towards savings’, Feb. 1969, CPA, CCO/180/9/9/1. Wider Share Ownership Committee, ‘Savings and attitudes to share owning’, p. 28. Reported in A. K. Rawlinson, ‘Government unit trust’, 18 Oct. 1968, T 326/1002. Wider Share Ownership Committee, ‘Savings and attitudes to share owning’, p. 5. David Maitland, of the Save and Prosper group, reported in ‘Government Unit Trust’, 18 Oct. 1968, T 326/1002.

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possibility some way down the line when savings had revived. Moreover, the change of emphasis also shifted the focus of equity investment from capitalism to the state. Increased personal saving was now a remedy for high levels of personal taxation. Easing the burdensome tax state, more than understanding modern industry, was the larger purpose. As it was, the Save as You Earn scheme introduced in Labour’s 1969 budget was not wholly successful: the need to commit to contributions over a long period before the terminal bonus was earned had little attraction as employment was becoming more uncertain. An alternative strategy to the unit trust route, but one also intended to soften class conflict, was that of encouraging workers to buy shares in their own companies. The survey evidence, which had reported the lack of interest in shares, had also found that when offered shares in their own companies workers had been far readier to purchase. But while at first sight it might have seemed consistent to pursue different routes to the same goal, the aim of persuading workers to buy shares in their own firm embodied a very different approach from the unit trust philosophy. The unit trust tried to diversify the commitment to capitalism; the employee share schemes concentrated it. The worker who held shares in his own company was putting all his eggs in one basket: the shares would supplement the wage payment but their source would still be the particular company. Critics also suggested that, in so far as such schemes did create a closer interest between employer and workforce, they would do so against the interests of the consumer. Another anticipated outcome was that the worker would compare his puny holdings with the more generous allocations to directors and be impressed with the continuing class difference rather than the reverse.41 These two versions of worker share ownership – the unit trust on the one hand and the employee owner on the other – represented contrasting versions of industrial capitalism. That represented by the employee investing in his own firm saw the industrial enterprise as an essentially self-sufficient organisation generating substantial growth from the reinvestment of its own profits. These profits therefore benefited management and workers without ‘leaking out’ as dividends to shareholders. Many in the Labour movement as well as in management thought that reinvestment of profits was a far more legitimate process than paying them out as dividends to ‘non-producing’ shareholders. The second version – the unit trust one – saw industry as constantly renewed by the input of new firms dependent upon capital raised on the stock exchange, and having to prove themselves through successful performance. The best use of 41

N. Davenport, ‘Employee shareholding’, The Spectator, 2 May 1958.

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profits was not necessarily to be retained in the individual business but to be released to shareholders who might then invest the money in new businesses. The judge of performance and investment decisions was the stock market and not the management of the particular business; company directors did not always know what to do best with their profits. Those who supported the unit trust movement believed in the rights of shareholders and were critical of the view that it was better for efficiency if companies retained rather than distributed their profits: ‘The large number of dumb managerial ducks sitting on idle cash not knowing how to invest it properly would surprise Mr Callaghan.’42 Economists could give no clear view about which version – plough back or distribution of profits – was better for industry. 43 Share ownership and the broader policy context The campaign to increase share ownership, and the willingness to introduce measures to achieve it, were inevitably affected by the direction of policy elsewhere. By the 1960s an ‘anti-shareholder’ perspective was apparent in two key policy areas – incomes policy and taxation. Incomes policy focused on non-wage income as a way of legitimating restraint on pay. Dividends came under scrutiny along with other forms of earnings, and this diminished the status of the shareholder. The willingness of company directors to accept dividend restraint was noted, but defenders of shareholder interests suggested that such limitation was irrelevant to the success of wage restraint.44 However, it is difficult to avoid the view that wider share ownership, especially through the Stock Exchange and unit trusts, was being promoted at a time when the main preoccupation was with class conflict in industry. Strictly speaking, these were just the conditions which worker share ownership was intended to ameliorate. However, they encouraged the view that working-class shareholders were irrelevant to the main struggles within industry. This was why David Howell was disappointed in the early 1970s when he took the Conservatives’ newly developed plans for capital ownership out into the wider 42

43 44

N. Davenport, ‘Why the City is “mad” ’, The Spectator, 2 July 1965. The reference to Callaghan concerned some of the tax measures in his 1965 budget which favoured the retention rather than distribution of profits. For Lever’s critical views on the encouragement of retained profits see HC Deb, 713, c. 1770, 31 May 1965. The key article was I. Little’s ‘Higgledy-piggledy growth’, Bulletin of the Oxford Institute of Statistics 24 (1962), pp. 387–412. ‘There is overwhelming evidence to show that workers are contemptuous of attempts to justify dismissals and rejections of wage demands by cuts in shareholders’ wages’: A. Rubner, The Ensnared Shareholder. Directors and the Modern Corporation (1965), p. 90. For an example of a discussion about dividend restraint and incomes policy see ‘Unearned income policy again’, The Economist, 30 Nov. 1963.

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world. When he visited the Federation of British Industries its director, John Methven, warned him of the hostility towards any really widespread worker share ownership; capital was for shareholders and wages were for workers.45 The private shareholder was seen as marginal to the central struggle between worker and manager. If problems with industrial relations coloured views about share ownership, so did the tax issues of the 1950s and 1960s. Taxes embody value judgements about the legitimacy or otherwise of certain kinds of economic activity. In fact, it was the legitimacy of the tax system itself which was under scrutiny in the 1950s and which encouraged focus on stockmarket transactions. What concerned some observers was the way in which income tax – the spine of the revenue system – seemed both to be holding back economic performance because it weakened incentives to improve production and earnings, yet was itself also being undermined by avoidance. The point was that income as treated by the Inland Revenue – essentially wages and salaries – was a more narrow definition than an economist’s one of an annual addition to spending power. Ironically it was Kaldor, Labour’s tax adviser, who came closest to giving expression to this truth in a tax instrument. His proposal in the 1950s for an expenditure tax was in this respect consistent with the vision of those who wanted wider share ownership, because both saw living standards as flowing desirably from a number of different sources and not just wages or salaries.46 Kaldor’s expenditure tax remained an intriguing but unfulfilled idea. The irony was that the alternative route which Labour took under Kaldor’s guidance – the capital gains tax – seemed to hit very squarely stock-market dealings and both drew strength from, but also reinforced, an anti-City rhetoric. Although it was possible for the income from trading in shares to fall under income tax, a good deal of capital appreciation went untouched. A capital gains tax was essentially an anti-avoidance device, despite its egalitarian name, and stock-market deals were one of the targets Harold Wilson had in mind when he articulated its benefits in 1961: Many schedule E pay-as-you-earn taxpayers at all levels of income feel that it is essentially unfair that they have to pay tax, at a very high marginal rate, on every penny they earn, when others can enjoy substantial accretions to their spending power for very little effort by means of a speculative Stock Exchange flutter or a big property deal.47 45 46 47

D. Howell, Blind Victory (1986), p. 119. N. Kaldor, An Expenditure Tax (1955). For recognition of the congruence between its logic and that of capital ownership, see Howell, Blind Victory, p. 109. ‘Capital gains must be taxed’, The Statist, 1 Dec. 1961.

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It was not only share speculation which the capital gains tax was aimed at, but also some of the devices – such as bond washing and dividend stripping – whereby brokers could avoid tax or claim relief for non-existent losses. Trade unions too supported the idea of a capital gains tax, and these pressures were significant enough for the Conservatives to introduce in 1962 a tax on capital gains made over a six-month period. Labour went further when in office with a tax on all gains, whatever the period over which they had been made. Although the capital gains tax received support from across the political spectrum, the wider share ownership group was against it. There were a number of points to be made. At a general level, the anti-City rhetoric that seemed so much in evidence in the arguments for a capital gains tax also appeared to contradict Labour’s broad aim of increasing efficiency in a private economy. Thomas Balogh felt that the exercise in tax reform had been carried out ‘without due importance being attached to temper the whole problem to the investment activity of the lambs to be shorn’.48 It was rash to embark on taxes directed at business when the economy was so precariously balanced. More specifically, a capital gains tax was thought to be the wrong way to marry Labour’s egalitarian impulse to capitalism. As Lever stressed in his opposition to it in the 1965 budget, it was a tax on realisations, on investments sold, not on wealth.49 It was an encouragement to hold on to shares rather than to change investments in search of the best return. For Lever, and for others of a similar persuasion who were happy to see people get rich, but not very rich, a wealth tax was a better option. This would have taxed capital, but not the search for its most efficient use. There was the possibility that a wealth tax might have even encouraged the search for higher returns to offset its impact. These specific aspects of the tax regime, however, were only reflective of a wider viewpoint strongly held in the Labour movement that put industry ahead of the City. As Kaldor put the point in a paper supporting a long-term capital gains tax, the very fact that we exempt capital gains from taxation gives a strong incentive to concentrate on financial activities as against activities which more directly serve the productive system . . . It is well known that an unusual proportion of our ablest young graduates seek jobs in the City in preference to industry.50 48

49 50

‘Note of dissent from report on taxation and incomes policy’, April 1964, LPA, RD.764. Some of these issues are explored further in R. Whiting, The Labour Party and Taxation. Party Purpose and Political Identity in Twentieth-Century Britain (Cambridge, 2001), esp. chs. 3–4. HC Deb, 713, c. 682, 26 May 1965. ‘Arguments for and against the long-term capital gains tax’, 18 Dec. 1964, T 171/805.

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This was the period when Labour introduced the Selective Employment Tax (1966) in order to try and encourage workers to move from the service sector into manufacturing. But it went deeper even than a calculation about what was in the best interests of the economy. Manufacturing industry embodied labour, that is work on the material environment in order to transform and improve it. The City dealt in paper titles to wealth rather than transactions in ‘real’ goods and this aroused suspicion. As Nicholas Davenport found, ‘this Labour government [1964–66] does not like portfolio investment; it does not approve of making money out of money’.51 Support for wider share ownership had come from both Conservative and Labour MPs, but in each party the majority had been opposed to the idea. The Conservatives’ main efforts were directed at industry and the trade union question; the City and finance was at best marginal to this, and at worst a symbol of the greed and vulgarity which made capitalism so disreputable and seemed to undermine its defence. When Edward Heath coined his phrase in May 1973 about the ‘unacceptable face of capitalism’ it was in reference to the Lonhro company in which Du Cann, a publicist for the wider share ownership movement, was prominent.52 Labour was suspicious about capitalism as part of its ethos; the City seemed both baffling and fraudulent. Although Lever was a key figure in Labour’s circles, he was regarded uncomprehendingly as a wizard in a world of money which most of his colleagues did not understand.53 The failure of the wider share ownership campaign was not surprising. Doubts about the wisdom of encouraging low-saving workers to invest in shares were echoed by politicians who thought the main way to win the argument about capitalism was to present the City as a peripheral rather than a central institution. Du Cann, one of the main figures in this episode, certainly took the view that without political encouragement the cause was unable to succeed: Over the years, I have heard many politicians and others pay lip service to the idea of a people’s capitalism. Iain Macleod used to speak about its advantages with particular emphasis. Talk there has been in abundance, but though many Chancellors of the Exchequer have had the chance to assist the process in a practical way none did so except to a modest extent until Mrs Thatcher became Prime Minister. In that year it is estimated there were some 3 million shareholders in the UK. By 1990 the figure had risen to 11 million.54 51 52 53 54

Davenport, ‘Why the City is “mad” ’, The Spectator, 2 July 1965. This is discussed in J. Campbell, Edward Heath. A Biography (1994), p. 528. E. Dell, A Hard Pounding. Political and Economic Crisis, 1974–76 (Oxford, 1991), p. 28. Du Cann, Two Lives, p. 68.

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Most of the key elements were very different in the 1980s as compared to the 1960s, with which this essay has been principally concerned. By the end of the 1960s the Conservatives recognised that stimulation of share purchase required some sort of dramatic gesture to capture the public imagination, and it was suggested that selling off nationalised industries might achieve this.55 The truth of this observation was borne out by the privatisations of the 1980s which were a major fillip for share ownership. Finance, too, acquired a more prominent place in the public discussion of economic life. In the 1960s labour correspondents had been some of the key journalists on their newspapers; in the 1980s their place was taken by the City editors.56 Even the increase in unemployment had some benefits: workers receiving redundancy payments had lump sums often suitable as a basis for share purchase. The tremendous boost to capitalism in the 1980s, culminating with the decline of communism, was also in marked contrast to the uncertainties of the 1960s and early 1970s. The disappointing results of the campaigns of the 1960s were therefore followed by a marked increase in individual share ownership during the 1980s. Conclusion Which is the more instructive example, the 1960s when the campaign stalled, or the 1980s when it had some success? Popular share ownership was always seen as having two basic functions: the practical one, of spreading more widely the higher returns from equities, at least in the longer term; and the political aim, of easing class conflict and increasing awareness of what capitalism was about, or, in the more recent usage, understanding the ‘enterprise culture’. There were significant uncertainties in both these aims. To take the practical side first. Share ownership fitted in uncertainly between gambling on the one hand and saving on the other. It was shown earlier how Labour enthusiasts for share ownership saw it as a better alternative to bingo and the pools. Over the longer term, they were right: shares did do better. In the short term, shares also had the character of a gamble, because they could fluctuate alarmingly and at any one time an investor could be carrying a significant paper loss. Those who responded to opinion polls by saying that they thought of shares as a chance to gamble after a level of savings had been achieved, were right. 55 56

Brian Reading memo, 3 Jan. 1969, Savings study group, CPA, CRD 3/7/22/2. For an interesting discussion see G. Goodman, ‘The role of industrial correspondents’, in J. McIlroy, A. Campbell, and N. Fishman (eds.), British Trade Unions and Industrial Politics. The Post-War Compromise, 1945–64 (Aldershot, 1999), pp. 23–36.

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Most savers had a specific form of consumption in mind, such as a holiday, alongside the obvious ‘rainy day’ possibilities. But share ownership was an inappropriate way of saving for these, because of the uncertainty about the timing of realising the investment. The Wider Share Ownership group was itself divided about whether it should be pushing saving in general, or focusing more specifically upon equities. When the Wider Share Ownership group met the Chancellor during the 1962 budget process, a civil servant commented on the ‘divergence of view among the Group about their aims’: Mr Geoffrey Lloyd, Mr Nigel Birch and possibly Mr Cockfield were interested in inducing the man earning between £600 and £1,000 to build up some capital. So long as this capital was reasonably safe, they were not primarily concerned that he should become an equity shareholder . . . Mr Macmillan and possibly Mr du Cann seemed more interested in getting the small man interested in having a stake in British industry, directly or through unit trusts. They wanted a wider holding of equity shares.57

Once shares were understood to be simply another form of capital holding, then their attractions over other forms of saving deteriorated. In fact, the level of savings required prior to share ownership effectively ruled out the majority of the working class, who were seen as the most important ‘target’ for such schemes. Despite the development of the unit trust, the practical conditions necessary for share ownership emphasised the gulf between the resources of the working class and those above them, rather than the reverse. There was, of course, the larger aim, summed up in a Treasury document as ‘to break down traditional barriers between management and labour and to promote understanding of industrial change and cooperation in economic policy’.58 Share ownership was meant to give a unique involvement in industrial capitalism, at a time when there was great interest in reducing restrictive practices and inducing workers to accept greater change not only in working practices but also in patterns of employment. What this focus on shares overlooked was just how much workers already invested in capitalism. Their skills were invested in their employment. Suggesting that workers buy shares in their own companies – the more popular form of equity holding – was asking them to deepen and intensify the risks they were taking. Although some of the wider share ownership enthusiasts contrasted the unit trust method favourably with workers buying shares in their own companies – because trusts spread the 57 58

‘Taxation and savings’, 7 June 1962, T 171/597. Working party report, ‘Unit trust policy’, para. 31, 1965, T 326/471.

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risks – workers would still have been committed to broadly similar fluctuations in value. Home ownership, the other dimension of a propertyholding democracy, was far more popular, and probably ‘squeezed out’ shares, for two reasons. First, houses were lumpy, indivisible, investments that probably absorbed most workers’ funds. Second, to add shares to house ownership was to invest in a form of property with a broadly similar cyclical pattern to shares.59 More fundamentally, perhaps, the lessons which share owning taught were not necessarily ones that would have developed a closer commitment to capitalism. Share ownership taught that gains were unpredictable in the short term, and probably significant over the long term. Most workers would have known the latter feature of capitalism already; they only had to compare their living standards with their parents’ to learn this. Shares, in fact, reinforced a lesson about short-term insecurity and instability, and this was what most workers were trying to guard against. The views of wider share ownership campaigns could be turned on their head. Precisely because shares were an authentic reflection of the capitalist system, most workers were better off not owning them. The City appeared to be a mysterious and elitist institution to most people. Perhaps it was right that it had remained so. 59

See P. Grout, ‘Wider share ownership: too many eggs, one portfolio’, in report of a Centre for Economic Policy Research meeting, at 5 Feb. 2001, http://www.cepr.org/ PUBS/Bulletin/MEETS/321.

Part III

Government and political parties

6

The Treasury and the City G. C. Peden

Geoffrey Ingham, in an influential sociological work, described the links between the City, the Bank of England and the Treasury as the ‘core institutional nexus’ of British society.1 The idea of a ‘City–Bank–Treasury nexus’ has been taken up by Peter Cain and Anthony Hopkins, whose concept of ‘gentlemanly capitalism’ rests on a belief that metropolitan finance dominated British politics, to the detriment of the interests of the manufacturing industry. In particular, they argue that economic policy was shaped by a belief that integration with the international economy was a national, as well as a City, interest.2 The belief that industry has suffered from the City’s superior access to policy-making through the Treasury has been shared by other economic historians, with the Treasury’s support for free trade and the gold standard before and after the First World War being cited as prime examples.3 Similarly, moves towards convertibility of sterling in the 1950s have been seen as the product of an overriding concern with the international interests of the City.4 On the other hand, attempts to use archival material to study how the City could influence the Treasury have been rare. Robert Boyce and Ewen Green have documented a shared ideology about Britain’s role in the international economy and have shown how the City could act as an organised lobby.5 Still less attention has been paid to the question of how the Treasury could influence the City. Yet Ranald Michie has shown that the London Stock Exchange had come to regard itself as a national institution by the 1 2 3

4 5

G. Ingham, Capitalism Divided? The City and Industry in British Social Development (Basingstoke, 1984), p. 9. P. J. Cain and A. G. Hopkins, British Imperialism, I: Innovation and Expansion 1688–1914, and II: Crisis and Deconstruction 1914–1990 (1993). S. Newton and D. Porter, Modernization Frustrated. The Politics of Industrial Decline in Britain since 1900 (1988), esp. pp. 10, 21, 43–4, 58–9; S. Pollard (ed.), The Gold Standard and Employment Policies between the Wars (1970), pp. 2–10, 23. B. W. E. Alford, Britain and the World Economy since 1880 (1996), pp. 239–42. R. Boyce, British Capitalism at the Crossroads 1919–1932. A Study in Politics, Economics and International Relations (Cambridge, 1987); E. H. H. Green, ‘The influence of the City over British economic policy, c. 1880–1960’, in Y. Cassis (ed.), Finance and Financiers in European History, 1880–1960 (Cambridge, 1992), pp. 193–218.

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1930s, and that it acted as an agent of the Bank of England and the Treasury after the Second World War, in return for semi-independence and self-regulation.6 The concept of a City–Bank–Treasury nexus does not in itself say anything about the direction in which influence runs. Only research based on case studies can do that. Ingham accepts that the Treasury has interests that are independent of its connection with the City. In particular, the Treasury has an institutional interest in maintaining its position in Whitehall, involving control of public expenditure, as well as financial policy. Treasury control of expenditure was reinforced in the nineteenth century to protect the interests of the taxpayer.7 The balanced budget rule in force prior to the Second World War ensured that more money for one minister meant either less money for others, or an increase in taxation. Consequently, the Chancellor of the Exchequer rarely lacked allies in Cabinet when he was in dispute with spending departments. Borrowing, except in wartime, was restricted to expenditure that would produce a money return sufficient to pay interest on, and to amortise, the debt. The balanced budget rule did not fit with the Keynesian concept of using fiscal policy to manage the level of aggregate demand in the economy, but in the post-1945 period maintenance of a fixed, although adjustable, exchange rate down to 1972 imposed a degree of financial discipline. Thereafter there was a lack of a credible macro-economic framework, and experience of very high inflation in the 1970s and 1980s strengthened the case for clear rules of public finance. Consequently the 1998 Finance Act set out a new fiscal policy framework, including the ‘golden rule’ that over the economic cycle the government would borrow only to invest and not to fund current spending.8 Purchasers of gilt-edged stock, including City institutions, have naturally shared the Treasury’s interest in rules that inhibit financial profligacy. More generally the Treasury and City have shared an interest in placing key decisions in financial policy beyond party politics. Not the least of the advantages of the gold standard was that decisions on interest rates were taken by an independent central bank. In the words of a former Treasury official, the gold standard was ‘knave proof’, in that ‘it could 6 7

8

R. Michie, The London Stock Exchange. A History (Oxford, 1999), esp. pp. 182–3, 186, 293–4. M. J. Daunton, ‘Trusting Leviathan: the politics of taxation, 1815–1914’, and G. C. Peden, ‘From cheap government to efficient government: the political economy of public expenditure in the United Kingdom, 1832–1914’, in D. Winch and P. K. O’Brien (eds.), The Political Economy of British Historical Experience, 1688–1914 (Oxford, 2002), pp. 319–50, 351–78. HM Treasury, Reforming Britain’s Economic and Financial Policy: Towards Greater Economic Stability, ed. E. Balls and G. O’Donnell (Basingstoke, 2002), ch. 3.

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not be rigged for political, or even more unworthy reasons’.9 When the gold standard was suspended in 1931, bank rate was changed only after consultation with the Chancellor of the Exchequer. The delegation in 1997 of decisions on interest rates to the Monetary Policy Committee of the Bank of England can be seen as a return to an older order. There are good grounds for believing that the City would have influence on the Treasury. The Chancellor’s responsibilities included public loans, the national debt, banking and currency, foreign exchanges and international financial relations. Chancellors rarely brought economic or financial expertise to their office and normally depended upon their officials for advice. The skills of an administrative official may be compared to those of an advocate, who has to be the judge of a good argument and to be able to cross-examine an expert. Expert advice regarding most matters that would affect the City would be sought from the Bank of England. In evidence to the Radcliffe Committee in 1958, Bridges, then a recently retired permanent secretary, described Treasury officials as ‘laymen’ compared with the specialists in the Bank.10 Advice from the Bank would also come unsolicited. Norman, Governor of the Bank from 1920 to 1944, saw the relationship between the Bank and the Treasury as in many ways akin to that between an old-fashioned banker and a customer. He felt it his duty to give his views frankly to the Chancellor and his senior officials, acting as the principal channel of communication between the City and Whitehall.11 Prior to 1914, visits by the Governor of the Bank to the Treasury had been rare, but under Norman they became routine. The relationship between the Treasury and the Bank evolved over time, and was not without tensions as the Treasury took on more responsibilities and the Bank became more subject to political control. When in 1935, and again in 1939, the Treasury asked if it could borrow a member of the Bank’s staff, Norman refused on the grounds that such a transfer would suggest that the staff of the two institutions were interchangeable and would be a ‘dangerous precedent’. He also thought that the member of staff involved ‘might be in a difficult position because of his divided allegiance’.12 In addition to communications through the Bank, Treasury officials maintained informal links with the City on a personal basis. The diary of Sir Edward Hamilton, who, first as head of the Treasury’s Finance 9 10 11 12

Lord Bradbury, quoted in P. J. Grigg, Prejudice and Judgment (1948), p. 183. (Radcliffe) Committee on the Working of the Monetary System, Memoranda of Evidence, 3 vols. (1960), III, p. 47. H. Clay, Lord Norman (1957), p. 296. Extracts from Committee of Treasury minutes, 25 Sept. 1935, 3 May 1939, BoE G15/7/1816/5.

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Division and then as joint permanent secretary, was the most senior official dealing with financial questions from 1885 to 1906, shows that he socialised with leading figures in the City. His closest associates appear to have been Ferdinand Rothschild and Cassel, but he also discussed questions relating to the national debt with Nathan Rothschild.13 We have less evidence for Hamilton’s successors, but they seem not to have followed his example so far as cruises in ‘Ferdie’ Rothschild’s yacht, or visits to country houses, were concerned. However, the ease with which some leading Treasury officials found employment in the City or the Bank suggests previous acquaintance as well as considerable common ground. Notable examples included Bradbury, permanent secretary, 1913–19, whose directorships, after his retirement from the civil service, included Williams Deacon’s Bank, and who was chairman of the Bankers’ Clearing House Committee and president of the British Bankers’ Association in 1929–30 and 1935–6; Blackett, controller of finance, 1919–22, who became a director of the Bank of England in 1929 after service with the Viceroy’s Council in India; and Niemeyer, Blackett’s successor as controller of finance, who was recruited as an advisor by the Bank in 1927, and was a director from 1938 to 1952. In wartime, some City men were recruited by the Treasury. For example, the stockbroker Falk served in the Treasury’s ‘A’ division dealing with overseas finance in the First World War, and the merchant banker, Brand, was the Treasury’s chief representative in Washington in 1944–5. Falk had in 1917 founded a small dining club, known as the Tuesday Club, which brought together City men, financial journalists, academic economists and Treasury officials to discuss economic questions. Its most regular members in the interwar period included Blackett, Brand and Niemeyer, as well as Keynes, who had served in the Treasury during the war and who was active in the City as well as in academic life.14 According to one Treasury official who attended its meetings, the club’s purpose was to educate the civil servants in financial matters and to give the City men some off-the-record tips about government policy.15 The fact that the City was well placed to influence policy does not, however, establish that its influence was always predominant. The Treasury has been able to exercise control of expenditure or establish rules of public finance only when it has had the support of the Cabinet. Contrary to popular mythology, Treasury views, although influential, have not 13 14 15

The Diary of Sir Edward Walter Hamilton 1885–1906, ed. D. W. R. Bahlman (Hull, 1993), pp. 343, 360, 364, 386, 405, 431, 453. R. Skidelsky, John Maynard Keynes: The Economist as Saviour 1920–1937 (1992), pp. 22–3, 197. F. Leith-Ross, Money Talks (1968), pp. 147–8.

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always prevailed in Whitehall. Moreover, as government responsibilities for social welfare were extended over the course of the twentieth century, the City found it had to compete with more interest groups. Likewise, as government responsibility for managing the economy developed, Chancellors of the Exchequer and their officials had to respond to a wider spectrum of interests than that represented by the City, and to defend national interests broadly conceived. The City–Bank–Treasury nexus therefore needs to be considered in the light of changing political circumstances. What follows is a series of case studies that cast light on the nature of the relationship between the Treasury and the City. Edwardian political economy The Boer War brought to an end a forty-year period in which there had been budget surpluses and a steady redemption of the national debt. Between 1899 and 1902 the national debt increased by about a quarter. Naturally Hamilton consulted his friends in the City about the forms that the borrowing should take, but he was by no means naive in doing so. As he noted in his diary, ‘the difficulty about getting good advice is that I don’t believe it is possible to obtain really disinterested advice from City men’.16 In order to relieve the pressure on the London money market, the Treasury sought funds in New York, a step rather resented in the City, and the views of J. P. Morgan & Co. had also to be taken into account. Morgans had the advantage of being linked with the London bank of J. S. Morgan & Co. (later Morgan Grenfell & Co.) and they established contacts with the Treasury that were to be renewed for the purposes of far greater borrowing in the United States during the First World War.17 Borrowing in New York for the Boer War marked the beginning of a process whereby, as Britain’s external financial position was weakened by war and relative economic decline, British policy-makers had to take account of opinion in financial centres around the world, and not just those in London. The Edwardian period also saw the beginnings of greater central government activity in relation to social services. Lloyd George’s proposal in his 1909 budget to increase death duties to help to pay for social reform provoked a major protest from the City. Thirty-six of its leading figures, headed by Lord Rothschild, wrote an open letter to the Prime Minister, 16 17

Hamilton diary, 6 Feb. 1901, cited in K. Burk, Morgan Grenfell, 1838–1988. The Biography of a Merchant Bank (Oxford, 1989), p. 119. Burk, Morgan Grenfell, esp. pp. 111–23, 126–34; J. Wormell, The Management of the National Debt of the United Kingdom, 1900–1932 (2000), pp. 31–9.

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Asquith, in which they claimed that death duties were really paid out of capital, to the detriment of trade in which that capital might otherwise have been employed. More generally, they expressed the belief that ‘the prosperity of all classes has been greatly due to the fact that this country has afforded indisputable safety for capital’.18 The increase in death duties had, in fact, been proposed by Treasury officials, and Lloyd George refused to make any concession on this issue. The reason why Treasury officials favoured progressive direct taxation to pay for social reform was that the alternative was a revenue tariff, and they were no less in favour of free trade than the Liberal government.19 Thus, although both the City and the Treasury favoured free trade, they differed over direct taxation. A further increase in death duties was included in the 1914 budget, and on that occasion Stamp of the Board of the Inland Revenue was asked to examine arguments that death duties had an adverse effect on capital accumulation. In a learned paper, drawing upon the views of economists from Mill to Pigou, he concluded that there was no evidence that death duties reduced savings and capital any more than income tax did.20 The City’s views did not prevail against New Liberalism. War finance, 1914–1920 The Treasury, the Bank of England and the City had to work together in 1914 to tackle a financial crisis brought about by the outbreak of the First World War. Following the Austro-Hungarian ultimatum to Serbia on 23 July, most European stock exchanges closed, making it impossible for foreigners to meet their liabilities in London. Consequently, London accepting houses were threatened with insolvency, and clearing banks faced heavy losses on re-discounted bills. The clearing banks sought to preserve their gold reserves by refusing to provide the public with gold coins, and proposed to the Chancellor on 31 July that the Bank of England should make an emergency note issue and suspend gold convertibility. However, Keynes, who had been summoned from Cambridge to advise Treasury officials, produced a memorandum on 3 August arguing that suspension of international gold payments would lower international confidence in sterling, and thereby impair Britain’s purchasing power in world markets and damage London’s reputation as a financial centre. His arguments were accepted by Lloyd George, who had been sympathetic to the bankers’ proposals, and only gold payments within Britain were 18 19 20

The Times, 15 May 1909, p. 4. G. C. Peden, The Treasury and British Public Policy, 1906–1959 (Oxford, 2000), pp. 43–5. J. Stamp, ‘The economic effects of estate duty upon capital’, 20 June 1914, T 171/85.

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restricted, this being made possible by the issue of currency notes by the Treasury.21 Meanwhile, on 2 August a conference at the Treasury with representatives of the City had agreed a moratorium on bills, thereby rescuing the accepting houses. On 6 August a more general moratorium regarding payments arising out of contracts made before 4 August was announced. This measure eased pressure on City institutions, but created a cashflow problem for manufacturers who could not collect debts but had to pay wages. The moratorium had been granted only after the banks had promised to be sympathetic to the needs of their customers, but evidence reaching the Treasury suggested that not all banks were carrying out this promise, and that the moratorium was unpopular with manufacturers. John Peters has argued that the moratorium is a clear example of favoured treatment for the City. However, his own evidence shows that, while 67 per cent of manufacturers who responded to a survey conducted by the Inland Revenue in August were against an extension of the moratorium, no fewer than 91.5 per cent reported that banking facilities were reasonable compared with before the war.22 Consequently, the Treasury felt justified in extending the moratorium to 4 November. If the Treasury was influenced by the City in 1914, the direction of influence was soon reversed. From January 1915 all new issues required Treasury approval and the Capital Issues Committee, which was established to advise the Treasury, took an increasingly negative attitude to applications for new issues, especially foreign ones, that could not be shown to be in the national interest. In order to maintain the sterling– dollar exchange rate at about $4.76, holders of dollar securities were invited to sell or lend them to the Treasury in December 1915, and a penal tax was imposed in May 1916 on income from such securities that had not been transferred. Finally, in January 1917 the Treasury was given powers to requisition securities. Treasury officials also took an active part in maintaining the sterling exchange rate – too active, in the opinion of the Governor of the Bank of England, Cunliffe. The resulting friction between the Treasury and the Bank caused a crisis in July 1917 that was resolved only by a promise from Cunliffe to work loyally and harmoniously with the Chancellor of the Exchequer.23 The continuing weakness of the exchange rate after the war led the Treasury and the Bank to bring influence to bear on the London Stock Exchange regarding new issues whenever capital exports threatened the balance of payments. As Michie 21 22 23

D. E. Moggridge, Maynard Keynes: An Economist’s Biography (1992), pp. 233–7. J. Peters, ‘The British government and the City–industry divide: the case of the 1914 financial crisis’, Twentieth Century British History 4 (1993), 126–48, at 144–5. R. S. Sayers, The Bank of England, 1891–1944, 3 vols. (Cambridge, 1976), I, pp. 99–107.

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observes, the Stock Exchange invariably responded to such influence by behaving in the way it was asked to do.24 The war brought about an increase in the national debt from £650 million in 1914 to £7,832 million in the financial year 1919/20. Failure to impose a capital levy to pay off part of the debt after the war can be seen as an example of the Treasury favouring the City. However, as Martin Daunton has shown, Treasury officials were prepared to consider a capital levy, or alternatively a levy on increases in wealth resulting from the war, as ways of dealing with the problem of reducing the tax burden of servicing the debt. In February 1920 Blackett, as the Treasury’s controller of finance, gave evidence to a select committee on increases of war wealth in which he stressed the advantage of some special method of raising cash with which to pay off a considerable proportion of the £1,000 million outstanding in Treasury bills. The existence of so large a floating debt made control of money markets by the Bank of England ineffective, as holders of Treasury bills could allow them to run off and force the government to borrow from the Bank on even more inflationary ways and means. However, three months later Blackett changed his mind, as the postwar inflationary boom was giving way to a slump. It was the change in the economic climate, rather than opposition from the City, that led to the change in the attitude of the Treasury to a war levy.25 Interwar financial policy The postwar slump created a new challenge for the Treasury. In 1921 Lloyd George, by then Prime Minister, asked the Financial Secretary of the Treasury, Hilton Young, to investigate the reactions of City men and industrialists to his idea of creating work for the unemployed, either on public works or in their own occupations, by resorting to ‘inflation’. By ‘inflation’, Lloyd George seems to have meant borrowing on ways and means from the Bank of England or borrowing money created by the banks, as in the First World War. Hilton Young’s enquiries were conducted in the short space of five days. As he himself observed, ‘industrial men, being mostly provincial, take longer to get at than financial men’. As a result, most industrial enquiries were conducted in Glasgow by Dudley Ward, a former temporary Treasury official who was now manager of the British Overseas Bank. City reactions were predictably hostile to any form 24 25

Michie, London Stock Exchange, p. 182. M. J. Daunton, ‘How to pay for the war: state, society and taxation in Britain, 1917–24’, English Historical Review 111 (1996), 882–919; M. J. Daunton, Just Taxes: The Politics of Taxation in Britain, 1914–1979 (Cambridge, 2002), pp. 77–81.

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of inflationary finance, and industrialists preferred export credits to public works. The gold standard had been suspended in 1919 but the Bank of England and the Treasury were agreed that a deliberate attempt to make British exports competitive by lowering the sterling exchange rate would fail. They believed that trade unions would successfully resist a reduction in the standard of living by claiming higher wages, and the burden of higher prices would fall on people with fixed incomes or the possessors of capital. Lloyd George was subsequently persuaded to reduce his ideas for new money for employment creation to a fraction of the figure that he had first thought of (£35.3 million compared with £250 million), and the possibility of Keynesian reflation – before Keynes himself had advocated it – faded.26 This episode certainly shows that the City had closer links with the Treasury than industry had, and that the City, the Bank and the Treasury were at one in defending financial orthodoxy. However, it is less certain that the Treasury was responding to City influence. The recent experience of wartime inflation, and the disruption it had caused to government finances, would have made the Treasury reluctant to resort to more of the same. The most notorious example of the City–Bank–Treasury nexus at work is the decision to return to the gold standard in 1925 at the prewar parity of $4.86, a revaluation by about 10 per cent compared with 1924 that handicapped exporters. Of the three committees recommending a resumption of gold payments, two, the Cunliffe Committee in 1918 and the Chamberlain–Bradbury Committee in 1924, contained no one with experience of manufacturing industry. The Committee on Financial Facilities after the war, whose report followed that of the Cunliffe Committee in 1918, did contain four industrialists, but was dominated by bankers and merchants from the City. Both in 1918 and in 1924–25 the evidence of the Federation of British Industries as to the difficulties that industry might face was given little weight compared with the views of City men. The Chancellor, Churchill, was impressed by Keynes’s criticisms of the gold standard, and expressed the view that he would ‘far rather see Finance less proud and Industry more content’. However, he lacked the technical competence to weigh the arguments of his advisers, Niemeyer and Norman, against those of Keynes.27 26 27

G. C. Peden, ‘The road to and from Gairloch: Lloyd George, unemployment, inflation, and the “Treasury view” in 1921’, Twentieth Century British History 4 (1993), 224–49. R. Boyce, ‘Creating the myth of consensus: public opinion and Britain’s return to the gold standard in 1925’, in P. L. Cottrell and D. E. Moggridge (eds.), Money and Power. Essays in Honour of L. S. Pressnell (1988), pp. 173–97; D. E. Moggridge, British Monetary Policy, 1924–1931. The Norman Conquest of $4.86 (Cambridge, 1972), ch. 3, esp. p. 76.

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In the long run the gold standard proved to be too tight a straitjacket for monetary and fiscal policy in the post-1929 depression. Prices fell and unemployment, and the cost of its relief, soared. In June 1931 a royal commission on unemployment insurance reported that the Unemployment Insurance Fund was actuarially unsound. Then, on 31 July, came the report of the May Committee, which had been asked by the Chancellor, Snowden, to consider all possible economies in government expenditure. The committee’s chairman, Sir George May, had formerly been secretary of the Prudential Assurance Company, and his report expressed the views of City men on public finance. Government accounts were recalculated to include not only expenditure within the budget as conventionally defined, but also extra-budgetary items, of which the Unemployment Insurance Fund was the most significant. Of the recommended economies of £96.6 million, no less than £66.5 million were on unemployment benefits, which were to be reduced in line with the cost of living. The Labour cabinet was unable to agree on economies that would balance the budget and resigned, to be replaced by the National Government headed by the outgoing Labour Prime Minister, MacDonald. There quickly arose a belief on the Left that the Labour government had been the victim of a ‘bankers’ ramp’. New York bankers, when asked about the feasibility of a government loan, had enquired if MacDonald’s proposals for balancing the budget would be supported by the Bank of England and the City generally. However, as Philip Williamson has shown, both the New York bankers and the Bank of England had been careful to avoid giving any advice that would give the appearance of attempting to impose specific economies.28 Once sterling had been forced off the gold standard in September 1931, the Treasury, not the Bank, determined what monetary policy would be. The evidence is that officials showed an awareness of the problems of industry that had been lacking in the 1920s. Within a week of the suspension of the gold standard, Phillips, the rising star on the finance side of the Treasury, was pointing out that the appreciation of gold since October 1929 had lowered wholesale prices by 25 per cent and the cost of living by 10 per cent, while wages remained practically unchanged. He went on: ‘This is what was crushing our farmers and manufacturers for the benefit of the rentier . . . Why go on with it?’29 Subsequently the Treasury made clear that there would be no early return to the gold 28 29

P. Williamson, ‘A “bankers’ ramp”? Financiers and the British political crisis of August 1931’, English Historical Review 99 (1984), 770–806. S. Howson, Domestic Monetary Management in Britain, 1919–1938 (Cambridge, 1975), p. 83.

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standard, and settled on a target rate for the floating pound of $3.40 rather than $4.86. The Treasury wanted prices to rise to their predepression levels, and Phillips noted in March 1932 that ‘the only method seems to be to hold sterling down until a rise in world gold prices takes us there’.30 Suspension of the gold standard also removed the need to prevent a drain of gold by raising the bank rate, and thus made possible a reduction in interest rates. As Phillips put it: ‘we want cheap money and plenty of it to stimulate industry’.31 Bank rate was reduced by stages from 5 per cent in February 1932 to 2 per cent on 30 June, at which rate it remained until August 1939. However, the banks were slow to reduce their overdraft rates and in autumn 1932 Phillips’s immediate superior, Hopkins, was surprised to learn that the total amount of overdrafts had fallen since bank rate had been reduced. He advised the Chancellor, Neville Chamberlain, that the banks would resent any Treasury intervention but that the matter could be raised informally by Chamberlain with the principal bankers. In April 1933 Hopkins was assured by the Bank of England that overdraft rates had been reduced and that it was the general policy of the banks to give advances freely to sound new borrowers.32 It is difficult to find evidence of bias against industry in monetary policy in the 1930s after the suspension of the gold standard. War finance, 1937–1945 By 1937 the clouds of war were once more gathering. The City, however, objected to the government’s intention to meet part of the cost of rearmament by imposing a special tax, albeit a temporary one, on profits. The original proposal for what was called the National Defence Contribution (NDC) was for a tax graduated according to the growth of profits. The estimated yield was only £25 million in a full year, compared with total estimated revenue for 1937–8 of £863.1 million, but Chamberlain believed that NDC would help to prevent accusations of profiteering. The City and business organisations regarded it as a socialist measure. Share values slumped. Horne, a former Chancellor and a prominent member of the City, criticised the measure as a tax on enterprise. Chamberlain felt that he had put his succession to the premiership at risk, and he and Simon, his successor as Chancellor, had to come to terms with the business community. A straight 5 per cent tax on profits, estimated to produce the same yield as the original NDC, was substituted for the graduated 30 31

Phillips, ‘The Mond-Strakosch memorandum’, 4 March 1932, T 175/57. 32 Peden, Treasury, pp. 258–9. Howson, Domestic Monetary Management, p. 86.

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scale, making the tax easier to calculate – and to pass on to the customer.33 However, when a Bill for compulsory military training was introduced in April 1939, Chamberlain responded to Labour demands for ‘conscription of wealth’ by promising that proposals for a tax on profits arising from armament contracts were being prepared. Armament profits duty was enacted a few weeks before war broke out but was merged with a new excess profits tax (EPT) in Simon’s budget of 27 September. Both the duty and EPT were levied at 60 per cent on profits above a standard based on pre-1938 profits. In Wood’s first budget on 23 July 1940 EPT was raised to 100 per cent, to appease workers’ resentment about shareholders’ profits, even although Treasury officials realised that such a rate would take away all incentive from businessmen to take risks in new investment.34 The outbreak of war altered relations between the Treasury and the City. The Stock Exchange immediately introduced a rule that, if the Treasury objected to any new issue, it would not be listed or quoted. On 26 September the Chancellor wrote to Norman asking for the Bank of England to request the banks to restrict advances to the needs of defence production, exports, coal-mining and agriculture. With regard to both the Stock Exchange and the banks the Treasury relied upon co-operation from the institutions concerned rather than imposing detailed control from Whitehall. In return, the Treasury agreed to legislation whereby only members of a recognised stock exchange could deal in securities, thereby empowering the Stock Exchange to act, in effect, as an agent of the state, as the still independent Bank of England had long done.35 Political considerations dictated that the government should not offer more than 3 per cent for long-term loans, compared with 5 per cent in the First World War. Firms and financial institutions were reluctant to hold long-term debt on such terms, with the result that, of the £14,800 million borrowed by the government within Britain during the war, £4,273 million was held in the form of floating debt, such as Treasury bills. The existence of these reserves did not matter so long as the government exercised direct controls over investment, including Board of Trade licensing of steel and machinery. However, decontrol of the civilian economy, as 33

34

35

HC Deb 323, cc. 249–57, 27 April 1937; K. Feiling, The Life of Neville Chamberlain (1946), pp. 292–3; R. Shay, British Rearmament in the Thirties: Politics and Profit (Princeton 1977), pp. 147–55. Wood’s 1941 budget recognised the need to restore incentives to enterprise by converting 20 per cent of EPT into a deferred credit to be repaid after the war, on condition that the credit was ploughed back into a business: Peden, Treasury, pp. 318–21, 324. Michie, London Stock Exchange, pp. 291–4; R. S. Sayers, Financial Policy, 1939–1945 (1956), pp. 184–6.

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after the First World War, would produce an inflationary boom similar to that of 1919–20. Consequently, even the Treasury favoured the continuation of controls on investment into the postwar period. It is not surprising that, when peace came in Europe in May 1945, there was no assumption in the City of a ready return to a golden past.36

Postwar domestic monetary policy The prospects of a return to what the City would regard as normality were not enhanced by Labour’s victory in the general election of July 1945. During the period of reconstruction planning the Treasury and the Bank of England had put pressure on the clearing banks to put up capital for an institution (later known as the Industrial and Commercial Finance Corporation) that would fill the Macmillan ‘gap’ by providing finance for small and medium-sized companies.37 As Eady of the Treasury pointed out, any alternative scheme devised in Whitehall was likely to be less acceptable to the bankers.38 In the event, the Investment (Controls and Guarantees) Act of 1946 made permanent the wartime Capital Issues Committee, and created a National Investment Council (NIC) under the chairmanship of the Chancellor of the Exchequer. The NIC might be seen as the entry of the City into Whitehall, as its membership included the chairman of the London Stock Exchange, and most other members had a City or industrial background. However, the NIC was purely advisory and, according to Dalton, the Chancellor, Treasury officials did not like it because they thought that its advice might conflict with their own.39 At all events, the NIC was wound up by Dalton’s successor, Cripps, in 1948. Labour’s postwar chancellors believed that planning and direct controls offered a better way of controlling investment than variations in interest rates. They seem to have assumed that the banks could be asked to restrict credit, as during the war. However, the Bank warned the Treasury in September 1948 that it would be ‘most unwise’ to set a fixed limit to bank advances; instead it proposed to invite the banks to ‘shorten their advances’. In June 1951 Treasury officials asked the Treasury Solicitor about the Chancellor of the Exchequer’s power to issue directions to the 36 37

38 39

Kynaston, City of London, III, p. 507. In 1931 the Macmillan Committee on Finance and Industry’s report (Cmd. 3897) referred to the lack of provision for supplying long-term capital, in amounts too small for a public issue, to small and medium-sized firms. This lack became known as the ‘Macmillan gap’. Kynaston, City of London, III, pp. 495–6. H. Dalton, High Tide and After: Memoirs 1945–1960 (1962), pp. 97–8.

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banks under the Act nationalising the Bank of England, but were told that he had none.40 Relations between the Treasury and the City did not change fundamentally with the election of a Conservative government in October 1951. The government’s reduction of direct controls over investment was offset by a more active use of bank rate, but the financing of government expenditure through the issue of Treasury bills increased the clearing banks’ liquid assets. There continued to be excess demand in the economy, and the Treasury continued to look to the Bank to persuade the clearing banks to restrict their advances. The Bank pressed for curbs on public expenditure, but the Treasury did not get the support it hoped for from Conservative governments. The Conservatives had pledged themselves before the 1951 election to deal with the housing shortage, and they sought to hold the middle ground of politics by maintaining the welfare state. Defence expenditure was reduced, but there were limits to the extent of cuts in the armed forces that would be acceptable to the Conservative party. As for fiscal policy, the Treasury shared the Conservatives’ belief that reductions in tax rates were necessary to encourage enterprise, but lower taxation also tended to increase demand. Macroeconomic policy required that taxes be cut only slowly. These problems were highlighted in 1955 when the Chancellor, Butler, justified a reduction of 6d in the pound in income tax by saying in his budget speech that he had monetary policy in reserve. The Bank of England was expected by the Treasury to control bank advances in order to curb demand, but Treasury officials learned from informal contacts with bank chairmen that the Bank was applying the credit squeeze with less rigour than the Governor, Cobbold, claimed. Most unusually, the Bank agreed to a meeting between Treasury officials and representatives of the clearing banks, in the presence of senior Bank officials, in July, and the banks agreed to reduce their lending provided that the Chancellor make a public statement asking them to do so. Even so, Cobbold persuaded the Chancellor not to put a figure on what the reduction in advances should be, although Treasury officials had proposed 10 per cent.41 Cobbold had made it his business since becoming Governor in 1949 to preserve the Bank’s independence and had kept contacts between Bank and Treasury officials to a minimum. The failure of monetary policy to restrict demand in 1955 forced Butler to introduce a second budget in the autumn, and led Treasury officials to press for a joint Bank–Treasury 40

41

A. Cairncross, ‘Prelude to Radcliffe: monetary policy in the United Kingdom 1948–57’, Revista di Storia Economica, 2nd series, 4 (1987), 1–20, at 5; S. Howson, British Monetary Policy 1945–1951 (Oxford, 1993), pp. 116–17, 297. Peden, Treasury, p. 468.

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working party to review the working of the monetary system. The working party’s recommendation in 1956 that the co-operation of the banks should be secured by mutual agreement rather than by direction merely confirmed the Bank’s understanding of the status quo. The Radcliffe inquiry into the working of the monetary system was set up in May 1957, but a sterling crisis in September led the Chancellor, Thorneycroft, to consider more urgent action. He set up a working party of Treasury and Bank officials, with the economist Lionel Robbins, to consider how credit could be controlled. Under pressure from the Chancellor, Cobbold accepted a scheme for ‘special deposits’, whereby banks could be required to deposit funds with the Bank, which would then lend them to the Treasury, as a means of reducing the government’s dependence on Treasury bills for Exchequer financing. However, the Bank reserved the right to use its own judgement in operating the scheme. The Radcliffe Report recommended in 1959 that the Chancellor of the Exchequer, not the Court of the Bank, should decide changes in bank rate, and that monetary policy should be coordinated by a committee of representatives from the Bank, the Board of Trade and the Treasury. Treasury officials, however, did not wish to share the conduct of monetary policy with the Board of Trade, and the committee was not set up. Relations between the Bank and the Treasury remained substantially unchanged because Treasury officials believed that too direct political control of the monetary system would have an adverse effect on confidence in sterling, abroad as well as in the City.42 The Bank’s leadership in control of policy towards the banking system was confirmed in the early 1970s. A high-level Treasury–Bank Committee was set up in 1969 to re-examine the fundamentals of monetary policy. The Bank wished to put an end to requests for ceilings on lending by the clearing banks, as many smaller, newer, banking concerns escaped from these restrictions. Its plan, which became known as Competition and Credit Control, was designed to place the different institutions offering credit on a level footing. Competition was to be secured by ending the clearing banks’ cartel on interest rates. The Bank was to be able to call on all banks, not just the clearing banks, to place a proportion of their assets with it as special deposits, but the Bank expected that interest rates would be the chief method of influencing the monetary system. The plan was presented by the Governor, O’Brien, to the Chancellor of the Exchequer, Barber, at a private dinner in January 1971 at which both 42

A. Ringe and N. Rollings, ‘Domesticating the “market animal”? The Treasury and the Bank of England, 1955–1960’, in R. A. W. Rhodes (ed.), Transforming British Government, I: Changing Institutions (2000), pp. 119–34.

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were accompanied by senior advisers. It appears that Treasury officials would have liked to have been consulted earlier than they were about the plan, and were reluctant to abandon loan ceilings. However, the plan was very much in line with the Conservative government’s ideology, and was finally approved in the autumn of 1971. In the event, the new system was unable to prevent, and may have helped to stimulate, a highly unstable boom in property development companies that broke at the end of 1973, leaving many smaller financial concerns, known as secondary banks, on the brink of insolvency. The Bank and the clearing banks had to launch a joint rescue of the secondary banks, to prevent a collapse of confidence in the banking system. The Treasury was kept informed by the Bank of England, but seems to have played no active part in directing what became known as the Lifeboat operation.43 Postwar international monetary policy As regards external monetary policy, the City, the Bank and the Treasury had shared the goal of making sterling an internationally convertible currency as soon as possible after the Second World War. An early attempt in 1947 with a fixed exchange rate failed. In 1952 Bank and Treasury officials devised a plan, code-named ‘Robot’, for making sterling convertible with a floating exchange rate. However, in contrast to the decision to return to the gold standard in 1925, the Bank and the Treasury no longer had a monopoly of advising the government on external financial policy. Hall, the head of the Economic Section of the Cabinet Office, and MacDougall, an economist in the office of the Paymaster-General, Cherwell, warned ministers of the risk of unemployment if the plan were implemented, and the Cabinet withheld approval.44 Thereafter exchange controls on sterling were eased only gradually, with the Treasury reacting cautiously to Bank advice, while accepting that ‘the Bank are the experts’. In 1955 Rowan, the principal Treasury official on the overseas finance side of the Treasury, thought that, given the choice between full employment and maintaining the exchange rate, public opinion would insist on full employment. Nevertheless, he believed that the discipline of maintaining a stable exchange rate ‘could be a good thing to get governments to take unpopular measures’.45 In the event, full convertibility was achieved in 1958 at the post-1949 exchange rate of $2.80, and the 43 44 45

M. Reid, The Secondary Banking Crisis, 1973–1975: its Causes and Course (1982), esp. pp. 18–19, 30–2. P. Burnham, ‘Britain’s external economic policy in the early 1950s: the historical significance of Operation Robot’, Twentieth Century British History 11 (2000), 379–408. Peden, Treasury, p. 464.

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Labour government of 1964–70 went to considerable lengths to avoid the devaluation to $2.40 that eventually took place in 1967, and defended the latter rate at the expense of projected public expenditure.46 Both the Bank and the Treasury had believed that convertibility would strengthen the position of the City in international financial markets, but the Treasury had had its own, additional motive. By the mid 1960s it had become apparent that London’s role did not depend upon sterling being a reserve currency. After devaluation in 1967 it was increasingly realised that the City could work in foreign currencies (especially dollars), and that therefore the exchange rate was almost an irrelevance to the City’s success as a financial centre.47 Consequently there was little opposition in the City to the decision in 1972 to allow sterling to float. The decision reflected and reinforced the inflationary situation in the economy at the time, and it left the Treasury without any clear target with which to guide macroeconomic policy. By 1976 confidence in sterling was so low that the Labour government was persuaded to make a formal application to the International Monetary Fund (IMF) for assistance to prevent a free fall in the exchange rate. Cuts in public expenditure programmes were negotiated with the IMF, and a letter to the IMF set out limits to domestic credit expansion.48 Opinion in the City was by then rapidly becoming convinced by monetarist arguments of financial journalists, in particular Brittan and Jay. The Treasury was sceptical about the value of monetary targets, but financial markets were strongly influenced by them. A money supply overshoot in 1977–8, followed by an expansionary budget in April 1978, led to the City refusing to purchase the gilt-edged securities required to fund the government’s deficit. The Bank warned the Treasury that something had to be done to restore confidence, and a deflationary ‘package’ followed in June in the form of a mini-budget and an increase in the Bank’s minimum lending rate. The City was in effect monitoring the government’s policies from a monetarist perspective even before Thatcher’s government brought monetarist economists into Whitehall.49 In the event, the development of global capital markets, financial deregulation and changing technology meant that there was no clear and stable relationship between money demand and inflation. Membership of the exchange rate mechanism of the European Monetary System between October 1990 and 46 47 48 49

A. Cairncross and B. Eichengreen, Sterling in Decline: the Devaluations of 1931, 1949 and 1967 (Oxford, 1983), ch. 4. S. Strange, Sterling and British Policy: A Political Study of an International Currency in Decline (Oxford, 1971), ch. 7. K. Burk and A. Cairncross, ‘Goodbye Great Britain’. The 1976 IMF Crisis (New Haven and London, 1992). D. Smith, The Rise and Fall of Monetarism (1987), ch. 5.

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September 1992 made the exchange rate once more the key target for macroeconomic policy, but proved to be unsustainable in view of financial markets’ lack of confidence in sterling. Mutual interdependence The interdependence of the different parts of the City–Bank–Treasury nexus was brought out clearly by developments in the 1990s. In 1993 the Treasury took over most of the Department of Trade and Industry’s responsibility for supervising financial services, and the transfer was completed in 1998 when the Treasury took over regulation of general insurance. The Treasury thus found itself dealing with a national scandal in relation to personal pensions, which the public had been encouraged to take out since the mid 1980s as an alternative to the State EarningsRelated Pension Scheme. Helen Liddell, the economic secretary to the Treasury, made her reputation in Whitehall in 1998 by successfully pressuring financial institutions to compensate people who had been missold personal pensions.50 The Bank of England’s independence in setting interest rates from 1997 did not remove ultimate control of monetary policy from the Treasury, since it was the Chancellor of the Exchequer who set the inflation target that the Bank’s Monetary Policy Committee had to meet. On the other hand, the new fiscal policy framework set out in the Finance Act of 1998 made it easier for the City to see if the Treasury was meeting its fiscal objectives. The Treasury and the City were thus in a position to monitor each other. Historical evidence leaves no doubt that the Treasury and the City have shared interests. What is less certain is the direction of influence between them. The Treasury has had to take account of conceptions of the national interest as well as the City’s particular interests. The overriding national interest was most obvious in wartime, but there have been other examples too. Monetary policy may have been shaped by the interests of the City in the return to gold in 1925, but the same cannot be said of the 1930s, once the gold standard had been suspended. Likewise the City had to accept credit squeezes in the 1950s and 1960s. On the other hand, the City’s refusal to buy all the gilt-edged securities that the Treasury wished to sell in the spring of 1978 powerfully illustrated the Treasury’s need to have the confidence of financial markets. Since that confidence rested on sound public finance, it was a constraint that was not unwelcome in the Treasury. 50

D. Lipsey, The Secret Treasury (2000), pp. 21, 23, 212–13.

7

The Liberals and the City 1900–1931 Anthony Howe

Until comparatively recently, historians have often accepted uncritically the notion that the City of London was able to exert a primary influence on economic policy-making by the British state. Balanced budgets, the gold standard, and adherence to free trade have all been put down to the power of the City of London.1 In a subtler variation, Peter Cain and Anthony Hopkins have ascribed predominant influence to a social nexus between the City and the aristocracy, the fusion of the wealth of the City with that of landed society.2 Despite the industrial revolution, they suggest that ‘gentlemanly capitalism’ had relegated industrial power to the margins of political influence. In the Edwardian period, the failure of tariff reform with its promise of modernisation and industrial regeneration has similarly been attributed to the power of ‘cosmopolitan’ capital, embodied in the City, which was able, in conjunction with other forces, to undermine the ‘productivist’ vision of Joseph Chamberlain.3 For many in the City, it is held, the beau id´eal was to create in Britain a paradise for rentiers, with the grimy-handed workers shipped off to their paradise in the colonies, removing the threat of proletarian revolution as well as that of environmental deterioration from excessive industrialisation. This type was well observed by Beatrice Webb in the person of her brother-in-law, Daniel Meinertzhagen: a great City financier, earning his tens of thousands each year, upright and honourable, cordially hating the ‘social question’, describing frankly his ideal: English capitalists retired from business living on an income of foreign investments, the land given over to sport, the people emigrated or starved out, no inhabitants except a few dependents to serve in one way or another the fortunate capitalists.4 1 2

3 4

G. Ingham, Capitalism Divided: The City and Industry in British Social Development (1984). P. J. Cain and A. G. Hopkins, British Imperialism, 2 vols. (1993; 2nd edn 2001); R. E. Dumett (ed.), Gentlemanly Capitalism and British Imperialism (1999); S. Akita (ed.), Gentlemanly Capitalism: Imperialism and Global History (2002). S. Newton and D. Porter, Modernisation Frustrated (1988); E. H. H. Green, The Crisis of Conservatism (1995). The Diary of Beatrice Webb, I: 1873–1892, ed. N. and J. Mackenzie (1982), p. 321 (1 Feb. 1890). Meinertzhagen (1842–1910) was a partner in Frederick Huth & Co., merchant bankers.

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However, it is unlikely that many financiers in the City of London by 1914 imagined that they were living in any such rentiers’ paradise. Rather, under the Liberal government since 1905 they had found themselves under steady attack, the ‘plutocosm’ assailed by more steeply graduated taxation, super tax, and land taxes in a ‘People’s’ (emphatically not a ‘City’) Budget, with the threat of industrial unrest ever present, with civil disturbance not unlikely in Ireland, and war with Germany in prospect. In addition, while foreign investments and migration had boomed in the Edwardian period, the social question had become insistent as the Liberals found themselves under growing pressure from the nascent Labour party. In many ways, therefore, it is possible to claim that under the Liberals between 1905 and 1914, rather than unfettered licence being granted to the aspirations of cosmopolitan capital, those aspirations were increasingly reined in by the democratic promise of the postGladstonian Liberal party. This essay will argue firstly that in respect of monetary, budgetary and commercial policies, the Liberal governments of 1905–14 consistently put what they saw as the wider needs of the British state and people above the narrow interests of the City. This in turn was to provide partial justification for Lloyd George’s otherwise tendentious claim in 1931 that the prewar Liberal governments, unlike the second Labour government, had successfully resisted pressure from the City of London, reducing its supposedly potent magnates to ‘frigid and flapping silence, as if a row of penguins in the Arctic Ocean’.5 Ironically, as the second part of this essay will show, one of the immediate effects of the outbreak of war in 1914 was to bring the City ‘penguins’ back from the cold into the warm embrace of the Liberal and then Coalition governments. Yet the First World War fundamentally undermined the political economy of free trade, the gold standard, and limited government expenditure, which had served so well both the Liberal party and the City of London. After the war, the City found its prosperity and international pre-eminence impaired, while the political basis of the Liberal party had been shattered by the rise of Labour and by internal party division. This dual transformation necessarily altered the relationship between the Liberals and the City. On the one hand, many Liberals, including some City financiers, linked the restoration of economic prosperity based on an identity of interest between the City and industry with 5

HC Deb 248, cc. 731–3, 12 Feb. 1931; R. W. D. Boyce, British Capitalism at the Crossroads (Cambridge, 1987), p. 300. This graphic image probably derived from the Westminster Gazette’s cartoon (28 June 1909) of ‘The City Penguins’ opposed to the People’s Budget. In a later series of ‘Potted Peers’ Lord Rothschild was depicted with the caption, ‘The whole of the British capital having been exported to the South Pacific as a result of the Budget revolution, Lord Rothschild flies from St Swithin’s Lane to the Antarctic regions disguised as a Penguin’: reproduced in N. Ferguson, The World’s Banker (1998), p. 955.

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the restoration of their own party fortunes based on opposition to socialism and tariffs.6 On the other hand, as any such prospect receded in the drastically altered political and economic conditions of the 1920s, Liberal attitudes to the economy and to the City were to show far greater disunity and diversity than in the past. As a result, by 1931, the Liberals had failed either to redefine themselves as a traditional party of City-based economic virtues, able to challenge the Conservative party, or to provide, as they had between 1908 and 1914, a progressive radicalism able to bolster their electoral fortunes at the expense of the Labour party. ‘The City’ and the ‘people’, 1905–1914 Before analysing the relationship between the City and policy-making under the Liberals, it is worth considering briefly the political complexion of the City of London in the early twentieth century. For while the City Liberal Club retained an important political presence, the City had shown an intense hatred of Gladstone from the 1880s and the City constituency had been solidly Conservative for a generation.7 The implosion of the free trade issue within the City revived Liberal opposition but the City’s last Liberal MP had been elected in 1880 and the Liberals had not contested the seat since 1885. As Lloyd George was to put it in 1912, ‘the City is a rather chilly atmosphere for Liberalism’.8 It is also unlikely that the 1905 Liberal government felt any debt of gratitude to the City. Rather, the Liberals would have been only too well aware that Balfour, leader of the Opposition, after losing his seat at the general election, had been granted an easy return to the Commons by the City Conservatives in a by-election in February 1906.9 Nor, we may surmise, did the Liberal government readily turn to ‘the City’ for collective advice on particular issues of policy. Rather as Herbert Gibbs, the Conservative financier, lamented in 1908, ‘there was a time when if these [commercial and budgetary] questions were raised, the City of London was consulted, but at the present time they were not consulted’.10 Influential City magnates who had had close links with previous Liberal governments also found themselves 6

7 9 10

‘. . . the present juncture offers a wonderful opportunity for the old Liberal Party brought up to date, if it were taken’: R. H. Brand to C. Sheridan Jones, 15 Jan. 1920, Brand Papers, 93/2, Bodleian Library, Oxford. For his war and postwar views, War and National Finance (1921). Brand, a partner in Lazards, consistently rejected tariffs while defending private property and the profit motive, e.g. Brand to A. Chamberlain, 27 Dec. 1923, Brand papers, 67/1; ‘Socialism and the banks’, The Times, 17 Apr. 1924; Why I am not a Socialist (Daily News Ltd, 1923). 8 The Times, 5 Feb. 1912. Kynaston, City of London, I, pp. 337, 371, 373, 375. Alban Gibbs stood down: Kynaston, City of London, II, p. 416. The Times, 3 July 1908.

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marginalised, for example Nathaniel Rothschild, who, as Sir Edward Hamilton had noted in 1902, ‘had become so strong a party man, he will now be “out of it” whenever the other side comes in’.11 On the other hand, the Liberal cabinets did have ready access to individual Liberals occupying prominent positions in the City such as Sir Felix Schuster.12 The City also contributed an important number of Liberal MPs, elected outside London, several of whom were to obtain office and preferment, even if Asquith’s quirky desire to make the chairman of the Midland Bank, Sir Edward Holden, Chancellor of the Exchequer was not to succeed.13 If the Liberals were not beholden to the City for their chancellor, how far was the City able to influence major areas of policy-making before 1914? Traditionally economic policy-making has been considered as dominated by the gold standard, the balanced budget and free trade. Of these, the gold standard had ceased to be an important topic of debate after the bimetallic movement of the 1880s and 1890s. Some Liberals such as Lord Swaythling and the Montagu family continued to be heavily involved in the silver interests of India and this gave rise in 1912–13 to an embarrassing ‘Indian Silver scandal’ exploited by the right-wing and antisemitic press.14 But however rebarbative the issue of Indian currency, it no longer called into question the desirability of the gold standard itself. This meant that the main issue of monetary debate was the size and nature of the banking reserves necessary to back up the gold standard. This was hardly the stuff of popular politics, but it provided a nice issue for the pages of the Bankers’ Magazine and became a growing concern of Britain’s defence planners, alarmed by what they saw as the negligible reserve stock of British gold.15 Even so, the Liberal cabinet remained, for the most part, unimpressed by the City’s argument for larger gold reserves, leaving clearing bankers increasingly alienated from its monetary policy.16 They were also alienated by the absence of any genuine attempt by the Liberals to revive the price of Consols, whose decline since the 1890s had itself substantially reduced the value of banking reserves. The decline in 11 12 13 14 15

16

Hamilton diary, quoted in Ferguson, World’s Banker, p. 946. Hamilton, the Treasury official, sent Asquith a list of City ‘wise men’: Kynaston, City of London, II, p. 414. As suggested in E. Green, ‘Holden’, in D. J. Jeremy (ed.), Dictionary of Business Biography [hereafter DBB], III, p. 295. G. R. Searle, Corruption in British Politics, 1895–1930 (Oxford, 1987), pp. 201–12. This scandal also indirectly affected Schuster, a Liberal candidate for the City in 1906. Sir George Clarke (secretary of Committee on Imperial Defence) to Asquith, 2 May 1906, ‘we could not enter upon a war of which the opening phase would be a general crash in the City’: Clarke papers, Add. ms 50836, British Library; Holden to McKenna, 23 March 1909, on Britain’s lack of a ‘war chest’, Holden papers 150/1, Hong Kong and Shanghai Banking Corporation Group Archives. Kynaston, City of London, II, pp. 387–90ff; Holden diary, 1906–14, passim.

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Consols was attributed in the City to excessive taxation and expenditure reducing the attractiveness of British government securities, encouraging a flight of capital abroad. City financiers such as Rothschild drew a fine distinction between capital ‘attracted’ abroad (under Conservative administrations) and capital ‘driven’ abroad (under the Liberals). The Liberals fended off this charge by pointing out the even greater decline in the price of Consols under the Conservatives and their own successful attempt to reduce the national debt, brought back ‘practically to the level of twenty years ago’ as Asquith proudly boasted.17 But they were also ready in 1912 to consult the City, as to the best way to restore its losses, with Lloyd George promising a Treasury inquiry.18 Interestingly among the Liberals’ own City supporters, Kleinwort compared the City agitation over Consols to the earlier bimetallic agitation as an artificial attempt to alter market prices.19 If reserves and the price of Consols were arcane, technical, and subpolitical issues, budgets remained very much the stuff of Liberal, as of Conservative politics, in this period. Gladstonian finance had arguably been pushed to its furthest extreme under Hicks Beach and Ritchie in the Conservative governments of 1895–1903. In many ways Asquith at the Exchequer between 1905 and 1908 was ready to break with Gladstonian tradition, and to mould, as Martin Daunton has recently argued, a new progressive ‘fiscal constitution’.20 Firstly, in a way that pleased City opinion, he was prepared for greater armaments’ expenditure and his first budget disappointed Liberals expecting immediate retrenchment.21 Secondly, he was prepared to introduce progressive taxation to pay for social reform. Following the introduction of the differentiation of taxation in 1907, in 1908 Asquith graduated the income tax, and looked forward in 1909 to ‘diverting some very substantial portion of that sum [surplus tax revenue] to the financing of necessary social reform’.22 It was this threat of higher taxation of the rich that immediately rankled with the City, leading to the charge of ‘socialistic finance’.23 Even so, important 17 18 19 20 21 22 23

To F. W. Hirst, editor of The Economist, 9 May 1908, Hirst papers, uncatalogued, Bodleian Library. Announced at the City meeting of 3 Feb.; for the text of the speech, see Lloyd George, Liberal Finance (1912), pp. 17–18. 15 Feb. 1912, T 172/92. M. J. Daunton, Trusting Leviathan. The Politics of Taxation in Britain 1799–1914 (Cambridge, 2001), pp. 330–74. Hirst to Asquith, 30 Jan. 1906 (copy), Hirst papers, on the ‘shocking Army estimates’. Asquith to Hirst, 9 May 1908, Hirst papers. On the Liberal government as ‘socialistic’, e.g. W. M. Campbell, Governor-elect of the Bank of England, to Hamilton, 3 Oct. 1907, Hamilton papers, Add. ms 48628. The newly elected Liberal banker Holden was apprehensive of ‘the socialistic tendencies of a great number of Members’: to James Simpson, 23 Jan. 1907, Holden papers 150/4.

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City voices, for example Schuster, had given qualified support to higher direct taxation.24 As is well known, what Asquith started, Lloyd George was to take up with Celtic dash and flamboyance. Here, it is surprising that those who argue that the City exerted a primary influence on policy-making have so often ignored the level of orchestrated City opposition to the People’s Budget, with the full panoply of petitions, a Budget Protest League, and hostile meetings. In the formulation of the budget City concerns were given due weight. In particular the Treasury’s suggestion of doubling the duty on bills of exchange was successfully resisted on the grounds that it endangered London’s financial pre-eminence.25 But the Budget as eventually presented to the House of Commons on 29 April 1909 was immediately deemed by many in the City, with Lord Rothschild leading the attack, to be totally opposed to its interests, endangering the whole basis of British prosperity. The gravamen of this charge lay in two main proposals, the departure from the tradition that any surplus revenue in any one year was devoted to reducing the Sinking Fund, and the disproportionate share of taxation to be borne by the rich. In particular, the increase and graduation of death duties, it was claimed, would deplete the nation’s stock of investible capital, and ultimately diminish wages and employment. Even well-known City Liberals such as Schuster joined the protests, which took the form of an impressively signed letter to Asquith in May and a City meeting attended by over a thousand merchants and traders.26 This was to no avail. Rather, Lloyd George showed himself ready to take up the charge against the gentlemanly capitalists. At the Holborn restaurant in June 1909, he singled out Rothschild (‘we are having too much Lord Rothschild’) in a speech The Times subsequently recalled ‘as practically telling “the bankers and merchants of London” that they were a parcel of impertinent busy bodies who were blocking the path to progress’.27 Lloyd George’s Holborn speech is less well known than his anti-aristocratic (but also anti-City) Limehouse speech a few weeks later, but it confirmed that the gulf between the Liberals and the City was almost as great as that opening between the Liberals and the Lords. Indeed, as Ferguson notes, City opposition to the budget was symbolically linked to that of the peers when Rothschild presented the Budget Protest League’s petition to the House of Lords on 22 November.28 ‘Lloyd George finance’ was both 24 25 26 27 28

Select Committee on Income Tax, Report (Parliamentary Papers 1906 (365) ix. 659), qq. 2851ff. B. K. Murray, The People’s Budget 1909–10 (Oxford, 1980), pp. 157–8. Rothschild to Asquith, 14 May 1909, Asquith papers 12/32, Bodleian Library; The Economist, 15 May 1909; The Times, 15 May 1909. The Times, 24 July; cf. original report, 25 June 1909. Ferguson, World’s Banker, p. 953.

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the symbol and the construction of an alienated City, dispossessed of its accustomed influence over financial policy under the Liberals. Indeed, contrary to the arguments of those who urge the primacy of the City, it might even be suggested that Liberal budgetary policy found much greater enthusiasm in the ranks of industry. For example, the (pro-)Budget League seems to have been largely funded by the industrialist Mond and the Dundee manufacturer Caird, and the League’s representation in the City was certainly far below that of the Budget Protest League.29 But in formulation the budget owed nothing to the City–Bank– Treasury nexus nor to industry, but much to Lloyd George’s desire to circumvent socialism by advancing ‘on broad, sympathetic lines as far as the mass of the people are concerned’.30 As Daunton has persuasively argued, the Edwardian Liberals had upheld the tradition of the disinterestedness of the state, not of its subservience to powerful interest groups.31 By 1909 budgets were inextricably linked to the issue of free trade, for the tariff reformers had widely proclaimed as one of their objectives the provision of a source of government revenue contributed by the foreigner, not the taxpayer. Of course the more sophisticated City tariff reformers did not succumb to this crude argument. But undoubtedly they did consider indirect taxation a more eligible form of government finance than taxing capital, with the belief that this would destroy incentives to invest and would lead to a flight of capital abroad. Even so, the City of London initially had proved hostile to the case for tariff reform. Indeed, Green has suggested that for the tariff reformers ‘“the City” became the enemy within, an internal “other” whose non-productive interests marked it out as different from and opposed to the interests of the national productive industrial base’.32 This polarisation should not be exaggerated; there was growing support for tariffs in the City, and in June 1906 the City Conservatives forced the retirement of Sir Edward Clarke in favour of the more committed Sir Frederick Banbury.33 By 1909, as the fear of socialism grew, the City undoubtedly swung in an anti-Liberal direction, so that as Cain and Hopkins have argued, pace Green, by 1909 there was no differentiation between industry and the City on the tariff issue.34 In particular, the fear of capital driven abroad by Liberal fiscal policies provided an unexpected common ground between City financiers and 29

30 31 33 34

For the League, see Murray, People’s Budget, pp. 188–90, 202–6, and C. Hazlehurst and C. Woodland (eds.), A Liberal Chronicle: Journals and Papers of J. A. Pease, 1908 to 1910 (1994), pp. 121–2, 145–6. For the League in the City, see The Times, 24 July 1909. Lloyd George, Liberal Finance, p. 13. 32 Green, Conservatism, p. 238. Daunton, Leviathan, p. 388. Council and Executive Committee minutes, 3 April, 23 May, 8 June 1906, City of London Conservative Association Archives 487/29, Westminster Library. Cain and Hopkins, British Imperialism, I, pp. 214–21.

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industrially based tariff reformers. Both could now see some merits in tariffs designed to improve the national economy, and City financiers who had for generations helped capital ‘flee’ abroad, were convinced by the People’s Budget of the merits of domestic investment. This, it is suggested, helped cement a previously rather improbable alliance between the City and the tariff reformers.35 Both now sought to promote the interdependence of the interests of the City and industry, however much some of the tariff reform ‘productivist’ ideologues had proclaimed the need to free the direction of policy-making from the seductive charms of the ‘money power’. Ironically, against City opposition, the Liberal government now based its policies on what had been the traditional ‘City’ view, namely that capital exports benefited the nation as a whole and not just its rentier elements. This view underpinned Lloyd George’s budgetary policy, sustained by his economic advisers Paish, a City journalist, and Speyer, a City financier, as well as by Hirst, editor of The Economist.36 On the broader issue of free trade versus tariffs, City of London elections showed that opinion favoured tariff reformers, but elections were weighted by numbers especially, to Liberal dismay, towards plural voters; arguably, the City elite – the Court of the Bank and the leading City financiers – still upheld free trade.37 Even so, they did not rally in any sizeable force to the City of London Free Trade Committee set up in 1909. This naturally received some support from well-known City Liberals, for example Holden, but relied for its dynamism on enthusiasts such as Hirst.38 Yet whatever the strength of its free-trade sentiment, the visible identity of the City remained Conservative and protectionist. Since by 1910 the City was willing to adopt the Chamberlainite line on tariffs, this served further to distance it from the Liberal government, much of whose raison d’ˆetre now became the defence of free trade. Of course the City still contained many free traders, some of them highly articulate, such as Schuster and Huth Jackson. They enjoyed too the support of the leading City weekly, The Economist, whose editor Hirst was tempted but eventually turned down the chance to contest the City in the January 1910 election, fearing the damage which an inevitable Liberal defeat would do 35 36

37 38

On City motives, see also A. Marrison, British Business and Protection 1903–1932 (Oxford, 1996), p. 206. A. Offer, ‘Empire and social reform: British overseas investment and domestic politics, 1908–1914’, Historical Journal 26 (1983), 119–38; F. W. Hirst, British Capital At Home and Abroad (1910); cf. Holden to Lloyd George, 24 Sept. 1909, Holden papers 150/1: ‘it is absolutely imperative for you to do something as the sending of money out of the country for investment is spreading to an alarming extent’. Green, Conservatism, p. 240. Holden diary, 8 Aug. 1909; Hirst papers, 1909 passim.

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to the free-trade cause. In fact no Liberal financier could be found to fight the January 1910 election in the City, a dubious honour left to a Northern industrialist Sir Hugh Bell, who won only 20 per cent of the votes cast.39 But nationally, the Liberal party rallied to free trade and the People’s Budget, issues unpopular in the City but which had helped sustain popular support for the Liberal party. By 1910, the New Liberal Hobson delineated, in his analysis of the January election, two nations, the ‘productivist’ North attached to industry, free trade and Liberalism, and the rentier South, attached to tariffs, City-based incomes, and Conservatism.40 This was an exaggerated picture but one which rightly assessed the growing disjunction between the interests of the City and the policies of the Liberal party. Arguably those policies were now far more open to influence from the Labour party, on whom the Liberals increasingly depended in Parliament, rather than from a City whose challenge had been seen off in 1910.41 If therefore, as many have argued, the nineteenth century saw a Government–City consensus over free trade and budgetary policy, that consensus had been largely shattered by 1910. On the one hand, the City had ostensibly abandoned its traditional commitment to free trade as the organising principle of the international economy, and on the other, the Liberals, under pressure from progressive intellectuals and organised Labour, had abandoned Gladstonian finance. Liberal policy after 1909 continued in a mildly progressive vein as it went on to tackle the issues of national insurance and even land ownership, which smacked to the City mind of the social question which it found so inherently distasteful. But interestingly the Liberal government strove to convince the City that social reform was an alternative to, not the embodiment of, socialism. Lord Lucas, for example, urged the City to realise ‘that after all what we are striving for is to make that base upon which all their interests, all the labours and the industry which they create depends, as sound as it possibly can be made’.42 As a result, it might be suggested that Liberal policy indirectly sustained at least the short-term interests of the City. As recent debates on globalisation have illustrated, the period before 1914 remained for Britain one of unparalleled openness, with extremely high volumes of capital export in relation to GNP.43 Having rejected 39

40 41 43

A. Howe, Free Trade and Liberal England (Oxford, 1997), p. 287. Hirst had been invited to stand by an impressive list of City figures: see H. Bell to Hirst, 20 Nov. 1909; J. L. Mackay to Hirst, 29 Nov.1909, Hirst papers. J. A. Hobson, ‘The general election: a sociological interpretation’, Sociological Review 3 (1910), 113. 42 HC Deb 4, c. 1059, 24 Nov. 1909. Daunton, Leviathan, p. 358. P. Hirst and G. Thompson, Globalisation in Question (Cambridge, 1999); K. O’Rourke and J. Williamson, Globalisation and History (Cambridge, Mass., 1999).

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the tariff-reform case for closure (looking inwardly to the empire), the Liberal government remained committed to the international economy, encouraging the maximum export of capital, goods and services. Lloyd George’s Mansion House speech of 1912 boasted that ‘the supremacy of London as the banking centre of the world is greater today than it has ever been’.44 Paradoxically, against opposition from the City itself, the Liberal party in its defence of the liberal international economic order had sustained what have traditionally been conceived as the City’s central interests. But there is little evidence that in doing so they had responded specifically to pressure from the City. Rather the City of London, like the cotton interest of Lancashire, had uncharacteristically been persuaded to endorse tariff reform for political reasons in which fear of socialism exceeded fear of the economic costs of tariffs.45 On the other hand, the wider political dynamics of Edwardian liberalism dictated policies of progressive taxation and social reform, which had further alienated financiers disdainful of the ‘social question’. While the Edwardian Liberal governments had succeeded in escaping the constraints of City influence on the main elements of policymaking, they did not wholly escape its embrace in other more insidious ways. In particular, as is well known, a series of scandals, above all the Marconi affair, suggested that individual Liberals used office for the purposes of individual fortune-seeking and reward. In addition, the growing sale of honours saw the Liberal party ready to reward its financial supporters with an array of titles. As Geoffrey Searle has argued, this provoked a vigorous attack on ‘Radical Plutocracy’ which proved a serious impediment to the Liberals’ credentials as a party of progress and democracy. The anti-Liberal press was keen to point out that, judged by names such as Speyer, Kleinwort, Swaythling and Strauss, ‘the Party of the rich had been in power since 1906’. This supposed ‘increasing sway of cosmopolitan financiers’, satirically epitomised in ‘Sir Ludwig Saurkraut of Little Britain EC and Sweatem Towers, Kent, one of our Free Trade stalwarts’, left a legacy of distrust which both the Conservative and Labour parties could exploit in a rhetoric which identified the Liberals with the interests of international capital rather than those of domestic industry.46 In this way the Liberal party, having successfully escaped the constraints of the systemic links between government and 44

45 46

Draft speech, with memo by Paish, T 171/20. Paish considered the export of capital as the real alternative to tariff reform: Paish, ‘My Memoirs’ (unpublished), p. 16, Coll. Misc. 621, British Library of Political and Economic Science. Thus the early reluctance of the City to support Chamberlain contrasts markedly with the tariff reformers’ later success in City elections. Searle, Corruption, esp. pp. 133, 134.

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the City, found itself tarnished by its vicarious connections with financial scandal and corruption. This continued during and after the First World War especially in relation to the sale of honours associated with Lloyd George and through the notoriety of the Lloyd George Fund, the existence of which proved such an obstacle to restoring party fortunes. Lloyd George benefited from his own City contacts for the chairman of the Fund was no less than the ‘hugely influential’ City investment banker J. W. Philipps, Lord St Davids, a keen defender of Lloyd George finance in the Lords before 1914.47 Even so, it is perhaps doubtful whether this negative imagery had serious long-term implications for the party, set against the far broader canvas of the changes in the relationship between the Liberals and the City induced by the outbreak of the First World War. The First World War, the City and Liberal political economy, 1914–1931 Ironically, in the light of the strained relations between 1905 and 1914, the outbreak of war was the prelude to a gradual restoration of the old City–Bank–Treasury nexus. The financial crisis of August 1914 led to the creation of a new wartime network of institutional co-operation, with the formation of a number of joint committees, such as the London Exchange Committee and the Capital Issues Committee. The City has also been seen as better placed than industry to preserve its interests on the outbreak of war, although, as we have seen, this should not necessarily be seen as typical of the primacy of ‘City’ over ‘Industry’.48 Government policy in wartime necessarily led to the suspension of the Liberals’ wider objectives permitting this rapprochement, while no government facing war could afford to risk a financial collapse.49 This favoured a conservative approach and as a result, the City found itself treated generously by the government under Lloyd George, although it is generally agreed that this increased the power of government over the City.50 Lloyd George’s handling of the financial aspects of the outbreak of war averted any real crisis, and won the encomia of erstwhile adversaries, for example the Rothschilds.51 47 48 49 50 51

HC Deb 4, c. 958, 24 Nov.1909; DBB, IV, pp. 662–7. J. Peters, ‘The British government and the City–industry divide: the case of the 1914 financial crisis’, Twentieth Century British History 4 (1993), 126–48. T. Seabourne, ‘The summer of 1914’, in F. Capie and G. Wood (eds.), Financial Crises and the World Banking System (1986), pp. 77–116. Kynaston, City of London, III, ch. 2. Rothschilds to Lloyd George, 13 Aug. 1914, Lloyd George papers C/11/2/2, House of Lords Record Office; Ferguson, World’s Banker, pp. 965–6; D. Lloyd George, War Memoirs, 6 vols. (1933–6), I, pp. 115–16.

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In a wider irony, Lloyd George, once the bˆete noire of the City, became virtually its idol. Thus, it was said that Cunliffe, the Governor of the Bank of England, on hearing that Lloyd George was to leave the Treasury, had tears in his eyes. Government–City relations became more fractious under his successor McKenna,52 but Lloyd George’s accession to the premiership in 1916 was welcomed in the City. ‘I think City people like the idea of being governed by Mr Lloyd George,’ wrote Mildmay, a partner in Barings.53 This acceptability owed much to Lloyd George’s rescuing of the City in 1914 but was cemented by the fact that he was now in coalition with the Conservative party, with Bonar Law as Chancellor of the Exchequer. Not surprisingly, as Lloyd George’s stature grew among Conservatives, it fell with the Liberal faithful in the City, for example Holden, who in 1917 declared he had no faith in the premier or the Chancellor: ‘They mean mischief to the Bankers.’54 Holden’s mistrust of the Coalition mirrored wider currents in Liberal opinion, as the war undermined classical economic orthodoxy, disposing of free trade, the gold standard and low government expenditure. This enforced breach with traditional beliefs encouraged a wider rethinking of attitudes in the business community, with many industrialists now much more readily inclined than in the past to endorse tariffs as a means towards the more effective organisation of production.55 However, Liberals – and certainly the minority of Liberals left in the City – were far slower than their Conservative and industrial counterparts to abandon free trade. Whatever the justification for a wartime abandonment of economic orthodoxy, they continued to argue that the only true course for the City and for Liberalism was to return to the Gladstonian past: to retrenchment, free trade and sound finance on which the City’s pre-eminence had been based before 1914. This position had achieved much support in the City during discussions of postwar economic policy, when for example the City by and large tended against support for a government– sponsored trade bank and against trade war and tariffs.56 The Paris Economic Resolutions of 1916, deemed to herald a departure from freetrade orthodoxy, met strong resistance in the City, in part orchestrated by Liberal publicists such as Hirst but supported by influential financiers 52 53 54 55 56

Kynaston, City of London, III, p. 16. But for a contrary tone of gratitude, McKenna to Holden, 9, 12 July 1915, Holden papers 558/04. Quoted in P. Ziegler, The Sixth Great Power. Barings 1762–1929 (1988), p. 326. Holden to Sheppard, 12 Jan. 1917, Holden papers 150/4; DBB, III, p. 295. F. Trentmann, ‘The transformation of fiscal reform’, Historical Journal 39 (1996), 1005–48. Kynaston, City of London, III, p. 40. For Brand’s scepticism as to the applicability of German banking methods, see Brand to Balfour, 13 Aug. 1918, Brand papers file 11.

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such as Addis.57 Typically, after the war, as the Liberals returned to their traditional economic prescriptions, their parliamentary chairman Maclean proclaimed in 1921 that the interests of industry and commerce could not be separated from those of the City: ‘The bankers of London’ were the ‘very linchpin of national financial safety . . . influenced not in the slightest degree by what is known as Party Politics; they are acting solely and absolutely in the interests, not only of those great institutions which are given into their charge, but of the nation itself.’58

Significantly too a powerful City manifesto, mirroring the famous London Merchants’ petition of 1820, called in May 1921 for the abolition of economic controls and restoration of the free exchange of goods.59 If the longer-term desirability of free trade was uncontroversial in theory, far more contentious became an understanding of sound finance in a period of rapid wartime inflation. In some ways it seemed perfectly congruous with Edwardian Liberal views on progressive finance to propose a capital levy.60 This nostrum soon became caught up in the idea of the conscription of wealth and socialism. But in its origins it was supported by liberal economists such as Cannan, Pigou and Edgworth, while Paish believed it justifiable in the absence of voluntary contributions from vast wartime profits.61 It was also endorsed by Keynes and had some City support.62 However, this was a policy from which Liberals increasingly backtracked while enthusiasts, including its main advocate Sydney Arnold, moved to the Labour party.63 The Liberal jettisoning of the capital levy may in part be ascribed to City resistance, for the idea of a levy fitted badly with City psychology.64 But more convincingly it may be ascribed to changing economic conditions – for as inflation gave way to rapid deflation, it seemed less needed and even if interest charges became heavier as prices fell Gladstonians could value this as a budgetary check on social 57

58 59 60 61 62 63 64

R. A. Dayer, Finance and Empire. Sir Charles Addis 1861–1945 (Basingstoke, 1988), pp. 87, 91; Charles Addis, Free Trade and the Colonies (privately printed, 1916); The Economist, 8 July 1916; Hirst to Addis, 13 Feb. 1916, Addis papers PP MS 14/378, School of Oriental and African Studies, London. Report of discussion in Bell, The Recent International Finance Conference at Brussels at the National Liberal Club Political and Economic Circle, 25 Feb. 1921 (1921), pp. 13–14. The Economist, 14 May 1921, pp. 964–5; Addis papers PP MS14/394, 12 May 1921. R. C. Whiting, The Labour Party and Taxation (Cambridge, 2000), pp. 22–34; M. Freeden, Liberalism Divided (Oxford, 1986), pp. 151–4. See report of paper, 12 Feb. 1919, in M. Freeden (ed.), Minutes of the Rainbow Circle, 1894–1924 (Camden, 4th series, 38, 1989), p. 290. T. J. Carlyle Gifford, ‘Inflation of credit and a tax on capital’, The Accountants’ Magazine, June 1918, 229–43. I am grateful to Richard Whiting for this reference. C. A. Cline, Recruits to Labour (New York, 1963), pp. 59–66. R. C. Whiting, ‘The Labour party, capitalism and the national debt, 1918–1924’, in P. J. Waller (ed.), Politics and Social Change in Modern Britain (Brighton, 1987), pp. 140–60.

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spending. In addition, Labour enthusiasm for the levy encouraged Liberal distancing from a policy seemingly based on class envy and sectional interest. In a wider context, as the Conservatives moved towards agreement on tariffs and taxation, the Liberals were forced back to their pasts. In the early 1920s, many City experts with Liberal sympathies, like Addis, continued to work for free trade and a return to gold.65 Lloyd George’s former economic adviser and prewar enthusiast for internationalism, Paish, now toured Europe, as Richard Cobden had done in the 1840s, to preach the virtues of free trade and international liberalism.66 This image of the prewar City of London giving stability to the world economic system continued to provide a benchmark for financiers and policymakers, however remote it often seemed from the realities of the market in the 1920s. This worldview was shared by many in the City who desired to see the liberal international order restored, and believed this was more likely to result from policies of free trade and currency stability than from trade embargoes, tariff wars and imperial preference. But however liberal in its political economy, the City remained firmly Conservative in its politics.67 Hence, the most noisy City demonstrations in favour of pre-1914style economic orthodoxy came from an unrepresentative Liberal minority, and did not necessarily betoken a more general division of opinion between the City and industry.68 For if many City experts tended to such views in theory, they were propagated with particular ideological vigour by a group of retro-Gladstonians with Hirst as high priest, and Lord Gladstone, Liberal scion but also merchant banker, as figurehead.69 However, to a large extent liberal political economy was now detached from its party politics, and became rather the basis for the search for ‘expert’ solutions to economic questions. For leading bankers the key objective was to wrest economies out of the control of volatile political regimes and restore the automatic mechanism that had seemed to work before 1914. In this context, City experts such as Addis and Brand became vital contributors to the series of international economic and financial conferences in the 1920s, however time-consuming and unproductive they often proved.70 65 67

68 69 70

66 Paish, ‘Memoirs’, fos. 117–25. Dayer, Addis, passim. For example, Lord Inchcape abandoned the Liberals in 1926 but remained a free trader until 1931: S. Jones, Trade and Shipping: Lord Inchcape 1852–1932 (Manchester, 1989), p. 194. Boyce, British Capitalism, pp. 116–17; Henry Bell, The “Bankers’ Plea” for Free Trade and its Reception (reprinted from Manchester Guardian, 1927). Howe, Free Trade, p. 282. For example Bell was willing, although Brand demurred, to join a public protest ‘against what appears to be the entire avoidance of practically everything the [Brussels] Conference recommended’: Bell to Brand, 11 May 1921, Brand papers file 37.

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The League of Nations and its subordinate bodies proved institutionally attractive to financiers used to operating on an international plane, and for whom it was vital that decision-making should lift itself above the limits of a corrosive nationalism.71 Thus, the pre-Home Rule Gladstonian, classical scholar and banker Sir Walter Leaf played an enthusiastic part in the 1920s in the International Chamber of Commerce and the League of Nations.72 Similarly, Henry Bell, managing director of Lloyds Bank, took part in the Brussels Financial Conference in 1920 and later campaigned for the League of Nations Union before attempting to revive Liberal fortunes in the City in a 1924 by-election.73 But an abiding faith in the liberal economic order could still unite a range of City voices, with even its Conservative MPs prepared to join Liberals in opposing excessive governmental intervention in trade at home and in support of the reconstruction of European trade.74 However great the theoretical support for an international solution to Britain’s economic problems, this approach never fully satisfied those Liberals who, particularly under the influence of Keynes, looked for more active prescriptions for the revival of domestic industry. This group of Liberals, among them Brand, Layton and McKenna, all intimately associated with the City, now adopted what may be seen as more flexible and innovative policies, with regard to both the City’s international position and its relationship with industry.75 Keynes himself was always ambiguous in his relationship to the City and the most acute in his recognition that the prewar ‘economic Eldorado’ could not be restored.76 He bitterly deplored the City’s conservatism, lamenting that ‘capitalist leaders in the City are incapable of distinguishing novel measures for safeguarding capitalism from what they call Bolshevism’.77 As a Liberal, he supported 71

72 73 74

75 76

77

‘The Central Bankers are still held by the bonds of Nationalism’, Addis lamented to Cannan, 3 Nov. 1931, Cannan papers 1031, British Library of Political and Economic Science. Leaf’s father had known Cobden: Charlotte M. Leaf, Walter Leaf, 1852–1927. Some Chapters of Autobiography with a Memoir (1932). The Times, 12, 28, 29, 30 Jan. 1924; City Press, 26 Jan., 2 and 9 Feb.; Bankers’ Magazine, 1935, p. 480; his share of the vote improved on Hugh Bell’s (no relation) in 1910. Banbury, City MP, 1906–24, and a committed tariff reformer spoke with Runciman and Cox in 1919: Speeches by Rt Hon. Walter Runciman and the Rt Hon. Sir Frederick Banbury (National Producers’ League, 1919); Anderson in 1926 supported a European trade League: Boyce, Capitalism, p. 116. Kynaston, City of London, III, passim. For a good insight into their criticisms of government policy in the 1920s, see N. Davenport, Memoirs of a City Radical (1974). John Maynard Keynes, Economic Consequences of the Peace (1919); Keynes to Lloyd George, 21 June 194[?2], Lloyd George papers G10/15/6: ‘In 1918 everyone was full of an urge to go back to the pleasures of pre-1914. No-one today feels like that about pre-1929.’ Quoted in Kynaston, City of London, III, p. 77.

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progressive policies consistent with prewar ‘New Liberal’ ideas in external and domestic spheres.78 But it proved more difficult to move forward domestically than internationally, for not only were the Liberals divided over the capital levy, they were also split in 1925 over the desirability of the return to the gold standard. This was perhaps supported by the majority but Keynes was a voluble dissenter. Addis, for example, recognised that the return to gold would involve sacrifices but believed them ‘not too high a price to pay for the substantial benefit to the trade of this country and its working classes, and also, although I put it last, for the recovery by the City of London of its former position as the world’s financial centre’.79 Interestingly, a firm supporter of the return such as Brand denied that it would benefit the City at the expense of industry. Rather, he believed the City would be far more adept at profit-making in a regime of floating exchange rates and that it was industry that required the stability the return to gold offered.80 But the return to gold also proved cathartic, for its failure to restore prosperity and stability released many Liberals from their prewar toils, and propelled them towards more innovative policies with regard to employment and industry. Many now recognised that the financing of industry did require new policies, and that the gold standard itself might need revision: leading bankers such as McKenna and Brand therefore moved towards the Keynesian idea of a managed currency.81 However, the Liberals even at their most radical proposed no dramatic structural alterations to the City of London and its part in the economy. Keynes himself always emphasised more the conduct of the City than its functions. In the famous Liberal ‘Yellow Book’, the prewar debate on the export of capital was reprised in the recommendation that overseas loans should be sanctioned by a National Investment Board.82 On the other hand, only minor changes were envisaged to the constitution of the Bank of England, stopping well short of nationalisation.83 This more interventionist approach to the economy led in the election of 1929 to the famous Lloyd George–Keynes programme to ‘conquer’ unemployment. 78 79 80 81

82 83

R. Skidelsky, John Maynard Keynes, 3 vols. (1983–2000), II; Freeden, Liberalism Divided, pp. 154–73. Quoted in Dayer, Addis, p. 166. Brand to Professor J. H. Jones, 22 Oct. 1925, Brand papers file 67(i). McKenna was chairman of the Midland Bank; Layton, editor of The Economist but with City directorships, including the National Mutual Life Insurance Co., of which Keynes was chairman. Britain’s Industrial Future being the Report of the Liberal Industrial Inquiry (1928), pp. 111–15, 409–17. Among City figures Brand had played an important part in the Liberal Industrial Inquiry, his advice toning down Keynes’s more radical ideas: see Brand papers, passim; Skidelsky, Keynes, II, pp. 266–7.

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This helped foster a Liberal revival nationally but in an interesting local variation, the Liberal vote in the City collapsed, to a mere 12 per cent, far below the 30 per cent Bell had secured in 1924.84 Conquering unemployment was not a cry to revive City Liberalism. In 1929, Keynes initially looked to the new Labour government for the more effective reform of capitalism. But as the international and domestic crises of 1929–31 intensified, a variety of Liberal responses emerged, highlighting the diversity of ideas and policies that had characterised the Liberals since the First World War. Already by July 1930, one group of City bankers, including the former Liberal Chancellor McKenna, finally abandoned the prospect of the revival of European trade in favour of imperial preference.85 A second group, less impressive when judged by its City credentials but one that became politically weighty through the support of several leading Liberal politicians, promoted economy and retrenchment as part of an orthodox response to fiscal crisis.86 While some hoped this would provide a means towards greater Liberal influence, for others it rather served to provide common ground with Conservatives, such that Schuster was by October 1930 prepared to advocate National government.87 This campaign by the ‘Friends of Economy’ continued to build up City support, and to promote non-party politics, arguably always a popular motif in a City disdainful of politicians as a breed.88 If this defined the middle ground, there was a nice congruity in the left still being occupied by the Chancellor of whose budget in 1909 the City had been such a vociferous critic. For Lloyd George, although largely isolated politically, now rediscovered his pre-1914 credentials as a leading opponent of the power of the City. He lambasted the Labour cabinet’s succumbing to City pressure in abandoning its employment policies, and the ideas he himself had put forward in 1929–30. ‘The City’, he proclaimed in February 1931, devoted ‘the whole of their tremendous influence for the purpose of restricting the raising of money for national 84

85 86

87 88

The Liberal candidate was Thomas Owen Jacobsen, Liberal MP for Hyde, 1916–18, and a leading City stationer, president of the Federation of Envelope Makers and Manufacturing Stationers, 1925–7 – a nice reminder of the City’s own industrial interests: City Press, 17, 24 May 1929. Boyce, Capitalism, p. 253; Marrison, British Business, p. 399. P. Williamson, National Crisis and National Government. British Politics, the Economy and Empire, 1926–1932 (Cambridge, 1992), esp. pp. 194–5, 205–6; Marrison, British Business, pp. 401–6. The Liberal ‘economy’ expert Maclean recorded his resistance to ‘City magnates’ urging support for an emergency tariff: to his wife, 18 Aug. 1931, Maclean papers dep. c. 468 f.116, Bodleian Library. For Schuster, see DNB; Marrison, British Business, p. 400; Williamson, National Government, pp. 150, 151. The Friends of Economy, 1st Annual Report, 1 Nov. 1931; Addis diary, 27 Jan. 1931, Addis papers 14/49.

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development.’89 His critique of City power interestingly prefigures the charge of a ‘bankers’ ramp’ which became popular among Labour politicians in the wake of the August crisis of 1931.90 In February, Lloyd George’s attacks served to win him the support of the Labour left, rather than to act as a rallying cry for the Liberal party, although as late as October 1931 Keynes regarded Lloyd George as the natural leader of a new Progressive alliance.91 But the main effect of the August crisis, from the Liberal perspective, was to end the prospect of any such alliance. For, as Williamson has shown, the crisis demonstrated the Liberal party’s reuniting, albeit only temporarily, around the older prescriptions of economy and retrenchment, with its ‘ultimate allegiance to property and the taxpayer, its tenuous commitment to “radical economics” in 1927–29 and to “progressive politics” in 1930–1’.92 However self-congratulatory and fruitless Lloyd George’s stance, it provided an apt reminder that the Edwardian Liberals had within the context of an earlier progressive alliance successfully disregarded the views of the City, with a selfconfidence quite beyond the Labour party in 1931. The ‘bankers’ ramp’ of 1931 has long been exposed as mythical; but, as this chapter has sought to demonstrate, it is equally mythical to believe that the Liberals before 1914 had been enmeshed in the gentlemanly shackles of City power. 89 90 91 92

HC Deb 248, c. 731, 12 Feb. 1931. P. Williamson, ‘A “bankers’ ramp”? Financiers and the British political crisis of August 1931’, English Historical Review 99 (1984), 770–806. Keynes to Lloyd George, 1 Oct. 1931, Lloyd George papers G10/15/6; cf. Skidelsky, Keynes, II, p. 344. Williamson, National Crisis, esp. p. 352.

8

The Conservatives and the City E. H. H. Green

In terms of British political history the twentieth century has been justifiably termed ‘the Conservative Century’;1 it would be equally justifiable to describe British economic history in the twentieth century as ‘the City’s Century’. Of course the term that has been most closely associated with the economic history of twentieth-century Britain is decline, reflected in the titles of many of the most celebrated and widely used studies of British economic development in the past hundred years.2 But the service sector, and in particular banking and financial services, have until recently stood out as apparently immune to the ‘British disease’. That the service sector, particularly the City, flourished has raised the question of whether this was due simply to market strengths or to the City’s interests being actively fostered by government economic strategy and policy over the long term. Inasmuch as governments throughout the century were overwhelmingly Conservative this in turn raises the question of whether the politics of the Conservative century and the economics of the century of the City were related. At first glance the City and the Conservative party do appear to have enjoyed close relations. In the last quarter of the nineteenth century the Conservatives had replaced the Liberals as the pre-eminent political representatives of City opinion, and in the last two decades of the twentieth century ‘Big Bang’ players on London’s international dealing, commodity and capital markets were very much associated with Thatcher’s Conservative party. But, as with even the closest relationship, matters between the Conservative party and the City did not always run smoothly: there were tensions and conflicts which at times rendered their apparently productive partnership tempestuous. 1 2

A. Seldon and S. Ball (eds.), Conservative Century (Oxford, 1994). For example, A. Gamble, Britain in Decline (1983) went into four editions. There are also B. Elbaum and W. Lazonick (eds.), The Decline of the British Economy (Oxford, 1986); D. Coates, The Question of UK Decline (1994); M. Wiener, English Culture and the Decline of the Industrial Spirit (Cambridge, 1980); W. D. Rubinstein, Capitalism, Culture and Decline in Britain (1993); K. Robbins and B. Collins (eds.), English Culture and Economic Decline (1990); M. Dintenfass, The Decline of Industrial Britain (1992); P. Clarke and C. Trebilcock (eds.), Understanding Decline (Cambridge, 2000).

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The Edwardian tariff debate: the rhetoric of producers versus rentiers The decade before the First World War witnessed one of the most serious policy disagreements between the City and the Conservatives, caused by the Conservative party’s commitment to tariff reform. This was explicitly presented by its adherents as a producers’ policy, on the basis that production, both agricultural and industrial, was the essence of a healthy national economy. In the late nineteenth century British agriculture, especially the arable sector, had been unable to compete with imported foreign foodstuffs and suffered serious difficulties, for which the most effective remedy was deemed to be a return to protection. However, tariff reformers saw similar problems beginning to affect British industry. Hence they advocated a combination of preferential imperial tariffs and protective duties to secure both the growing imperial markets and the British domestic market for British manufacturers.3 In contrast, tariff reformers saw the service sector as flourishing. According to the tariff argument, Britain’s position as an international financial and banking sector had waxed as Britain’s agriculture and industry had waned, with both developments resulting from free trade. The argument here was straightforward. The interests of the financial sector were cosmopolitan and not national: capital flowed to where it would gain returns, insurance flourished no matter whose trade was insured, and bills of exchange could be profitably discounted no matter who presented them. The City’s interests were seen to lie in a net expansion of world trade – anyone’s trade – and in a continuation of Britain’s role as the world’s mart. Most tariff reformers used a rhetoric that was openly contemptuous of the financial sector. Joseph Chamberlain himself stated at Birmingham in May 1904 that ‘invisible exports are invisible as far as the working man is concerned. What does he see of them?’,4 while another Conservative tariff reformer, Sir Gilbert Parker, argued that ‘for invisible exports there were only invisible commercial travellers’.5 The tariff campaign argued that ‘non-producers’ were largely parasitic upon ‘producers’. The free-trade conception of rational economic action, namely to buy in the cheapest market and sell in the dearest, was thought to have encouraged a short-term, ‘consumerist’ approach to economics. In particular, the great failure of free trade was that Britain was no longer paying for goods with goods, but covering its foreign trade 3 4 5

For an extended discussion see E. H. H. Green, The Crisis of Conservatism (1995). Chamberlain at Birmingham, 22 May 1904, in W. E. Dowding, The Tariff Reform Mirage (1912), p. 236. Ibid., Sir Gilbert Parker.

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imbalance with the income from capital assets, or in other words ‘living off its capital’. But for the tariff reformers Britain’s stock of capital was in itself ‘the expression and the result of our ascendancy in manufactures in the past’ which had been ‘the principal base from which the supremacy of Great Britain as the chief reservoir of capital in the world has been built up’.6 Given these assumptions, the tariff-reform case was that ‘with the gradual diminution of the industrial power of the United Kingdom England will cease to be the great financial and commercial centre of the world’.7 Productive enterprise was deemed essential to the national economy, including its cosmopolitan sector. The tariff-reform message was clear. The British economy consisted of a productive sector, agriculture and industry, which would be best served by the national economic logic of tariffs, and a non-productive sector, financial services, served by the cosmopolitan economics of free trade. This message reflected the tariff campaigners’ experience of dealing with the service sector. Throughout the campaign, relations between the tariff camp and the City, especially the banking sector, were always strained and often hostile. Only eight bankers were listed as co-operating with the enquiries of the Tariff Commission, the investigative body established by Chamberlain to study the condition of Britain’s productive sector and design a ‘scientific’ tariff. Of these eight, three – Sir Vincent Caillard, Vicary Gibbs and A. L. Jones – were members of the Commission, and lack of City co-operation made life difficult for the Commission. Its secretary, the economist W. A. S. Hewins, found it almost impossible to gather data or detailed observations about Britain’s role as a financial centre. At a meeting of the Commission in May 1906 Hewins noted that ‘the position of the bankers, I gather, is that any change in our fiscal system would be disastrous to London as a banking centre’.8 This was certainly the view expressed by Sir Felix Schuster in his address to the Institute of Bankers in December 1903. Later assertions at Commission meetings that ‘almost every banker is opposed to tariff reform’9 were challenged on the basis that ‘bankers whose business is largely on the Exchange are against it . . . [whilst] those who are doing general business and who would benefit by the increased prosperity of the country more or less favour it’,10 but in 6 7 8 9 10

B. Kidd, ‘Colonial Preference’, 5th article, section I of printed manuscript, Benjamin Kidd papers, Cambridge University Library MS 8069. W. A. S. Hewins memo. of conversations with A. J. Balfour, 1, 3, 4 Nov. 1907, Balfour papers, British Library Add. mss 49779/117–28. Tariff Commission, Minutes of Proceedings, 17 May 1906, Tariff Commission papers (TC) 2/1/12, British Library of Political and Economic Science. Tariff Commission, Minutes of Proceedings, statement by C. Phillips, 31 May 1906, TC 2/1/13. Ibid., A. Mosely statement.

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fact not even the domestic clearing banks provided support for the tariff cause. The experience of the tariff campaign bore out the findings of a survey of City opinion on the tariff question carried out by the journalist H. A. Gwynne, on Chamberlain’s behalf, in late 1903. Gwynne discovered a range of opinion, pointing out that on the Stock Exchange and in the insurance world there was support for tariff reform, but also noting that ‘in banking circles . . . opposition shows itself very strongly’.11 An interesting feature of the tariff campaign, however, was that the position of the City was conflated with that of the banks. By concentrating attention on the banks, the tariff campaign directed criticism at the City elite, a sector which was socially, structurally and geographically separated from industry. In this respect the tariff campaign both reflected and helped create a sense of social and regional stratification in the Conservative party between, in particular, provincial industrial interests and metropolitan ‘gentlemanly capitalism’. Socio-economic divisions were clearly crucial to the construction of different ‘imagined communities’ within the Conservative party, but so too were ideological divisions over the optimum path for British economic development. Frequently explicitly, always implicitly, the tariff debate saw many Conservatives question whether it was either beneficial or necessary for Britain to ‘become more and more a creditor country – a banking country rather than an industrial country’,12 and many concluded that it was neither. The outbreak of the war saw the tariff debate subside, but the question of whether the service sector, and in particular the banks, made a positive contribution to the health of the British economy re-emerged in a different but equally potent form after 1918. The interwar years: a deepening concern? The interwar years saw hard times for important sections of British industry, most notably the staples of coal, iron and steel, shipbuilding and textiles. The difficulties facing the Victorian staples became very apparent following the downturn of the autumn of 1921; the ‘intractable million’ of unemployed workers that was a particular feature of the British economy in the 1920s was concentrated largely in these industries. Contemporary analyses of the problems, like those of later economic historians, focused on a number of micro- and macroeconomic factors. At the micro 11 12

H. A. Gwynne memo. on arguments against Mr Chamberlain’s policy, n.d. (Dec.?) 1903, ms Gwynne 27, Bodleian Library, Oxford. Ashley to Balfour, 4 July 1904, Balfour papers Add. mss 49870/38–45.

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level the organisation of the staple industries was seen as an important structural weakness. At the macro level the labour market was regarded as insufficiently flexible, largely as a result of the ‘sticky wage’ problem resulting from the intransigence of trade unions. The desire of industrialists, particularly in the export sector, for wage reductions was highlighted after the return to the gold standard at prewar parity in April 1925, for the 10 per cent overvaluation of sterling led industrialists to seek ‘compensatory’ wage-cost adjustments. The historically best-known diagnosis of and prescription for Britain’s economic problems was that advocated most forcefully, although by no means solely, by J. M. Keynes, who called for extensive public works to boost employment and aggregate effective demand. The Conservative party engaged with all of the analyses outlined above, and as with the pre-1914 tariff debate the question of the City’s role was frequently raised. With regard to policy, Conservative governments of the 1920s did not always see eye to eye with City priorities. For example in 1923 the Baldwin administration’s advocacy of tariffs ran counter to the City’s long-standing commitment to free trade, and although the 1924–9 government eschewed tariffs some Cabinet members and many of the party rank and file remained tariff enthusiasts. The return to gold pleased the City, but there was some unease in industrial circles where many regarded it as a fait accompli rather than an unmixed blessing.13 Indeed there was concern that the City’s close relationship with and influence over the government’s economic policy machinery led to a prioritisation of pro-City policies which were at best indifferent to industry’s interests. This concern was perhaps understandable, for in the discussions which led up to the return to the gold standard several of the Treasury hierarchy, notably Bradbury, Niemeyer and Hawtrey, expressed the view that a large measure of industrial decline was inevitable, that the future lay with the service sector and that to ‘reestablish the business of London as a world clearing centre’ it was necessary to create conditions in which ‘a sufficient number of foreign currencies . . . [were] fixed in value in relation to sterling’, that is to say it was essential to restore the gold standard.14 For those who had opposed the return to gold and who denounced its economic impact, notably Keynes, there was no doubt that it was a disastrous policy for industry,15 but the main target of Keynes’s criticism, 13 14 15

Some prominent City figures, notably McKenna, Chairman of the Midland Bank, expressed similar concern. See Hawtrey notes on ‘Sterling and gold’, n.d. July 1924, Hawtrey papers 1/26, Churchill College, Cambridge. For the classic statement of Keynes’s position see his The Economic Consequences of Mr Churchill (1925).

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Churchill – the Chancellor of the Exchequer who presided over the return to gold – himself stated in 1927 that he would rather see industry more prosperous and finance less proud, and later declared that the re-introduction of the gold standard had been the greatest mistake of his career.16 The concern that deference to City interests and judgement had been misplaced was not confined to committed critics of the City but was part of Conservative intraparty debate on the condition of the economy.17 But if the issue of the gold standard revealed some disquiet about the City’s influence over macroeconomic policy decisions, there was arguably more concern in Conservative circles over the City’s microeconomic failings. In their book Industry and the State, published in 1927, Robert Boothby, Harold Macmillan, John Loder and Oliver Stanley voiced the concern that ‘our banking system . . . has been insufficiently elastic to play a substantial part in the vital process of industrial reorganisation’.18 This criticism was developed over the late 1920s and the 1930s. The Bank of England appeared to respond positively to these concerns, and established the Bankers’ Industrial Development Corporation (BIDC) as a means of increasing co-operation between the financial sector and industry in the process of industrial amalgamation and rationalisation. The creation of BIDC was regarded by many Conservatives as a step in the right direction, not least because it promised to forestall radical Labour initiatives, but the adequacy and effectiveness of its operations were questioned. To some extent this was hardly surprising. Norman had not created BIDC out of a new-found enthusiasm for investment banking, but because, firstly, he wished to pre-empt the possibility of state intervention, which he defined in whatever form as ‘socialist’, and, secondly, to stabilise the banking system. The Bank’s involvement in the formation of the Lancashire Cotton Corporation (LCC) from 1929 exemplified Norman’s system of priorities, insofar as he informed the Bank’s Court that action was necessary in order to rescue local banks that had over-extended their cotton accounts and faced possible collapse, to forestall state action and, only finally, to rationalise the industry. The fact was that the LCC proved to be an extremely ‘irrational’ rationalisation from an industrial point of view, in that it was a horizontal rather than vertical integration,19 and was made up of firms that were most subject to creditor pressure, many of which were close to bankruptcy and, therefore, least profitable and 16 17

18 19

P. Grigg, Prejudice and Judgement (1948), p. 180. For a discussion of the full range of Conservative positions see P. Williamson, National Crisis and National Government. British Politics, the Economy and Empire 1926–1932 (Cambridge, 1992). R. Boothby, H. Macmillan, J. Loder and O. Stanley, Industry and the State (1927), p. 64. It amalgamated ninety-six firms from the spinning sector, but included no weaving firms.

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efficient.20 The BIDC’s involvement with amalgamations in the iron and steel sector revealed similar problems of coordinating banking interests with those of industry.21 It was concern over the shortcomings of the BIDC and the City’s, especially Norman’s, activities on the industrial rationalisation front that prompted Sir Arthur Steel-Maitland, who had been Minister of Labour in Baldwin’s second government, to propose an alternative approach to the question. In his book The Trade Crisis and the Way Out, published in 1931,22 Steel-Maitland warned against the way the term rationalisation was being ‘often too glibly used’, and pointed out that it was not a synonym for amalgamation.23 He felt that the state could assist industries to reorganise and re-equip, as it had done in Belgium and France,24 but he also argued that it should play an arm’s-length, facilitating role, and that financial institutions should take the lead in coordinating industrial reorganisation. However, Steel-Maitland was not convinced that the banks would spontaneously develop this strategy in Britain, and so in mid December 1930 he proposed that government should raise a large, low-interest loan to fund a major programme of rationalisations under the management of a committee of businessmen. This scheme drew a lukewarm response from the City hierarchy. Peacock, a leading Bank of England director, told Steel-Maitland that both he and Norman were of the view that ‘the Government should be kept out of intervention in the financing of industry’, and that his scheme would be acceptable only as an alternative to schemes which threatened greater intervention.25 SteelMaitland’s response was to seek to persuade Peacock.26 that the Bank should be more active on the industrial front. Earlier in 1930 Norman had of course set up the BIDC, and by late 1930 it was already deeply involved with the iron and steel and cotton industries. Steel-Maitland told Peacock that he had ‘great admiration for the Governor, both for his judgement and his courage in breaking through tradition, by taking a lead in industry’, but he felt that Norman was still somewhat tentative in pursuing this new strategy and that there was a sense of too little too late. He recalled that: 20

21 22 23 25 26

Some of the firms brought into the LCC had already ceased operations. For a full discussion of the LCC’s creation and the strategy of Norman and the banks, see J. H. Bamberg, ‘The government, the banks and the Lancashire cotton industry’ (PhD thesis, Cambridge, 1984). See S. Tolliday, Business, Banking and Politics (Cambridge, Mass., 1986). The book was based on a series of articles he had published in The Observer in November 1930. 24 Ibid., p. 110. Steel-Maitland, Trade Crisis, p. 37. Peacock to Steel-Maitland, 18 Dec. 1930, Steel-Maitland papers GD 193/119/1/8, National Archives of Scotland. He was also Steel-Maitland’s friend and frequent golf partner.

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In 1918 before he [Norman] was Governor and I was at the Board of Trade, he came . . . to dine with me and two or three of my head officials, so that we might question him. I asked him then whether it would not be possible for the Banks to do with Industry what he is doing now. I was not talking wildly or without thought. He was amused, quizzical, determinedly negative, said that British banks weren’t built that way. (It was the bankers not the banks who were not adaptable.) Now he is taking the lead in doing it. Had the Banks taken the business in hand earlier, the cotton industry would not be in such a mess to-day, nor some of the other industries.27

Steel-Maitland’s concern, even scepticism, about Norman’s commitment to industrial reorganisation was, in effect, what had prompted him to advocate his own scheme, for he told Peacock that ‘if the Bank and BIDC could multiply itself tenfold and deal with other industries as it is doing with cotton . . . [my] proposal would not be needed’, but he added that it was clear that the Bank could not do this, that ‘others won’t’, and that a government-sponsored programme was necessary.28 One of Steel-Maitland’s main aims was the same as that of Norman and the Conservative party generally – to keep the state as far away as possible from the control and management of industry. For a minority of Conservatives, any state intervention in the economy was ‘socialism’, but Steel-Maitland denied that his scheme carried any such danger. He told Peacock that he ‘should hate the Government to interfere in the management of industry as much as you or the Governor or anyone’, and claimed that his proposal would ensure that ‘we can get the remodelling done now without the Government retaining any permanent control’.29 Indeed, he argued that far from being ‘socialist’, his scheme was a way of thwarting socialism. But in spite of his efforts to assuage concern Norman described it as ‘really a means of reaching purgatory instead of hell’.30 Although Steel-Maitland’s proposals came to nought his criticisms of the failings of the banking sector provide an interesting window on to an important sub-theme of Conservative political economy in the interwar period. Moreover, it was a sub-theme that was to be developed in the 1930s. The Conservative leadership was largely content with the banking sector’s role, and was deferential to the Bank of England’s claims to expertise, but the party’s grass roots demonstrated no small degree of scepticism and unease. The Conservative’s newly established College at 27 28

29 30

Steel-Maitland to Peacock, 26 Dec. 1930, GD 193/119/1/5. Steel-Maitland to Peacock, 26 Dec. 1930, GD 193/119/1/6. That Steel-Maitland sent two letters on the subject on the same day indicates his determination to pursue the issue. Steel-Maitland to Peacock, 26 Dec. 1930, GD 193/119/1/5. Norman to Steel-Maitland, 18 Dec. 1930, GD 193/119/1/23.

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Ashridge held numerous conferences on the role of the banks over the course of the decade, and one bank manager who attended such a conference noted that ‘at tea . . . it was passed from mouth to mouth that there were (in bated breath) a number of bankers present, and there was a sort of furtive scrutiny of one’s neighbours which searched for signs of horns or tail!’31 With Britain’s departure from the gold standard in 1931 the City’s international role was reduced, and the terms of its relationship with the domestic economy came in for fresh scrutiny. In the 1930s the Treasury and the Bank of England adopted a low-interest-rate regime, but the financial sector still faced criticisms from some Conservative quarters. Two in particular are worth noting. The first is Harold Macmillan’s The Middle Way of 1938; the second is J. W. Hills’s Managed Money, published in 1937. As noted earlier, Macmillan had expressed concern at the financial sector’s lack of co-operation with industry in 1927. In the 1930s his own interest in this problem developed considerably. In his 1932 pamphlet The Next Step he advocated the creation of an investment and development board made up of a membership drawn from government, industry and the financial sector. This board was to ‘direct investment into the correct channels as advocated by the Macmillan Committee’s Report . . . [and] the Federation of British Industry’, which meant directing ‘new money into capital modernisation’ and if ‘unfavourable market conditions discouraged borrowers’, engaging in investment activity itself.32 Keynes told Macmillan that, although he liked the pamphlet ‘very much’, he found its ‘proposals for developing the investment functions of the State . . . not nearly bold enough’. In Keynes’s view the main problem was ‘the sort of middle position’ Macmillan occupied, which meant that he overestimated the level of private investment that could be encouraged in a depression, and underestimated the extent of direct investment necessary to reflate the economy and provide a stimulus to private investors.33 Macmillan accepted much of Keynes’s criticism, and argued that political considerations had led him to moderate his position. ‘I am still trying’, he explained, ‘the perhaps hopeless task of [influencing] the Government . . . [and] have to conceal a certain amount and to preserve certain political decencies!’34 31

32 33 34

E. J. Garmeson, ‘As others see us: a visit to the Bonar Law College at Ashridge’, Ashridge Journal, Sept. 1935, p. 27, quoted in C. Berthez`ene, ‘Les Conservateurs Britanniques dans la bataille des id´ees. Le Ashridge Bonar Law Memorial College: des “Conservateurs Fabiens” a` la conquˆete des esprits, 1929–54’ (unpublished PhD thesis, University of Paris III, La Sorbonne Nouvelle, 2003). H. Macmillan, The Next Step (1932), pp. 31–2. Keynes to Macmillan, 6 June 1932, Keynes papers, microfilm reel 61. Ibid., Macmillan to Keynes, 9 June 1932.

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Political caution may have influenced Macmillan, but whether this explains his stance completely is open to question. That Keynes pointed to Macmillan’s ‘middle position’ as a problem is important here, insofar as Macmillan finding a ‘middle way’ was the whole point. Certainly his position changed little through the 1930s. He sat on the committee that drafted The Next Five Years, which was clear that ‘the existing capital market in Great Britain leaves much to be desired’.35 The Next Five Years group did not advocate state ownership and control of either the Bank of England or merchant or joint-stock banks, but it did call for the creation of a National Investment Board (NIB) to regulate and encourage the capital market. Regulation was to include not only powers against fraud but also to discourage share issues ‘of a kind which it considered to be already overdone’ and to ‘encourage issues in directions where further investment seemed to be desirable’.36 In addition the NIB was to monitor the volume of savings available for investment and to ‘endeavour to see’ that they were ‘sensibly distributed’.37 Encouragement meant that the NIB had ‘the duty of creating an active and adequate capital market and watching over its development’. This was to include the creation of a ‘domestic issuing house’, which would perform the function for home investment that the merchant banks performed for overseas lending, and thereby rectify the institutional bias against domestic lending that characterised the existing British capital market.38 However, much as it wished the new institution and existing banks and finance houses to invest in the reorganisation of old and the creation of new enterprises, The Next Five Years stressed that ‘none of these functions can properly be performed by the State’.39 The state was to act as a ‘midwife’ not a ‘mother’, on the assumption that having created the requisite institutional framework investors would want to lend and industrialists borrow. The state would rectify ‘defects of the capital market’ which had rendered it ‘by far the weakest section of the nation’s financial machinery’,40 but was not to replace it. Whether or not political niceties separated Macmillan and Keynes on the issue of direct state investment, they were certainly not divided when it came to criticism of the British capital market and banking system. In his General Theory Keynes famously looked forward to the ‘euthanasia of the rentier’,41 on the grounds that investment was far too important an activity to be left in the hands of a casino-like financial market. Macmillan shared this disdain. In The Middle Way he pointedly remarked 35 38 41

36 Ibid., p. 120. 37 Ibid., pp. 119–20. The Next Five Years (1935), p. 116. 39 Ibid., p. 122. 40 Ibid., p. 123. Ibid., pp. 120–1. J. M. Keynes, The General Theory of Employment, Interest and Money (1936; 1973 edn), p. 376.

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that ‘finance is a service. Its function is not, or ought not to be, to dictate or determine the condition under which industry and commerce have to be conducted’.42 The state, Macmillan contended, needed to exercise a greater influence over the capital market, which was ‘dominated by irrational and anti-social speculation in the fluctuating volume of securities’. Credit and investment, he argued, were needed by ‘productive industry’, but they tended to be used for ‘speculative purchase of existing securities’, and, as a consequence, were ‘performing no useful social function’.43 Like Keynes, Macmillan thought that British financial institutions, and the City in particular, needed to change their outlook and their practices and that the state had an important part to play in helping to bring this about. In order to create ‘a more rational financial mechanism’ it was necessary, Macmillan argued, to have five main elements in place. First the accumulation of ‘idle balances’ in banks was to be prevented. Second, the volume of credit and the quantity of money was to be regulated in accordance with the needs of production rather than being ‘dominated by irrational and anti-social speculation’. Third, the price of goods was to be determined by the cost of production rather than manipulation of the value of the medium of exchange. Fourth, money was to be a measure of value and a medium of exchange and not a store of idle value. Finally, the central bank was to be made a public institution and be in a position to ‘influnce the direction of investment’ as well as its volume.44 Some of Macmillan’s themes were also explored in J. W. Hills’s undeservedly neglected work Managed Money. Hills criticised the return to gold and its attendant high-interest rate regime as having caused great damage to British agriculture and industry, and noted that although there had been much lamenting when the standard had been abandoned ‘when we woke up next morning we found that, like Christian, we had cast off an exceeding great burden’.45 Hills acknowledged that ensuring the stability of the currency and exchange rate had become more problematic with the removal of the standard’s ‘automatic’ mechanism, but felt that a combination of international negotiations, such as that of September 1936 between Britain, France and the United States, and careful management of short-term interest rates and judicious budgetary policy were the best route to avoiding wild fluctuations.46 But Hills had broader concerns than currency stability, and indeed argued that one of the main 42 43 45

H. Macmillan, The Middle Way (1938, 1978 edn), p. 194. 44 Ibid., pp. 256–8. Ibid., pp. 257–8. 46 Ibid., pp. 21–95. J. W. Hills, Managed Money (1937), p. 100.

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failings of the Bank of England was that it had been and largely remained fixated on the exchange.47 The key goal of managed money, in Hills’s view, was to ensure domestic economic stability, and he declared ‘what we have to look for is an authority which will be the judge of the money which trade, industry, and commerce require’, and which would increase or decrease monetary circulation with the objective of preventing ‘a contraction of prices or extreme expansion’.48 This, he argued, could be achieved in a number of ways. If an expansion was required the government could either borrow money for public works or lower taxes, and he noted that ‘Mr Keynes has said that it lies within the power of the Chancellor to get this money without producing conditions of inflation.’49 Hills rejected Harrod’s scheme for a ‘reflation fund’ on the basis that it would be too open to political misuse, but he accepted that deficit finance was an acceptable option, and suggested that taxes should be raised in times of prosperity and lowered in times of scarcity in combination with suspension of the sinking fund and loan-financed public works.50 In addition, lower interest rates and active buying and selling of securities by the Bank were also an option for the management of money.51 Taken together these steps would, Hills contended, provide the basis for economic management that would avoid swings between ‘boom one day, slump the next’.52 Hills felt that related institutional and psychological changes were required to bring his scheme to fruition. The new institutional mechanism he proposed was the establishment of a Currency Authority (CA), which would examine the state of unemployment, costs, prices, profits and trade and would calculate how much currency was needed in circulation to maintain prosperity and stability.53 The CA was to have a membership drawn from four areas, the Treasury, the Bank of England, the business community and independent experts. Hills specifically rejected the Bank as an adequate CA on the basis that it had shown that it possessed only a narrow, financial expertise, whereas the CA needed to know all business interests and thus, Hills argued, ‘its controllers must be drawn from a wider area’.54 This he deemed essential in order to meet the ‘common complaint of manufacturers that financial decisions of the Chancellor of the Exchequer are taken solely on the advice of the Bank of England, or, if any further authority is sought, of the City’,55 a complaint which Hills clearly shared. He also stressed that the CA should not be a department of State but an independent authority. The government was only 47 51 54

48 Ibid., p. 107. Ibid., p. 100. 52 Ibid., p. 12. Ibid., p. 109. 55 Ibid. Ibid., pp. 123–4.

49 Ibid., p. 53 Ibid., pp.

50 Ibid., pp. 116–17. 98. 107, 134.

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to assist the CA with information, but otherwise it was not to interfere. Government, with Parliament as the final arbiter, was to take decisions on taxation and spending; the CA’s role was to provide expert advice for the long term, and it was thus not to be ‘political’.56 Parliament would thus necessarily retain a veto over any CA advice, but the weight that the CA’s political independence was to carry was to render this unlikely.57 Hills also viewed the CA’s ‘non-political’ role as crucial in helping to bring about a shift in public economic assumptions and behaviour. He noted that ‘the difficulty of this [counter-cyclical] policy is that it runs counter to ordinary opinion’. An individual thought that bad times required belttightening and ‘he expects the government to practise the same austerity as is forced upon himself ’.58 ‘This mentality’, Hills argued, was ‘hard to combat’,59 and Bank and City opinion tended to reinforce rather than modify prevailing orthodoxy. The CA, however, because of its independent authority, could assist the government in educating the banks and people at large to invest rather than save during slumps, and also help to make clear that increased public expenditure, even if it meant a budget deficit, was acceptable.60 The work of Macmillan and Hills provides interesting insights into the development of a Conservative critique of the City in its most articulate form in the 1930s. Obviously not all Conservatives shared their opinions, and very few could have matched the sophistication of their ideas, but in many respects this should not detract from their significance. Conservative concern over the City’s contribution to the economic difficulties of the 1920s and its failure to provide more effective assistance during the 1929–30 slump and its aftermath was both pervasive and often very deep. The critical themes that Macmillan, Hills and Steel-Maitland raised also surfaced in Conservative Research Department (CRD) and Conservative Central Office (CCO) Committee discussions on the condition of industry in the 1930s;61 party conference also saw similar views expressed. That Macmillan’s position shifted over the 1930s to the point where he advocated public ownership of the Bank of England is an interesting development, given his concern, expressed in his correspondence with Keynes, as far as possible to accommodate or not drastically offend the political sensibilities of his party. Indeed it is perhaps the case that the percolation of disquiet through the party about the financial sector’s activities, and especially the outlook of the City elite, contributed to the Conservative 56 59 61

57 Ibid., p. 126. 58 Ibid., p. 113. Ibid., pp. 125–36. 60 Ibid., pp. 113–16. Ibid. See in particular the discussions of the Central Office Committee on ‘Future relations between the state and industry’ in 1934, CPA, CRD 1/65/2.

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party’s lack of resistance to the nationalisation of the Bank of England by the Attlee government. The postwar decades: a brave new world but with old concerns The Second World War and postwar reconstruction had a major impact on the City. The war saw the liquidation of much of Britain’s portfolio of overseas investments, exchange controls were introduced and retained in peacetime, sterling’s international convertibility was suspended and not fully restored (apart from the very brief episode in 1947) until the late 1950s. The Bank of England was nationalised in 1946, and government economic policy after 1947 was focused on active fiscal and monetary initiatives as successive governments employed ‘Keynesian’ techniques of demand management. The 1950s saw the City seek, with some success, to re-establish its position as a world financial centre, with active encouragement from the government which looked to the City’s invisible earnings as an important weapon in the ongoing struggle over the balance of payments. Moreover, sterling, even when not fully convertible, was still an important international reserve currency, not least as a consequence of the sterling balances held by many Commonwealth countries and the continued importance of the Sterling Area as a discrete currency region. But although the steady flow of criticism of the interwar years was somewhat reduced, the City still faced significant Conservative displeasure in the 1950s, as new areas of conflict arose. Intriguingly, whereas in the interwar years the City was held to be supportive of and partly responsible for deflation, in the 1950s it was the financial sector’s contribution to the problem of inflation that led to renewed criticism of the City by the Conservative governments of the 1950s. It was in and after 1955 that these new tensions became most apparent, as attention was focused on the contribution of the British monetary system to inflationary pressures. An important episode in the debate on inflation was the resignation of the Conservative Treasury ministers, Thorneycroft, Birch and Powell, in January 1958. The proximate cause of the resignation was the refusal of their Cabinet colleagues to agree to the full measure of public expenditure cuts demanded by the Chancellor and his Treasury ministers.62 These cuts had been proposed on the basis that the growth of public expenditure was contributing to an expansion of the money 62

For a discussion of this episode see E. H. H. Green, ‘The Treasury resignations of 1958: a reconsideration’, Twentieth Century British History 11 (2000), 409–30.

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supply, and that this in turn was a major cause of inflation. However, the part played by government expenditure was only one aspect of the problem under discussion in 1958, and indeed for the most part it played a secondary role in the contemporary debate on monetary causes of inflation. In July 1957 Macmillan, as Prime Minister, had told Thorneycroft that if the government was to obtain proper control over the level of economic activity, for either expansionary or contractionary purposes, then this would require greater control over the banking and credit system.63 Thorneycroft concurred. In a Treasury memorandum in August, which emphasised control of the money supply as a key anti-inflation device, Thorneycroft stressed that private as well as public expenditure and borrowing had to be curbed,64 and in September he complained to Powell that ‘we are not in control of the credit base’.65 This was not a new complaint. The Treasury had been concerned about this issue since at least 1955, and in April 1957 the Radcliffe Committee had been set to inquire into the workings of the monetary system in order to explore more effective controls. However, Thorneycroft was faced by immediate difficulties and sought more rapid action. For Thorneycroft the crucial problem was how to limit the level of credit made available by Britain’s banks. Hire-purchase restrictions were available to deal with the lower-grade elements of consumer credit, but bank advances were a more difficult question. Short-term interest rates were a well-established means of acting upon private borrowing, but by the mid to late 1950s they were increasingly regarded as a clumsy instrument, and they had the further drawback that, if raised, they increased the cost of government borrowing.66 Thus the Chancellor and his Treasury officials looked to establish other, more direct methods of curbing bank lending. But how was this to be done? Since 1945 informal government approaches to the banks, pursued through the medium of the Bank of England, had been the preferred option. But Thorneycroft felt that this approach was inadequate, and that the severity of the inflationary problem he faced was clear evidence of this. Hence he began to explore the possibility of issuing direct orders to the clearing and other banks to limit their advances, but soon discovered that there were limitations to this approach that he had not expected. 63 64 65 66

Macmillan to Thorneycroft, 19 July 1957, T 233/1369. Ibid., Thorneycroft, ‘Inflation’, 7 Aug. 1957. Thorneycroft to Powell, 20? Sept. 1957, T 233/1370. For Treasury concern on this point see S. Howson, ‘Money and monetary policy in Britain, 1945–90’, in R. Floud and D. N. McCloskey (eds.), The Economic History of Britain Since 1700 (2nd edn, 3 vols.; Cambridge, 1994), III, pp. 221–54.

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Like his predecessors, Thorneycroft sought to use the Bank of England as the institutional route to dealing with the banking system. This was problematic to begin with, for the Bank was far from enthusiastic about acting as the government’s monetary catspaw. As early as April 1955 Robert Hall, the government’s economic adviser, had noted that the Bank of England haven’t been as co-operative on monetary policy as they might have been. They have been none too keen on being tough with the Banks. Now the Governor tells the Chancellor that he is being tough . . . but Oliver Franks (now Chairman of Lloyds) tells us that this is not so, and E[dwin] P[lowden] got the same story from the Chairman of the Westminster [Lord Aldenham] and T. L. [Rowan] from the Chairman at Barclays [A. W. Tuke].67

Although in May 1955 Hall felt the Bank had ‘been tougher’, in December he was recording that he had ‘told Oliver [Franks] that I thought the Bank of England and the Clearing Banks were on trial as well as the Government and the Treasury’ as a result of rising inflation and the apparent inability of the ‘credit squeeze’ to bite effectively.68 In 1957 Thorneycroft, his officials and some members of the Conservative Cabinet, including Macmillan, came to the conclusion that the banks were failing this trial. Thorneycroft’s aim in late summer 1957 was to get the banks to reduce their advances by 5 per cent. This he felt would do as much, if not more, to dampen economic activity than even his proposed public expenditure reductions. However, in late August Compton noted that Cobbold, Governor of the Bank, was opposed to this course of action, and had told him that if the Chancellor was to proceed it ‘would require compulsion’ which he deemed ‘not appropriate’.69 Cobbold himself informed Roger Makins, the head of the Treasury, that an ‘attack’ on bank credit was unwise and would prove ineffective, insofar as the only thing it would affect would be ‘the financing of H[er] M[ajesty’s] G[overnment]’s seasonal autumn deficit and the November maturity [of Treasury Bills]’.70 Discussions between the Chancellor, Treasury officials and the Bank in the first week of September produced a statement that the City was ‘willing to co-operate’,71 but further meetings with the Committee of London Clearing Banks (CLCB) seemed to indicate that the Bank may have been ‘indulging in wishful thinking’, for the banks made clear that limitations 67 68 69 70 71

The Robert Hall Diaries, ed. A. Cairncross, 2 vols. (1991), II, p. 33 (19 April 1955). Ibid., pp. 37, 55 (26 May, 21 Dec. 1955). Compton, note of meeting with Cobbold and O’Brien, 22, 23 Aug. 1957, T 233/1369. Ibid., Cobbold to Makins, 22 Aug. 1957. Notes of meeting between Mynors, Deputy Governor of the Bank of England, the Chancellor, Padmore, and Maude, 4 Sept. 1957, T 233/1369.

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on their advances would damage their business.72 All of these discussions confirmed Cobbold’s view that a limit had been reached in terms of what could be achieved by talking to the banks about limiting advances,73 but that left the question of what action could be taken. Unfortunately for Thorneycroft the answer was very little, for the Treasury Solicitor was clear that the Bank of England Act of 1946 did not provide the Treasury with the powers to compel the Bank to issue directives to the financial sector.74 The Bank was only obliged to comply with Treasury requests if its Court agreed that such requests were necessary in the public interest, and the Court’s attitude, Treasury officials concluded, would probably be determined by its view of ‘the “look” of the government’s policy as a whole’.75 Makins told Thorneycroft that any attempt to limit bank advances would run into ‘the teeth of the opposition of the Court’,76 and the Chancellor, surprised to find himself effectively powerless in the face of the Bank’s opposition and the City’s non-cooperation in limiting advances, considered sacking Cobbold.77 Given that the latter course was both politically and administratively difficult, a frustrated Thorneycroft was left searching for a way ‘(a) . . . to control bank credit (b) . . . to amend the law to give the Treasury the powers it thought it had already’.78 Legislation either to amend the 1946 Act, or to redefine the relationship between the Treasury and the Bank would have required time that Thorneycroft did not have in his ‘crisis’, and there was little else he could do other than exhort and hope in his efforts to control private bank credit. Consequently the problems on which Thorneycroft’s chancellorship had focused attention did not go away, and Macmillan’s government continued to be exercised about bank credit. In February 1958 Macmillan enquired of his new Chancellor, Heathcoat Amory, as to what steps were being taken to reconstitute Treasury–Bank relations as it was ‘very important that we should have adequate techniques when the need for re-inflation comes’, a point he had also made to Thorneycroft in October 1957.79 In reply Heathcoat Amory complained that 72 73 74 75 76 77 79

Notes of meetings with the CLCB, and with the chairman of the CLCB, 9, 17 Sept. 1957, T 233/1369, 1370. Cobbold to Makins, 22 Aug. 1957, T 233/1369. Anderson to Armstrong, 5 Sept. 1957, T 233/1664. Treasury officers to the Chancellor, 23 Aug. 1957, T 233/1369. Ibid., Makins to Thorneycroft, 23 Aug. 1957. 78 Ibid., p. 127. Hall Diaries, II, p. 126 (29 Oct. 1957). Macmillan to Heathcoat Amory, 20 Feb. 1958, PREM 11/41199. For his earlier remarks, see Macmillan to Thorneycroft, 28 Oct. 1957, PREM 11/41199.

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It seems clear that our present controls over the provision of credit by the Banks and other agencies are inadequate to deal with severe inflationary pressure. Requests to the Banks to co-operate on a voluntary basis . . . may succeed within limits . . . But by themselves they are not desirable as a long continuing arrangement.80

When the Radcliffe Committee reported in 1959 it recommended a new relationship between the Treasury and the Bank, with greater authority for the former, and also suggested giving the Bank powers to request ‘Special (non interest-bearing) Deposits’ from the clearing banks, which would reduce their liquidity and thereby their advances if the government felt the economy was overheating. Both of these recommendations were acted upon, but these measures did not stem either concern or criticism. In August 1960 Macmillan’s fury was aroused when the Midland Bank, having been asked to make a Special Deposit, proceeded to sell $15 million of Treasury bills to replenish its liquidity. Writing to Selwyn Lloyd, who had replaced Heathcoat Amory at the Exchequer, the Prime Minister launched into what can only be described as a diatribe, arguing that The City, especially the Clearing Banks, seem to me to be out of touch with modern conditions. It is all very well for them to say it is their job to make money for their shareholders and that they won’t co-operate with the Treasury on something which may cause them losses or may reduce their profits. If capitalist society as a whole were still to take that view we should be very near the crash . . . If the Chancellor says he wants the base of credit restricted he ought to be able to have a meeting with them, tell them what he wants, and rely upon them to carry it out . . . At present it is all kept as a sort of mystery, very much on an ‘old boy’ basis. This is all very well, but it needs some new look at it.81

Given that this remark was made less than a year after the Radcliffe Committee’s report had supposedly provided such an in-depth ‘new look’, the Prime Minister’s outburst was eloquent expression of a deep-seated frustration at his government’s inability to make any substantial headway on the question that had so vexed Thorneycroft. The continuing debate over control of the credit base has some important implications, and not simply for a proper consideration of the Treasury resignations of 1958. In so far as Thorneycroft and his contemporaries, including Macmillan, regarded the money supply as crucial to the problem of inflation their emphasis was on the role of bank advances and private credit as the key engines of monetary growth. In terms of both monetary theory and practice what Thorneycroft and other members of 80 81

Ibid., Heathcoat Amory to Macmillan, 26 Feb. 1958. Macmillan to Lloyd, 1 Aug. 1960, PREM 11/3756.

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the Conservative hierarchy were advocating was what has come to be termed Monetary Base Control (MBC). This particular form of monetarism, if rigorously implemented, could not but have a major effect on the market activities of the financial sector. Macmillan’s governments fought shy of establishing more rigorous controls over the private credit base. In part this was because they did not wish to provide a future Labour government with ready-made mechanisms ‘to lay its hands on the City’,82 and also there was a question of whether the banks would find themselves more rigorously supervised than the burgeoning ‘secondary banking’ sector.83 In the late 1950s and early 1960s the political and technical difficulties of MBC were it seems too difficult to confront.84 Embracing the City in the Thatcherite era Throughout the twentieth century many Conservatives regarded the financial sector in general and the City in particular with critical suspicion. In the last quarter of the century, however, the Conservatives took a more positive view of the City’s activities. Following the 1962 decision to allow trading in foreign-denominated securities and bonds on the London market the City’s position as an international financial centre was greatly enhanced, and its international earnings vastly extended. Earlier in the century the City’s ‘cosmopolitan’ market and investment activities had attracted much Conservative criticism, and in the 1930s some had called for government regulation of the flow of capital from London, but from the 1970s the Conservative party’s tone and policy approach became markedly pro-City. In 1978 Thatcher, speaking to overseas bankers based in London, praised the City’s contribution to Britain’s overseas earnings, noting that ‘invisible earnings . . . shipping, banking, insurance and other services provided for the world community by the City of London – brought in $4.5 billion: more than all the savings in foreign currency which we hope to enjoy from North Sea Oil’. She also celebrated the fact that ‘this was not the achievement of politicians [because] the services provided by the City attract no subsidies, no hidden subventions from Government’.85 For Thatcher the only thing that government did for the 82 83 84

85

Ibid., D. Eccles, ‘The organisation and status of the Bank of England’, 3 Aug. 1960, enclosed with Eccles to Macmillan, 4 Aug. 1960. See Green, ‘Treasury resignations’, for a discussion of this question. The issue of MBC was, however, to emerge again in the 1980s, when some monetarists argued that the Thatcher governments had, by failing to pursue MBC, failed to pursue a genuine monetarist economic strategy. For this perspective see in particular G. Pepper and M. Oliver, Monetarism Under Thatcher: Lessons for the Future (2001). M. Thatcher in the City of London, 7 Feb. 1978, in Margaret Thatcher: Complete Public Statements, 1945–90, ed. C. Collins, CD-ROM (Oxford, 2000).

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City was to place ‘barriers . . . in the way of its improvement’, and the Conservative governments from 1979 moved to dismantle any such barriers. One of the first things the first Thatcher administration did was to abolish exchange controls, and this was followed between 1983 and 1986 by the wholesale deregulation of the London financial markets known as ‘Big Bang’. In the Thatcher era the City boomed, at any rate until the ‘crash’ of October 1987, and the Prime Minister’s admiration for and support of the City was reciprocated.86 Whereas Conservatives earlier in the century had tended to valorise the ‘real’ economy,87 Thatcherite Conservatives had no such prejudice. Thatcher again expressed the position well, when she stated at the Lord Mayor’s banquet in 1981 that ‘the City of London is a precious national asset’ and declared that ‘any government which fails to recognise this, fails to understand our national interest’.88 Thatcher was clear that she and her government had grasped not only the importance of the City but also how best to ensure its continued growth and prosperity, in that they understood that what had made the City ‘perhaps the greatest banking centre in the world’ was not simply ‘the standards of excellence’ of City firms but also ‘the freedom for British banks to transact business wherever they will’ provided by the Conservatives’ rolling programme of deregulation.89 The Thatcher years saw an important new departure in the political economy of Conservatism, in that the period after 1975 saw the Conservative party actively embrace the structural shift in the British economy from the secondary to the tertiary sector. The Conservatives’ late-twentieth-century enthusiasm for the City ultimately resulted in a somewhat paradoxical, or ironic, outcome. The nature and structure of Britain’s financial sector changed, as did the Conservative party, over the course of the century, and the elite at the heart of the system changed as much as did its broad constituents. For the greater part of the century the financial sector’s elite were the ‘gentlemanly capitalists’ of London’s accepting, discount and merchant-banking houses whose origins pre-dated the industrial revolution; alongside them there had emerged the ‘big five’ clearing banks that had come to dominate the domestic capital markets by the early twentieth century. By the late 1950s the growth of secondary banks and credit agencies had rendered the structure of the British credit and capital market complex, but the City, with 86

87 88 89

The chorus of City brokers singing ‘five more glorious years’ in celebration of the 1983 Conservative election victory in Carol Churchill’s musical Serious Money is one of the author’s abiding memories of the 1980s, as is his witnessing actual brokers singing the very same song in a City wine bar on the evening after the Conservatives’ 1987 victory. A position taken by Thatcher’s internal party critics in the 1980s. M. Thatcher at the Guildhall, 16 Nov. 1981, in Thatcher: Complete Public Statements. Ibid.

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its long-established institutions, was still the hub of the system. But the establishment of the Eurodollar market and the increasing internationalisation of London had, by the 1970s, begun to alter the socio-economic and functional make-up of the City, and the comprehensive deregulation of the 1980s and the increasing pace of the globalization of the London capital markets saw the make-up of the City alter dramatically. At the close of the twentieth century London had witnessed, in terms of the related institutional and socio-economic structures that had once dominated it, the ‘death of gentlemanly capitalism’.90 The market-led expansion of the City’s activities that the Conservatives had embraced had brought about if not the destruction then the replacement of the ‘old-boy’ City elite that early twentieth-century Conservatives had so frequently criticised. 90

See P. Augar, The Death of Gentlemanly Capitalism. The Rise and Fall of London’s Investment Banks (2000).

9

Labour party and the City 1945–1970 Jim Tomlinson

The Labour party’s relationship with the City of London in this period was complex and often troubled because of fundamental conflicts over aims and objectives. Occasionally these divergent aims were compatible with tactical alliances over the means to achieve these aims, but more often the conflicts were predominant. The party’s objectives over this period may be summarised as ‘economic efficiency and social justice’.1 Of course, for Labour economic efficiency was seen in a very particular light. Labour’s vision of an efficient economy was one in which the state played a significant role in setting economic priorities, regulating the market and influencing resource allocation. More specifically, efficiency was seen as delivered by high levels of investment in industry, economies of scale, state-sponsored technical advance and co-operative industrial relations, underpinned by full employment and ‘corporatist’ institutions. Social justice included ideals of both the ‘national minimum’ and equalities of opportunity and outcome, but in practice generally meant (alongside full employment) expanding state provision of welfare, especially in the areas of income support, health and housing.2 The City, even more than the Labour party, was divided in its ideology and aims (though arguably less in this period than in subsequent decades), but it is perhaps fair to see the latter as predominantly twofold. Pride of place must go to the aim of maximising its autonomy, the ability to do its business and make profits with the minimum of state regulation. From this primary aim flowed specific economic policy goals (low inflation, a stable exchange rate, low government borrowing, for example), these

I am grateful to David Kynaston for discussion of some of the issues covered in this chapter, for very useful references, and to the fourth volume of his magisterial work, The City of London. 1 2

J. Tomlinson, ‘Labour and economic policy’, in D. Tanner, P. Thane and N. Tiratsoo (eds.), Labour’s First Century (Cambridge, 2000), pp. 46–79. A. Thorpe, A History of the Labour Party (1997; 2nd edn, 2001).

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being highly important but always ultimately to be seen in the light of the overarching attachment to autonomy.3 From this clash of aims we may schematically identify three critiques of the City that, in descending order of generality, played a role in Labour’s policy agenda in these twenty-five years. First, central to Labour’s approach, if diffuse in its consequences, was the belief that the (unelected) City was too powerful in its ability to shape economic policy, compared with elected (Labour) governments. Labour believed the City had to be persuaded or coerced into supporting government aims. Such a view was built upon Labour’s interpretation of the events of 1931, when the City was seen as having imposed its priorities on enough of the credulous Labour Cabinet to have caused the collapse of the government.4 Labour’s second critique of the City flowed from the first, alleging that the City’s orientation towards external goals had biased policy away from domestic concerns, especially those of full employment and growth. This again had roots in the interwar period, but was powerfully reinforced after 1945 when these domestic goals were seen as much more widely accepted, even consensual. The final critique suggested that City institutions, because of their external orientation, were unsuitable for the task of raising investment in the domestic industrial sector. Such views can be seen as an extension of the ‘Macmillan gap’ arguments of the 1920s and 1930s, but in Labour’s minds tended to have a broader thrust, including a sociological-cum-cultural suggestion that aristocratic bankers and the like disdained the dirty business of making things in favour of their own clean-handed but unproductive pursuits. This essay examines how these three strands of criticism evolved in the twenty-five years after 1945, but with special weight given to the period after 1960 when Labour was developing the policies that they took into office in 1964. The account given of this period in office seeks in particular to emphasise the tensions between the party and the City, and to counter the widespread view that Labour’s economic policy-making was largely subordinate to the aims of the City.5 3

4

5

R. Stones, ‘Government finance relations in Britain 1964–7: a tale of three cities’, Economy and Society 19 (1990), 32–55; D. Kynaston, ‘The Bank of England and the government’, in R. Roberts and D. Kynaston (eds.), The Bank of England: Money, Power and Influence 1694–1994 (1995), p. 50. For an analysis of City aims in a broad context, E. H. H. Green, ‘The influence of the City over British economic policy c. 1880–1960’, in Y. Cassis (ed.), Finance and Financiers in European History 1880–1960 (Cambridge, 1992), pp. 193–218. P. Williamson, ‘Financiers, the gold standard and British politics 1925–31’, in J. Turner (ed.), Businessmen and Politics (1984), pp. 105–29; D. Kunz, The Battle for Britain’s Gold Standard in 1931 (1987). In developing this argument I have learnt a great deal from Stones, ‘Government–finance relations’.

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Who is in charge? The first of these arguments led most obviously to the nationalisation of the Bank of England in 1946, though by common consent this did little to change the actual distribution of policy-making power. However, the ambiguities in the status of the nationalised industries, while clearly emerging in some sectors almost as soon as the new public corporations of the 1940s were created, did not surface much in relation to the Bank under the Attlee government. All three Labour Chancellors of the Exchequer in these years set themselves against the use of monetary policy as a macroeconomic instrument, and at the same time maintained strict controls over most of the City’s activities. Together these elements created an environment in which the City, politically on the defensive for much of the time, seems to have had little impact on the big economic policy decisions.6 Apart from the nationalisation of the Bank, the Attlee government did remarkably little to reform the City. That hardy perennial of Labour manifestos, a National Investment Board, remained unestablished. The stock exchange was allowed to revive slowly, with a limited role only for the Capital Investment Council. In sum, Labour retained strict physical controls over much of the area of the economy where the City was normally active, but did little to change the inherited institutional structure. When that control regime was eroded, a process begun in the late 1940s, but gaining pace after the Conservative victory of 1951, most of that structure remained to underpin a revival in much of the City’s old ways.7 The belief that the City was too powerful remained an article of faith in Labour circles in the 1950s, and later in the decade this view was seen as justified by the evident failure of Bank nationalisation to settle the question of how far government rather than the Bank could determine policy. The 1955–6 episode, leading to the setting up of the Radcliffe Committee, brought out the extent to which Dalton’s claim that his ‘streamlined socialist statute’ (of nationalisation) fell short of establishing that ‘to-day the Chancellor in disagreement with the Bank always has the last word’.8 In evidence to Radcliffe one key Labour figure, Balogh, argued that subordination of the Bank was the right policy, and should be secured by 6 7

8

On the City’s role in monetary policy see S. Howson, British Monetary Policy 1945–1951 (Oxford, 1993). On Labour and the City in the 1940s, see J. Tomlinson, ‘Attlee’s inheritance and the financial system: whatever happened to the National Investment Board?’, Financial History Review 1 (1994), 139–55. Dalton, cited by Balogh in (Radcliffe) Committee on the Working of the Monetary System, Memoranda of Evidence, 3 vols. (1960), III, p. 33.

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the Permanent Secretary to the Treasury becoming the Chairman of the Court of Governors.9 However, Balogh’s ideas seem to have been regarded as too extreme by most Labour policy-makers, whose views were more in line with the Radcliffe Report’s own emphasis on greater co-operation between Bank and Treasury rather than subordination of the former to the latter.10 Balogh’s critique of the Bank of England included arguments about its amateurism as well as its excessive influence on policy. In a line of rhetoric he was famously to extend into a critique of many of the British policymaking institutions, he suggested that the Bank lacked the economic and financial expertise necessary to give good policy advice. Others were to take this argument further, suggesting this amateurism was a function of the sociology of the Bank, with its alleged domination by effete aristocrats who inhabited ‘old-boy networks’ that excluded talented individuals with less elevated social credentials.11 Wilson made much of this kind of argument in his contributions to the debate around the Bank Rate Tribunal.12 This was not just a passing diversion in the debate on economic policy and the role of the City; such sociological reductionism was to become a staple of the ‘declinist’ accounts of the British economy emerging at this time, which are discussed in the following section. A historian familiar with the literature about Britain’s economic policy in the twentieth century, its alleged domination by ‘gentlemanly capitalism’, and the alleged suborning of Labour by City interests is likely to be astonished by the records of the 1964–70 period, which show almost uninterrupted and often bitter clashes over policy between the government and the City. It is true that Labour’s manifesto of 1964 had no programme of seemingly radical institutional reform, unlike that of 1945 with its plans for public ownership of the Bank and creation of a powerful National Investment Board. But the policies pursued in office after 1964 brought much more of a hostile response from financial quarters than almost anything actually done under Attlee.13 These hostilities were pursued across a broad swathe of policy issues. Perhaps most anger was roused by Labour’s external economic policies, where the City saw major errors of both commission and omission. As part of the policies for improving the balance of payments, controls over 9 10 11 12 13

Ibid., pp. 33–5. For more mainstream Labour views, see Memoranda of Evidence, III, pp. 159–69. ‘Apotheosis of the Dilettante’, in H. Thomas (ed.), The Establishment (1959), pp. 83–126. On the Bank Rate Tribunal episode see Kynaston, City of London, IV, pp. 87–96. The Labour manifesto of 1964 in the section on ‘the national plan’ talked vaguely of a Labour government ‘providing better terms of credit where the business justifies it’ and ‘improving the facilities and help for small enterprises’. In the 1940s the major dispute had been about Dalton’s pursuit of cheaper money: see Howson, Monetary Policy, ch. 4.

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foreign investment were greatly intensified under Labour, and were ‘informally’ extended to the Sterling Area, which had previously been exempt. In 1965 the Bank of England accepted extremely reluctantly that given the payments position some temporary constraint on foreign investment might be inescapable, but fought very hard against any proposals that implied that such investment should be permanently curtailed. This was of course to hit at what many in the City saw as its raison d’ˆetre as supplier of capital to the world.14 Particular hostility was evinced against proposals that suggested that any depth of crisis could justify government requisition of privately held foreign assets.15 The City was unsuccessful in its general resistance to tightening controls on British investment outside the Sterling Area, and investment there did fall quite sharply,16 but it successfully fought against formal controls on flows within the area. Instead, informal ‘guidance’ was instituted, especially relating to developed area members.17 Success in this respect was probably helped by Labour’s continuing attachment to the idea of the (largely political) benefits of the Sterling Area, an attachment only slowly eroded after 1964, a point returned to below.18 The City was also highly critical of Labour’s slowness in cutting overseas public expenditure, contrasting the profligacy of government with the earning power of the City.19 This was part of a more general set of criticisms of the failure of the government to pursue the City’s preferred strategy of public spending cuts, lower direct taxes and emphasis on constraining the public rather than the private sector. As Governor of the Bank of England in the years 1964–6, Cromer enthusiastically pressed this approach on the Labour government, showing little concern that it directly conflicted with Labour’s belief that the government had a democratic mandate for its own policies. Bitter clashes between Wilson and the Governor occurred in November 1964 and March 1966.20 In the latter case Cromer made the classic ploy by saying that though he did not himself agree, foreign bankers believed that Labour’s intention to nationalise steel and its failure to bring in an effective incomes policy 14

15 16 17 18

19 20

Cromer to Armstrong, 17 March 1965, BoE G1/260; Cromer to Armstrong, 5 March 1965, T 171/801. Eventually scepticism on the impact of foreign investment led to W. Reddaway, Effects of UK Direct Investment Overseas (Cambridge, 1968). Cromer to Callaghan, 23 Mar. 1965, BoE G1/260. ‘Draft budget statement’, 3 April 1965, T 171/809. Cromer to Callaghan, 11 Feb., 6 April 1966, BoE G1/260. The economic consequences of the Sterling Area came to greater prominence as attention focused more on the capital account of the balance of payments e.g. Mitchell to Bancroft, ‘Economic Forecasts’, 17 Nov. 1965, T 171/811D. There was of course counter-pressure from the USA, e.g. ‘Briefs for Chancellor’s visit to the USA and Canada, June 1965’, T 312/1206. ‘Meeting of 9 Mar. 1966’, PREM 13/851; Kynaston, City of London, IV, pp. 304–5.

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were fundamental mistakes in policy. The argument then became even more heated as Cromer wanted to raise bank rate, while Wilson said that for the Bank to do so in the run up to an election and against the will of the government ‘would constitute deliberate interference with politics’.21 On this occasion Cromer’s bluff was called, but plainly he was willing to try and pursue his own agenda to an extent that was bound to antagonise the government. Yet in following this line there is evidence that he was doing no more than expressing the generality of City views, which were absurdly paranoid at this time.22 Labour was happy to see the end of Cromer later in 1966. His successor, O’Brien, had less of Cromer’s patrician arrogance and was more sensitive to constitutional and political realities, but nevertheless continued to urge the same deflationary, anti-public sector policies on the government.23 An area of particular contention between City and government in the 1960s was taxation. The City combined a general distaste for higher direct taxation with particular venom for Corporation Tax and the extension of Capital Gains Tax. Hostility to the former was linked to the foreign investment issue, as Labour’s aim was to use the tax to equalise the treatment of home and foreign investment to the disadvantage of the latter. The Bank commissioned an opinion survey on this tax, which unsurprisingly revealed enormous hostility amongst City institutions.24 Aware of such hostility, Wilson arranged a dinner to make more personal contact with senior financiers, only to be met with a barrage of generalised hostile questions about taxation.25 Another of Labour’s initiatives, the Selective Employment Tax, was a red rag to the City bull because it quite explicitly rested on the assumption that service industries, including finance, should be squeezed for the benefit of the manufacturing sector.26 This battle between widely differing ideologies and policies threatened occasionally to get out of hand, especially under Cromer, but it never did so. Partly this was because both sides were constrained by overarching considerations which prevented them going too far in pursuit of particular policy goals. On the government’s part the central concern was of course to find a ‘third way’ between deflation and devaluation to reconcile their ambition to have both a faster growing economy and a sounder balance of payments. To prevent either a devaluation or (major) deflation required the maintenance of financial confidence, and this in turn 21 22 23 24 25 26

PREM 18/851; also Cromer to Callaghan, 24 July 1965, BoE GI/260. Kynaston, City of London IV, pp. 306–7. Cromer to Callaghan, 12 July 1966, BoE GV44/124; Cromer to Callaghan, 17 Nov. 1967, PREM 13/1447; and ‘Governor’s tax proposals’, 8 Feb. 1968, T 171/829. Cromer to Armstrong, 2 Dec. 1964, 26 Jan. 1965, BoE G1/260. ‘Dinner for PM and Chancellor’, 14 July 1965, BoE G1/182. Kynaston, City of London IV, p. 319.

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meant that substantial regard had to be had to financial opinion, however unwelcome the prejudices underlying that opinion. For this reason the government could never disregard what it was being told by Cromer or O’Brien, however much it was suspicious of the way ‘confidence’ could be manipulated by the Bank. Undoubtedly the Bank did use its recognition of the government’s weakness to advance its own policy agenda. Thus, for example, a common ploy was to suggest that concerns of the government about the perceived volatility of the sterling balances or the diversification of reserves out of sterling were not really important, as they could readily be prevented by more deflationary domestic policies.27 Equally, the Bank was active in trying to shape foreign financial opinion about what acceptable policies on the part of the Labour government would look like. For example, and with an echo of the manoeuvring of 1931, Cromer in June 1966 wrote to Bill Martin of the Federal Reserve Board urging that if the British government made inquiries about the possibility of further borrowing beyond that already agreed it would be desirable if they were told no such facilities were available, in order to persuade them that the only real way forward was ‘a display of resolute policy’, that is, deflation.28 The government was of course aware of the extent to which the need to maintain confidence constrained their freedom of action.29 Part of the government’s response was to behave, as Barbara Castle put it, like the parson who preaches against sin on Sunday and then fornicates the rest of the week.30 This behaviour understandably infuriated the Bank, because they saw the government as telling one story to its domestic supporters and another to those whose confidence it wanted to retain.31 Undoubtedly this meant that the government was involved in what would now be called a complex process of ‘spin’, that involved putting the most confidence-boosting varnish on the minimum level of policy concessions, an approach which ultimately failed in 1967, but might be said to have worked with a degree of success until that time. On the other side of the battle was the key concern within the City to maintain its autonomy and freedom from formal government control. This concern is evident, for example, in the continuing conflict over the control of bank rate. Although the Radcliffe Report was supposed to have inaugurated a new era of Bank–Treasury co-operation on this crucial 27 28 29 30 31

‘BoE comments on HMT paper on OSA diversification’, 1 March 1967, T 312/1701. 15 June 1966, BoE OV44/123. ‘Economic strategy’, 15 April 1966, PREM 13/852. B. Castle, The Castle Diaries (1984), p. 281, cited Stones, ‘Government–finance relations’, 41–2. Cromer to Wilson, 21 Dec. 1964, BoE G1/260.

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matter, the right to set interest rates was still being fought over in the 1960s. The Bank was not only keen to preserve freedom of action in this regard against the claims of the British government, but also fought against Labour’s idea of consultation with the American authorities on the rate.32 This claim to autonomy impinged on issues beyond the economic, into foreign policy. One of Cromer’s most audacious assertions of the right not to conform to government wishes was over Rhodesia.33 Part of this claim rested on ideological foundations. In the Bank’s view financial markets were superb but fragile mechanisms, interference in which was a threat to their functioning because it undermined confidence: Uncertainty of no matter what cause, intervention by government to put the market operator at a disadvantage, any action by authority which threatens the free exercise of market forces and the threat of tax changes which may disturb basically accepted relationships, each and all will undermine market confidence.34

The commitment to the sanctity of market forces could lead Cromer into absurd hyperbole, as when he claimed that exchange control regulations proposed ‘were harsher than any other country, other than Hitler’s Germany, had applied in times of peace’.35 But alongside the ideological claims the Bank also wanted to sustain its position as spokesperson for the City, resisting any ideas about other channels of communication between financial institutions and government.36 This desire may help to explain some of Cromer’s excesses, because he was seeking to represent a body of opinion still largely unrepentantly reactionary. But this pattern also seemed to suit the government because it had only to negotiate with one body. However, this relationship rested on the ‘club’ framework in which competition was limited and regulation largely informal and self-policed. In other words, for most of the postwar years the government let the City conduct its own affairs, mainly steering policy at a macro level through informal Treasury contacts with the Bank, indeed largely through personal contact between the Governor and the Chancellor and the Permanent Secretary to the Treasury. By the 1960s this framework was coming under pressure from a range of changes, most notably the growth of institutions and financial innovation,37 alongside growing 32 33 34 35 36

37

Cromer to Armstrong, 13 Nov. 1964, BoE OV44/123. Cromer to Callaghan, 19 Oct. 1965, BoE G1/260. Cromer to Callaghan, 31 Mar. 1965, BoE OV44/123. Conversation with Goldman, 22 April 1966, BoE G1/556. ‘Deputy-Governor’s memo on Governor’s communication with D. Allen’, ? July 1965, BoE G1/182. This role seems to have been accepted by the City: see Kynaston, City of London, IV, p. 319. R. Roberts, ‘The Bank of England and the City’, in Roberts and Kynaston, The Bank of England, p. 180.

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scepticism in Labour and other circles about whether the existing financial and monetary system was really adequate to a ‘modernising’ society. Really radical changes in the structure and behaviour of the City had to await the 1970s, but the National Board for Prices and Incomes inquiry of 1966, which began as a limited look at bank charges, widened out into a critique of the whole cartelised arrangements which underpinned both bank profits and monetary controls.38 It was followed by a similarly critical report from the monopolies commission.39 Finally, in 1970 the Select Committee on Nationalised Industries looked at the Bank, exposing that body to a wholly new critical gaze.40 But a Treasury–Bank alliance prevented this inquiry from looking at monetary policy-making, and Labour’s search for new ways of conducting this policy led only to an agreement that the Bank would continue to use mainly informal methods, though Special Deposits might be employed somewhat more frequently.41 These activities were not part of some strategic design by the government to attack the City, but collectively they did mark a substantial challenge to the ‘secret garden’ of finance, which had underpinned many of the claims to autonomy previously made by the City. However, by the time Labour lost office the City, while undoubtedly more subject to scrutiny from state agencies than it had ever been before, still hung on to much of its traditional freedom of action. Regulation had been extended to previously exempt areas, e.g. the takeover panel, but it was still largely self-regulation. Despite Cromer’s rhetoric, the successful City strategy was to give a little ground in the face of criticism, subordinating its disquiet with particular government actions to the belief that too intransigent a response would bring about the ultimate hell of direct state regulation.42 ‘Decline’, sterling, Labour and the City The belief that the Labour government after 1964 fell into the clutches of the City is fundamentally based on the defence down to November 1967 38

39 40 41 42

National Board for Prices and Incomes, Report no. 34: Bank Charges (Cmd. 3292, PP 1966–7 xliii, 87); M. Moran, ‘Power, policy and the City of London’, in R. King (ed.), Politics and Capital (1980), pp. 49–68, at 55–6; M. Moran ‘Finance capital and pressuregroup politics in Britain’, British Journal of Political Science 11 (1981), 381–404, at 397. Monopolies Commission, Barclays Bank Ltd, Lloyds Bank Ltd, and Martins Bank: a Report on the Proposed Merger (PP 1967–8 (319) xxvi, 395). Kynaston, City of London IV, pp. 405–8. Goldman to Armstrong, 30 March 1967, T 171/825. Stones, ‘Government–finance relations’.

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of the $2.80 sterling parity.43 In accounts of this, Labour’s modernising aims were understood to have been subverted by their subordination to the deflationary macroeconomic policies required to defend the pound. That the Labour government did put a high priority on this defence cannot be disputed, but what is at issue here is the argument that this posture should be represented as surrender to the forces of finance and the City. To see why this is not the case the argument needs to be taken back to the Attlee period. The Attlee government was committed to rebuilding Britain’s role as a world power; Labour shared Churchill’s ‘geometric conceit’ that Britain was at the centre of three concentric circles of influence – with the USA, with western Europe, and above all with the Commonwealth. The latter was seen as broadly coterminous with the Sterling Area, so that a broad geopolitical stance became translated into the defence of this particular financial arrangement. Further, the presumption was clearly made that a stable and strong pound was integral to the survival of the Area. Labour also seems to have assumed that the pound’s strength was crucial to the financial role of the City of London, but this had a much lower political priority than the continuation of the Sterling Area. Some questions about the benefits of the Sterling Area to Britain had been asked under the Attlee government, especially the way in which, because British investment in the area was unregulated, it facilitated the huge outflow of capital in the late 1940s.44 But the predominant assumption in Labour circles then and for a good few years while in opposition was that the area was a symbol of the continuing economic importance of Britain, and part of the cement of the Commonwealth. Crosland, for example, in his book about the balance of payments published in 1953, while recognising the problem of its encouragement of very high capital outflows from Britain, overall clearly saw the area as a ‘good thing’. He assumed that in a world of continuing dollar shortage a discriminatory Commonwealth–Sterling Area bloc was vital for Britain, his main concern being to get the Dominion countries to accept more of the costs of running the area.45 In the early 1950s a more sceptical attitude became apparent in some academic literature, but it was not really until the area’s role was linked to the nascent declinism of the late 1950s that criticism gained force 43 44 45

The most extreme but not untypical version of this thesis is C. Ponting, Breach of Promise (London, 1989). A. Cairncross, Years of Recovery: British Economic Policy 1945–51 (1986); J. Tomlinson, Democratic Socialism and Economic Policy. The Attlee Years, 1945–1951 (Cambridge, 1997). A. Crosland, Britain’s Economic Problem (1953), ch. 7.

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and was taken up by some in Labour circles. A key text in declinism generally, but particularly in linking ‘decline’ to the Sterling Area was A. Shonfield’s British Economic Policy Since the War (1958). He presented a wide-ranging indictment of the area, which was to be a foundation for most future critiques. The area, he argued, starved British industry of capital by allowing free movement of funds to the Commonwealth, most of which went, not to poor dependencies, but to the rich white Dominions. The area underpinned the ‘obsession’ with the international value of sterling. Its encouragement of the use of sterling made the pound inescapably vulnerable to speculative ‘flurries’, which then had to be fought off by deflationary domestic policies, reducing investment and retarding growth. He also suggested that much of the City’s activity was not dependent on the strength of sterling, and therefore the direct economic benefits were almost vanishingly small.46 Labour took such arguments, coming broadly from the centre-left, seriously. In December 1957 the party set up a Working Party on the Sterling Area within which the issues were debated.47 For this group, chaired by Jenkins, and including Wilson, Jay and Balogh, the problem of the area was intimately linked to the viability of the Commonwealth as an economic zone. On one hand was the view expressed by Neild and Day, and similar to that of Shonfield, that the key aim was to reduce Britain’s overseas commitments and to cut back on capital exports, and that broadly the Sterling Area was a burden on Britain rather than an advantage.48 On the other hand was the Balogh view that the key issue was to reverse the movement towards trade and exchange liberalisation in order to rebuild a sustainable Commonwealth/sterling bloc as the key to the improvement of Britain’s payments position.49 The Working Party’s report did not come out clearly in favour of either of these views, but recommended further exchange control within the area, the encouragement of bulk-purchasing agreements within the Commonwealth, agreements with the holders on an orderly run down of sterling balances, the end of official support for transferable sterling, and greater co-operation within the area on the use of the area’s exchange reserves. It concluded by noting the broader issue of international liquidity within which the sterling 46

47 48

49

A. Shonfield, British Economic Policy Since the War, esp. ch. 6. For an effective critique of these arguments see C. R. Schenk, Britain and the Sterling Area. From Devaluation to Convertibility in the 1950s (1994). Finance and Economic Policy Sub-Committee, Working group on the Sterling Area, minutes and papers 1957–59, Labour Party Archive [LPA]. R. Neild, ‘Capital movements and the problem of sterling’, District Bank Review 124 (1957), 3–20; A. C. L. Day, The Future of Sterling (Oxford, 1954), and ‘What price the Sterling Area?’, Listener 21 Nov. 1957. Balogh, ‘Thoughts on the Sterling Area’ (1957), LPA, Re. 254.

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issue was embedded.50 These discussions showed the continuing strength of pro-Commonwealth views in the party, the continuing attachment to trade controls, some growth in scepticism about the benefits of the Sterling Area, but an unwillingness to accept the full logic of the declinist case for abolishing effectively the area and ceasing to regard safeguarding the pound’s international role as a significant policy goal. During the 1959 general election campaign, Jenkins’s The Labour Case accepted Shonfield’s argument that the benefits of sterling’s role in terms of aiding the prosperity of the City of London was greatly overstated, and in general regarded sterling’s status as a problem, but did not spell out how this problem was to be dealt with.51 But in the early 1960s, especially after Wilson’s accession to the leadership, there seems to have developed a more positive attitude towards the Sterling Area, as part of the Commonwealth link to be defended against emergent Conservative ‘Europeanism’. The new government’s attitude in this area was well summarised by Wilson in an interview he gave to the ‘This Week’ TV programme in November 1964. Asked if Britain did not pay too high a price for continuing the role of the Sterling Area, he said emphatically not: For one thing, this is one of the essential links with the Commonwealth and the Commonwealth trade, and if we were to say that we were just going to cultivate our own back garden, that would not only be bad for Britain – it would be bad for the Commonwealth.52

During the course of the government’s life after 1964 we can crudely summarise the policy position on the Sterling Area as evolving from one of defending its value to Britain (and the Commonwealth) to one of acceptance that it imposed burdens that were no longer outweighed by benefits. This was part of the bigger story of disillusion with the Commonwealth and a growing enthusiasm for Europe, where the area was at best irrelevant, and at worst positively harmful to Britain’s chance of entry into the European Economic Community. But this evolution was never straightforward, and came only after some painful reevaluations. Labour’s initial position in the face of the balance-of-payments deficit it faced on coming to office was famously that it could be solved neither by devaluation not by deflation, but rather by pursuing a ‘third way’ of planned modernisation of the economy and higher productivity. In this perspective, balance-of-payments difficulties were largely a 50 51 52

‘The Labour party and the future of Sterling’ (1958), LPA, Re. 299. R. Jenkins, The Labour Case (Harmondsworth, 1959), ch. 5. ‘This Week’ broadcast, 3 Dec. 1964, BoE OV44/123.

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consequence of Britain’s lack of competitiveness. This stance was used to argue that the sterling crises arose neither from overvaluation nor from the existence of the Sterling Area. If holders of sterling withdrew, this was because of their perception of the weakness of the British balance of payments; once this was corrected, the vulnerability to sterling flight would disappear. In a post-mortem on the problems of sterling in 1964–5 Treasury advisers sustained this emphasis on the issue of competitiveness. They argued that while the imbalance of sterling assets and liabilities was linked to the role of the pound as a key currency, the underlying issue was Britain’s payments weakness. But they also recognised that this broad stance did not rule out action to correct the asset:liability ratio, though they had no specific suggestions on how to do this. This kind of focus on domestic matters was, of course, music to the ears of conservative forces such as the Bank of England, providing a useful weapon to use in its urging of cuts in public spending and other deflationary policies.53 But it would be wrong to suggest that criticism of the Sterling Area was not heard at this time. In reporting on the Treasury experts’ report to the Prime Minister, the covering summary rightly suggested the existence of ‘a general feeling that the Sterling Area has become in some respects one-sided’, though it also noted a lack of ‘radical proposals to dismantle it’.54 These doubts about the area were partly due to the growing recognition of Britain’s problems on the capital as well as current account of the balance of payments, and the way in which the Sterling Area encouraged such flows. But any proposal to regulate British investment in the Area would undermine the main reason for those countries being members, and therefore bring the whole edifice into question.55 Another problem of the area subject to increasing concern in the mid 1960s was the diversification of reserves out of pounds by Sterling Area members. Generally the problem was not one of an absolute fall in sterling held; rather the volume was stagnating as countries increased total reserves and holdings of dollars and marks.56 Such patterns tended to reinforce doubts about the extent to which the area could be seen as reinforcing Commonwealth links, especially when the countries involved included Australia and India. Like the weakening of Commonwealth trade links, a large part of this reserve diversification reflected 53 54

55 56

R. Kahn et al., ‘Report of the enquiry into the position of sterling 1964–5’, 1 June 1966, T 312/1484. Meeting of Governor of Bank of England with Prime Minister and Chancellor, 15 July 1966, PREM 13/853; ‘Sterling balances: ways to improve asset:liability ratio’, June 1967, T 312/1706. ‘Report of enquiry into the position of sterling 1964–5’, PREM 13/852. Balogh to Armstrong, ‘Overseas investment’, 11 Feb. 1965, PREM 13/250.

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long-term ‘structural’ patterns rather than short-term policy options, though enthusiasm for holding sterling was hardly encouraged by the persistent exchange-rate pressure of the 1964–7 period.57 This pressure led Commonwealth countries like Australia, as well as oil producers like Kuwait, to seek dollar guarantees for their sterling reserves, another sign of the weakness of Commonwealth solidarity. London’s view was that this risk should be offset against the favourable access Sterling Area countries had to the London capital market, though ‘voluntary’ restraint operated on these outflows from 1966.58 So far this account of Labour’s stance on the pound has suggested that it needs to be seen in the light of the evolution of the party’s global political pretensions, above all the key role allotted to the Sterling Area and Commonwealth in the thinking of the early to mid 1960s. Only as these pretensions were found to be weak (and the illusion of the Commonwealth as a basis for British power exposed) after 1964 did this stance shift. But this, while deserving of emphasis, is by no means the entire story of Labour’s attachment to the strength of the pound. Also crucial to Labour’s stance on devaluation was the American alliance. Here of course, immense amounts have been written. One theme common to critics of the Labour government has been that it was subservient to Washington, and to its discredit kowtowed to American foreign policy on such issues as Vietnam in order to gain American support for the pound.59 Undoubtedly Wilson and Callaghan did regard good relations with the USA as central to their foreign policy, and tried to walk a tightrope between Labour opinion at home and an American president increasingly obsessed with the Vietnam issue. But this stance was underpinned by the assumption that only good relations with the USA could stabilise the international financial system, and that the defence of the pound was in the joint interest of both countries. It needs to be emphasised that Labour saw itself as a key guardian of the institutions of the international economy, and that stable exchange rates were seen as vital to that system. This was a recurrent theme in the writings of Wilson and Callaghan at this time.60 The view that the pound was the first line of defence for the dollar was a position initially shared by many (but by no means all) of President 57 58 59 60

Bank of England, ‘The problem of the sterling balances’, 1 Nov. 1965; Treasury, ‘Diversification of Sterling Area reserves’ (n.d.), T 312/1700. ‘Policy on exchange guarantees 1961–66’, T 312/1487; Bank of England ‘Treasury paper on OSA diversification’, 1 Nov. 1967, T 312/1701. Ponting, Breach. Wilson to Johnson, 24 Oct. 1964, BoE OV4/123; Callaghan to Shanks, 22 Jan. 1968, PREM 13/2015.

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Johnson’s advisers. But United States’ attitudes were complex and shifting. On one side were people like McNamara, the Defence Secretary, who saw British weakness as a lever for imposing the American view that Britain should retain its role as a major world power, especially east of Suez. At the other end of the spectrum were those such as the presidential adviser George Ball who accepted the ‘overstretch’ view of Britain’s problems and thought the country should cut its global role and enter the European Economic Community. In between were those who wanted to support the pound but who eventually came round to the view that this was an impossible task. As the crisis of the pound continued through the mid 1960s, the predominant US view shifted from ‘save the pound at any cost’ or ‘only help the Brits if they sustain their overseas defence effort’ to recognition that Britain was over-extended and that devaluation need not be disastrous for the international financial system.61 But the value of the pound was not just about international politics. Rather than accepting the view of the critics that defence of the pound’s value undermined the domestic growth and modernisation strategy, key Labour figures believed on the contrary that devaluation would wreck that policy. First, it would destabilise the international economy and thereby hit the balance of payments. Second, rather than devaluation being an alternative to deflation, it would require deflation to push resources into exports. Third, devaluation would depress real wages and in response cause upward pressure on money wages and undermine the attempt at voluntary incomes policy.62 In its defence of the pound’s parity between 1964 and 1967 Labour was by no means a creature of the City’s prejudices. We can sensibly speak of Labour’s largely internally generated ‘politics of the pound’, compounded of the following mix: a belief that the Sterling Area and the strength of the pound were inextricable, and that the area was key to Britain’s world standing; concerns with the stability of the international financial system (to which the alliance with the USA was deemed vital); and the belief that devaluation would hinder not help the fragile economic and political balance required to increase the domestic rate of growth. There was also no doubt a perceived popular politics of equating the strength of the pound with the strength of Britain, though it is far from clear to what extent the government was hoist with its own rhetoric in this regard.63 61

62 63

These points are derived from research in the Lyndon B. Johnson papers and National Archives (as well as the PRO), discussed in J. Tomlinson, The Labour Governments 1964– 1970, III: Economic Policy (Manchester, 2004), ch. 2. K. Morgan, Callaghan: a Life (Oxford, 1997), ch. 13. D. Blaazer, ‘Devalued and dejected Britons: the pound in public discourse in the mid 1960s’, History Workshop Journal 47 (1999), 121–40.

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The support of the City for the defence of the pound was not the most important factor in Labour’s approach. That support was in any event not unconditional. As already suggested, the City’s overarching aim was to sustain its autonomy, and by early 1966 there were influential voices arguing that the restrictions on that autonomy being imposed in the name of defence of the pound were too great. McMahon (a senior figure in the Bank of England) argued that current policy threatened a ‘siege economy’ and that a planned devaluation would help exports, make the need for deflation more evident and, above all, allow an easing of restrictions.64 This was still a minority view, and many in the City as elsewhere defended the parity not on any sophisticated analytic grounds but because of a belief in it as a symbol of Britain’s strength and a moral feeling that devaluation was to rob Britain’s creditors. As for 1925, we need to recognise the moral dimension to the arguments about the pound’s value.65 But there was a further reason why informed opinion was shifting against such priority being given to the value of the pound. For most of the postwar years both supporters and ‘declinist’ critics of the City had assumed that the City of London’s earnings were dependent upon the status and value of the pound. Shonfield typically argued that these earnings were not very important relative to the costs imposed by the sterling system, while defenders emphasised their significance to the balance of payments.66 But from the early 1960s there grew a recognition that the role of the City would not be hard hit by any diminution in the role of sterling, that the City was an ‘offshore’ entity which could happily operate in other currencies, especially dollars. An important change here was that in the mid 1960s this argument was being made by City supporters as well as critics, most notably William Clarke. He cut across traditional declinist doctrine that commitment to the pound had favoured the City at the expense of industry by arguing that ‘it is the City’s usefulness both to Britain and to the world that attracts pounds to London, not the prestige surrounding a reserve currency’. By late 1966 this view was readily accepted in the Treasury.67 64 65

66 67

McMahon, ‘Economic policy’, 18 March 1966, BoE OV44/123; Kynaston, City of London, IV, p. 356 refers to similar views in 1967. Kynaston, ‘Bank of England’; D. E. Moggridge, British Monetary Policy, 1924–1931: the Norman Conquest of $4.86 (Cambridge, 1972), p. 270 described the 1925 decision as ‘ultimately an act of faith . . . undertaken for largely moral reasons’. Shonfield, British Economic Policy; W. Clarke, The City’s Invisible Earnings: How London’s Financial Skill Serves the World and Brings Profit to Britain (1958). W. M. Clarke, The City in the World Economy (1963), p. 245; W. M. Clarke, ‘How far does the City depend on sterling?’, 21 Nov. 1966, T 312/312/1949. This development was of course linked to the rapid growth of the Euromarkets, on which see G. Burn, ‘The state, the City and the Euromarkets’, Review of International Political Economy 6 (1999), 225–61.

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The City and domestic investment The argument that the City’s external priorities damaged British investment, especially in industry, were not central to Labour’s critique of the City in the period discussed here. Labour’s major statements of economic policy in the opposition years, Industry and Society (1957) and Signposts to the Sixties (1961), focused on the perceived transformation of the economy into one dominated by giant enterprises in which ownership was separated from control, and on the challenges posed for both democracy and efficiency by this transformation.68 Investment needed to be raised, but this was to be achieved partly by macroeconomic stability (‘an end to stop-go’) and greater incentives in the context of a national plan. There was no strong sense of a ‘supply-side’ failure in the capital market. There was criticism of the City for its perceived speculative activities, including in the takeover process, but this was not part of a broader critique of ‘short-termism’, or like notions. The City’s impact on investment in contemporary declinist literature was mainly seen as indirect, a consequence of the attachment to the value of the pound leading to growth-inhibiting stop-go policies. Undoubtedly criticism of institutions like the banks grew in the 1960s, but this largely derived from outside party or government circles, and focused more on defending the interests of consumers than on linking the banks’ behaviour to the issue of investment.69 In part this quiescence may have been due to the fact that the financial system had been seen to be compatible with a very rapid rise in investment in Britain in the 1950s and 1960s, as recognised for example in the TUC evidence to Radcliffe.70 There was no perception of a ‘Radcliffe gap’ to match that of the Macmillan committee. The Industrial and Commercial Finance Corporation (ICFC), which had been the City’s defensive creation to head off more radical state intervention in industrial finance, was an object of criticism throughout these years, but this was always a marginal issue.71 Labour’s commitment to raising investment via the process of merger largely outweighed criticisms of the ‘casino capitalism’ of the takeover process (begun, of course, under the Conservatives). The creation of the Industrial Reorganisation Corporation (IRC) was not predicated on major criticism of the City, 68 69 70 71

J. Tomlinson, ‘Inventing “decline”: the falling behind of the British economy in the postwar years’, EcHR 49 (1996), 731–57. National Board for Prices and Incomes, Bank Charges. TUC memo. in Radcliffe Committee, Memoranda of Evidence, II, pp. 145–50. Kynaston, City of London, IV, pp. 14, 25. The foundation of the ICFC was in the classic calculation by the City (prodded by the Bank) that criticism should be responded to by a City initiative to stave off government intervention: R. Coopey and D. Clarke, 3i: Fifty Years Investing in Industry (Oxford, 1995) pp. 13–16.

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but mainly on the belief that there were opportunities for merger where only government was powerful enough to overcome the obstacles. There was a parallel belief that too many existing mergers were driven more by speculation than ‘industrial logic’, but this was only a faint echo of radical criticisms of the City’s role. The creation of the IRC was not strongly opposed in the City, though it was keen both to get its people in control of the institution and to minimise the state’s direct financing role in industry.72 Conclusions From Attlee to Wilson many in the Labour party disliked the City and all it was seen to stand for. This attitude was largely reciprocated. There was a gulf in values and policy objectives that if uninhibitedly articulated would have made almost any relationship unworkable. In the 1940s the advantage lay with the government, supported by a huge electoral and ideological mandate, plus the inheritance of wartime regulations, which kept the City firmly under government control. Nationalisation of the bank was more a (misleading) symbol of this relationship than a radical measure in its own right. But the Attlee government’s failure to reform the City meant that by 1964 the incoming government faced an opponent now much stronger than in the days of its predecessor. The City had in many areas revived its little-regulated strength under the Conservatives, and in addition the weakness of the balance of payments in a liberalised environment gave the City the powerful ‘confidence’ card to play as hard as it dared. Labour and the City agreed on the need to defend the pound, but for reasons that overlapped only in part, and with quite divergent views of what should be done to achieve that aim. Hence the Labour government was continuously embroiled in conflict with the City over a wide range of issues. After devaluation both recognised that the Sterling Area no longer had the significance previously attached to it, and the City recognised that its fortunes no longer coincided with those of the pound. Labour realised that the idea of the Sterling Area as part of a world power role was an illusion, and focused much more attention on Europe. Before Labour left office the groundswell of opinion in the Labour party was moving leftwards, and part of this arose from growing criticism of the failure of persuasion and incentives to raise industrial investment as hoped.73 This line of argument developed in the direction of calls for 72 73

The IRC, Cmd. 2889, 1966; D. Hague and G. Wilkinson, The IRC: An Experiment in Industrial Organisation (1983), chs. 1, 14. Labour Party, ‘Labour’s economic strategy’ (1969); D. Hatfield, The House the Left Built (1978).

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much greater public control of both financial institutions and industry, and when this shift in opinion coincided with the end of the ‘golden age’ and the beginnings of ‘de-industrialisation’, a much more radical critique of the City’s domestic role developed in the 1970s. However, while this tended to shift policy attention more onto the City’s investment role, there was also continuity in Labour’s attitude that a major problem was that the City had unaccountable power, and this was a vital underpinning to the nationalisation proposals that were to be put forward in 1976, which in turn led to the Wilson inquiry of 1977.74 74

Labour Party, Banking and Finance (1976). The Labour party evidence to the (Wilson) Committee to Review the Functioning of Financial Institutions is in First Statement of Evidence (1977) and Second Statement (1979).

Part IV

The interwar period

10

Moral suasion, empire borrowers and the new issue market during the 1920s Bernard Attard

The problems of British monetary policy during the 1920s are well known.1 The effort to restore gold parity at $4.86, and subsequent weakness of sterling under the gold-exchange standard, preoccupied the monetary authorities and compelled the Bank of England to intervene in markets in ways that had only been faintly anticipated before 1914. In the capital market, the Bank curtailed the activities of overseas borrowers.2 Yet, apart from a brief period during 1925, empire governments appeared largely to escape restriction, even though their loans interfered most directly with domestic funding operations, drained what appeared to be a diminishing pool of savings, and potentially threatened both sterling and gold reserves. This appearance, however, is partly misleading. The Empire’s inclusion in the 1925 embargo on overseas loans has already been noted.3 But well before then its issues were incorporated in the marketing arrangements for all trustee securities introduced in 1920, and afterwards subject to the Bank’s increasingly determined efforts to control the terms of all large new public offers. These measures, and their limited success, are examined here as a case study of government–City relations with respect to the Empire. While illustrating the Bank’s efforts to regulate the capital market independently of official controls, they also show the extent to which it was subject to political constraints, particularly in dealing with The research for this paper was made possible by a grant from the Faculty of Social Sciences in the University of Leicester. I particularly wish to thank my colleague, Philip Cottrell, and the editors of this volume for their comments and suggestions. All responsibility for the contents remains my own. 1

2 3

For example, D. E. Moggridge, British Monetary Policy, 1924–1931. The Norman Conquest of $4.86 (Cambridge, 1972); S. Howson, Domestic Monetary Management in Britain, 1919– 1938 (Cambridge, 1975). John Atkin, ‘Official regulation of British overseas investment, 1914–1931’, EcHR, 2nd ser. 23 (1970), 324–35. Ibid., 330; Moggridge, British Monetary Policy, pp. 206–9; R. W. D. Boyce, British Capitalism at the Crossroads 1919–1932. A Study in Politics, Economics and International Relations (Cambridge, 1987), pp. 95–7.

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dominion governments which enjoyed the status of domestic borrowers and whose relations with the British government were increasingly characterised by partnership rather than subordination. Thus the Bank found it increasingly necessary to seek government assistance (and even appeal directly to dominion governments themselves) rather than rely solely on its customary influence in the City. The first part of this chapter comments briefly on the record of empire borrowing and the nature of imperial preference in the London capital market during the 1920s. Two phases in the regulation of new issues are then discussed. The first runs from the removal of the last wartime restrictions on capital exports in November 1919 to the lifting of the embargo on overseas loans at the end of 1925. The second follows the Bank’s efforts from summer 1925 to divert some empire demand to New York and to subject new loans in London to its approval. Some of the narrative is familiar from Donald Moggridge and Robert Boyce, but a considerable amount of new material is presented. Throughout the emphasis is on what might be called the ‘imperial factor’ in the regulation of the London capital market during the 1920s. The concluding section reflects on the insights that the case study provides into aspects of government–City relations during the decade. Empire borrowing and imperial preference during the 1920s Regulation of overseas borrowing was initially reintroduced after the First World War because of the postwar need to facilitate sales of British government and corporation stocks, and later continued as a result of the Bank’s concerns about the level of capital export that could be sustained without putting pressure on domestic savings and gold reserves. Empire borrowing became a problem because certain Dominions began to weigh increasingly heavily on the market.4 Indeed, once allowance is made for the massive growth of the national debt, empire stocks were one of the few classes of securities during the decade to increase their share of the nominal value of all securities quoted on the Stock Exchange.5 Atkin’s statistics of new overseas issues from 1918 to 1931 illustrate the point. Although the nominal value of capital issues on overseas accounts was lower than during 1900–13, the loans of public authorities within 4 5

W. K. Hancock, Survey of British Commonwealth Affairs, II: Problems of Economic Policy 1918–1939, part 1 (1940) [hereafter Survey II/1], p. 179. R. C. Michie, The London Stock Exchange. A History (Oxford, 1999), p. 184, table 5.2; I. M. Drummond, British Economic Policy and the Empire 1919–1939 (1972), p. 29; for surveys of empire borrowing, see pp. 43–51; Hancock, Survey II/1, pp. 177–98.

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the Empire rose from 17 per cent to over 45 per cent of the total.6 Issues by overseas companies registered in the Empire accounted for a further 20 per cent. Of all overseas borrowers, the Australian federal and state governments (which until 1927 retained independent borrowing powers) were by far the most active.7 Between 1919 and 1929, they took just under a fifth of all subscriptions to new overseas issues, with the result that by the end of the decade the Dominion was Britain’s greatest debtor.8 New South Wales alone raised more than either New Zealand or South Africa. Moreover, while other borrowers turned increasingly to New York, the majority of empire governments still looked to London as the most favourable market. Only Canada sought funds exclusively from Wall Street.9 Its absence, together with that of India – which for much of the decade found it cheaper to raise domestic capital – probably favoured other empire stocks as near substitutes.10 Amongst these, Australian securities were in greatest supply. Thus, while London began to focus more narrowly on the supply of development capital to the Empire, Australian governments were the most prominent of all overseas borrowers.11 The problem of regulating empire borrowing, therefore, largely became one of restraining the Australians. W. K. Hancock argued that the changes just described were ‘in large measure explained by . . . natural economic evolution’ rather than ‘the product of deliberate policy’, but it would be difficult to maintain that policy had nothing to do with it.12 The most obvious form this had taken was the Colonial Stock Acts of 1877 and 1900. The first allowed colonial governments to inscribe their stocks in the United Kingdom, permitting them to pay a single composition fee that exempted all future transfers from stamp duty. The second conferred trustee status on colonial loans by admitting them to the list of securities in which trustees could invest without requiring specific authorisation in a deed of trust.13 The British authorities, including the Treasury, acknowledged that the later Act was ‘a very substantial measure of preferential treatment’ which 6

7

8 10 12 13

Statistics of new issues for 1918–31 from John Atkin, ‘British overseas investment, 1918– 1931’ (PhD thesis, University of London, 1968), based on the weekly list published in The Economist; for 1900–13 from the revised Jenks-Simons series in Irving Stone, The Global Export of Capital from Great Britain, 1865–1914: A Statistical Survey (Basingstoke, 1999). Placings and introductions are excluded. C. B. Schedvin, Australia and the Great Depression (Sydney, 1970), ch. 5; B. Attard, ‘Australian financial diplomacy’, in C. Bridge and B. Attard (eds.), Between Empire and Nation: Australia’s External Relations from Federation to the Second World War (Melbourne, 2000), pp. 113–21. 9 Atkin, ‘British overseas investment’, p. 147. Hancock, Survey II/1, p. 183. 11 Ibid., p. 164. Ibid., pp. 171–2. Hancock, Survey II/1, pp. 182–3. Atkin, ‘British overseas investment’, pp. 19–23, 76–86.

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virtually transformed empire securities into gilt-edged stocks.14 Their combined effect widened permanently the market for Dominion and other securities, putting empire governments on the same footing as the most favoured domestic borrowers and lowering the cost of capital by between half and one per cent.15 With the introduction of capital controls at the start of 1915, the Empire’s parity with domestic borrowers was further emphasised, while dominion access to the market became a matter of political judgement rather than one determined solely by financial conditions. The Australians insisted that they be exempt from the embargo on capital exports because of their need to finance current public works, with the result that the Chancellor of the Exchequer conceded, in the words of the Treasury notice, that empire issues would be ‘allowed where it is shown . . . that urgent necessity and special circumstances exist’.16 This, together with the new instructions in March 1919 that ‘preference should be given ceteris paribus to those cases in which the proceeds of the issues are to be applied in British Dominions overseas’, was the nearest the British government ever came to explicit statements in favour of the Empire.17 But the concession had gone further. As ‘sovereign’ governments, the Australian states objected to the requirement that they submit their loan proposals to a capital issues committee which would scrutinise all domestic applications for new capital. Instead, these would be dealt with directly by the Treasury.18 In the event, with the Federal government taking responsibility for all wartime borrowing overseas (only New South Wales standing aside) the Chancellor approved all requests, most for political reasons. In practice, it proved impossible to deny the Australians access, even when the financial strain in London was greatest. During 1915–18, Australia issued loans in the City for public works for just under £33 million.19 The need to allow Australia to continue borrowing was a consequence of Britain’s increasing dependence on its partnership with the white 14

15 16

17 18 19

Niemeyer, ‘Empire development’, 28 June [1923], T 176/11; Overseas Loans SubCommittee Report, 16 Oct. 1925, C. R. (H.) 31, para. 44, CAB 58/9 (henceforth Overseas Loans Report). For ‘gilt edged’, Niemeyer to Chancellor, 7 Oct. 1921, T 172/1208. Atkin, ‘British overseas investment’, p. 77; Drummond, British Economic Policy, p. 43. R. S. Sayers, The Bank of England, 1891–1944, 3 vols. (Cambridge, 1976), III, app. 30, no. 2; B. Attard, ‘Politics, finance and Anglo-Australian relations: Australian borrowing in London, 1914–1920’, Australian Journal of Politics and History 35 (1989), pp. 143–6; Atkin, ‘Official regulation’, pp. 325–6. ‘Treasury instructions to the capital issues committee’ (Cmd. 99, PP 1919 xxxii, 99); Hancock, Survey II/1, pp. 183–4. Attard, ‘Politics, finance’, pp. 146–7. Ibid., pp. 151–6; Attard, ‘Financial diplomacy’, p. 112.

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Dominions.20 Arguably, this continued to be a factor after the war. With the emergence of mass unemployment during the winter of 1920–1, British governments also began to perceive a more immediate economic advantage in encouraging imperial investment to provide direct relief for depressed British industries, enlarge export markets and secure cheaper raw materials.21 Despite Treasury opposition to the expenditure involved, Parliament passed a series of measures from the Empire Settlement Act of 1922 to the Colonial Development Act of 1929 which, amongst their provisions, widened the coverage of the Colonial Stock Act, guaranteed some colonial loans, and authorised interest subsidies for certain dominion capital issues. The ultimate results were disappointing but the legislative effort was noteworthy nevertheless because of the political will it embodied and its implicit assumption that empire borrowers would continue to have free entry to London. Even the Treasury had to concede this much in 1923 when objecting to a Board of Trade proposal for further interest subsidies: ‘The recognised way in which Great Britain gives the Dominions financial assistance is by lending to the Dominions in the market.’22 In conclusion, market forces played an important part in explaining the prominence of particular empire borrowers in London during the 1920s. But they were reinforced by institutional and political developments that reached back into the nineteenth century. Empire governments operated in London on the same footing as domestic public borrowers. Their right of access was secured by political privilege which exempted them from the restrictions imposed on foreigners. Moreover, public policy favoured high levels of capital export to the Empire. In this context, it is reasonable to view the government–City relationship as potentially triangular, with the Empire as a third factor and the Dominions, in particular, inclined to assert their independence of the City’s regulatory authorities. Loan queue to embargo, 1920–1925 When the last official controls on capital exports were finally removed in November 1919, inflation rather than unemployment was Britain’s 20

21

22

J. Darwin, ‘A third British empire? The dominion idea in Imperial politics’, in J. M. Brown and W. R. Louis (eds.), The Oxford History of the British Empire, 5 vols. (Oxford and New York, 1999), IV, pp. 66–7, 85–6. Drummond, British Economic Policy, chs. 1–2; I. M. Drummond, Imperial Economic Policy 1917–1939: Studies in Expansion and Protection (Toronto, 1974); S. Constantine, The Making of British Colonial Development Policy 1914–1940 (1984); G. C. Peden, The Treasury and British Public Policy 1906–1959 (Oxford, 2000), pp. 178–84. Niemeyer, ‘Empire development’, 28 June [1923], T 176/11.

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principal economic problem.23 In the City, the monetary authorities confronted the task of funding the enormous floating component of the national debt while allowing local authorities to issue loans to finance Addison’s housing programme. One regime of regulation passed almost seamlessly into another. Yet while the first had ultimately derived from legislation, the second rested on the Bank of England’s moral authority. Moggridge described this particular mode of operating as ‘moral suasion’ and saw it largely as an innovation following the return to gold.24 But in many respects it describes the typical way in which the Bank exercised its influence in the City, where the high degree of concentration, primacy of personal contacts and dependence on the Bank’s good will made it uniquely effective. It was also particularly suited to the personality of Norman, the Bank’s Governor from April 1920. Apart from the consultative bodies through which the Bank routinely communicated with the City’s various constituents, Norman relied on personal contact and a mixture of blandishment, bullying and cajolery to impose his will. As one Dutch banker later recalled: ‘He exerted power but always through influence.’25 From early 1920, the Governor managed the new issue market in two ways.26 First, at the Chancellor of the Exchequer’s request, he reinstated the ban on overseas fixed-interest loans that interfered with the government’s funding operations, initially applying this to ‘short-dated’ issues with maturities of less than twenty years. Second, from May he arranged with the three brokers who issued trustee securities to operate a queue for new public offers. This was principally to facilitate the sale of housing loans but also allowed the Governor to scrutinise the terms and timing of new issues. Empire loans were subsumed within the arrangements for trustee securities. Two of the three brokers concerned (the other being Mullens, the government broker) virtually monopolised the issue of dominion and colonial loans: R. Nivison & Co. underwrote for the Australian governments and South Africa; J. & A. Scrimgeour was the broker to New Zealand and the Crown Agents. Mullens dealt with what remained, sometimes (as in India’s case) in association with one of the

23 25

26

24 Moggridge, British Monetary Policy, pp. 166–8. Peden, Treasury, p. 128. Quoted in D. Kynaston, The City of London, III, p. 66, also p. 162; D. Kynaston, ‘The Bank of England and the government’, in R. Roberts and D. Kynaston (eds.), The Bank of England: Money, Power and Influence 1694–1994 (Oxford, 1995), p. 46; E. H. H. Green, ‘The influence of the City over British economic policy, c. 1880–1960’, in Y. Cassis (ed.), Finance and Financiers in European History, 1880–1960 (Cambridge, 1992), pp. 196–8. For the following, see Atkin, ‘Official regulation’, 326–30; Sayers, Bank of England, III, app. 30, pp. 288–9; Kynaston, City of London, III, p. 59.

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other two.27 By the end of 1920, the brokers were alternating empire with housing loans.28 As regards the former, Norman also ‘was inclined to dislike’ proposals for short-term issues.29 But a dominion sufficiently determined might still attempt to jump the queue by appealing to a higher authority. In November, the Australians, who were making heavy weather of solving a financial crisis, asked for the Chancellor’s help in having a Commonwealth loan floated ahead of a housing issue and succeeded in getting first place after Christmas.30 With the completion of the housing-loan programme the following summer, Norman prepared to drop the supervision of trustee issues but the three issuing brokers chose voluntarily to continue the queue.31 There is no evidence that these arrangements inhibited empire borrowers. Bank rate fell steadily from April 1921 and new empire issues boomed (see Table 10.1). The pace slowed a little from 1922, but this left the field clearer for the Australians, whose nominal annual raisings of new money peaked in 1924 at £33 million. As early as June 1923, Otto Niemeyer, financial controller at the Treasury, commented on the facilities for dominion borrowers in London: ‘Many people . . . think that in present circumstances these . . . are dangerously excessive.’32 With wool prices rising, the high level of borrowing by Australia and New Zealand during 1924 also meant that the Australian trading banks started to accumulate funds in London and put pressure on the exchange by converting them to gold in New York and South Africa. Between February and June 1925, some £10 million were transferred to Australia in this manner.33 Through much of 1924, Norman worried about the strain on sterling.34 With the completion of the main phase of postwar funding operations, the Treasury agreed in January to drop the remaining restrictions on foreign loans, except Treasury bills and other discounted paper.35 27 28 29 30 31 32 33

34 35

Atkin, ‘British overseas investment’, p. 104; Nivison had also underwritten Canadian loans before the war. Blackett to Chancellor, 16 Nov. [1920], T 172/1156. Ibid., Blackett to Gower, 12 Nov. 1920. Ibid., Millen to Chancellor, 11 Nov. 1920, and A. Chamberlain to Goschen, 26 Nov. 1920. Norman to Blackett, 11 June 1921, Bank of England archives [BoE] C 40/655; Norman diary, 10 October 1921, in BoE. Niemeyer, ‘Empire development’, 28 June [1923], T 176/11. L. F. Giblin, The Growth of a Central Bank: The Development of the Commonwealth Bank of Australia, 1924–1945 (Melbourne, 1951), p. 25; also, Norman to Niemeyer, 11 May 1925, T 176/17, part 1. Sayers, Bank of England, I, pp. 138–40; III, app. 30, no. 10. J. Wormell, The Management of the National Debt of the United Kingdom, 1900–1932 (2000), pp. 435, 443–5; Norman diary, 18 Dec. 1923; Sayers, Bank of England, III, no. 9.

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Table 10.1 New overseas issues in London by public offer, 1920–1929

1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 a

Total overseas issues (Economist series) £000s

Overseas issues as a proportion of all issues (%) (Midland Bank series)a

Empire government

Australian government

Foreign government

52,745 113,234 130,198 137,576 124,560 77,055 101,728 148,442 105,342 87,697

15 54 57 67 60 40 44 44 40 37

23 65 45 50 40 40 31 38 38 30

15 18 15 19 27 19 21 18 19 9

0 5 3 19 33 0 23 8 15 4

Proportion of total overseas issues (%) (Economist series)

British government issues excluded.

Source: Atkin, ‘British overseas investment’, tables 6 and 12 and app. A.

Yet by April, Norman was contemplating raising bank rate. He also again tightened restrictions on foreign issues, telling the Bank’s Committee of Treasury that ‘in view of the Exchanges and of the overlending by this Country in 1923, he was strongly of opinion that only applications on behalf of those countries which were in need of money for reconstruction purposes deserved consideration’.36 The big foreign loans during 1923–4 were issues of just this kind for Austria, Hungary and Germany. But the Empire remained the heaviest consumer of sterling funds (see Table 10.1).37 Apart from government loans, companies registered in British territory were taking more than half the capital issued on private account.38 Finally the return to gold on 28 April 1925 forced Norman’s hand. Now the deciding factors were his nervousness about reserves, the overhang of Australasian claims on sterling, and his conviction that London was still lending beyond its means. 36 37 38

Norman diary, 16 April 1924; Sayers, Bank of England, III, no. 10, 9 April 1924; Boyce, British Capitalism at the Crossroads, p. 59. A. Orde, British Policy and European Reconstruction after the First World War (Cambridge, 1990), pp. 145, 272–3, 264–5; Kynaston, City of London, III, pp. 81–4. Moggridge, British Monetary Policy, table 16, p. 204, using Atkin’s unpublished data, gives a breakdown of empire and foreign issues in government, municipal and company categories.

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In mid April, he asked the three issuing brokers to refrain from floating any new loans between 20 April and 1 May. At this point, his sole purpose was to ease the transition to gold. Once the danger period passed, he told the Agent-General for British Columbia that there was ‘no bar to Colonials’ in London.39 He nevertheless worried that the apparent comfort of the exchange position was illusory and that Australasia, amongst other potential withdrawers of gold, was ‘over-borrowed’.40 His immediate instincts were to ask individual borrowers to go easy. On 4 May, he told Scrimgeours that the size and price of a forthcoming New Zealand issue were too high. The government (for whom the Bank acted as financial agent) refused to be persuaded.41 Norman later complained that ‘the real benefits of the Embargo were being seized for themselves by the Dominions whose appetite for new Loans threatened to become insatiable’.42 The trustee status of their stocks, however, gave them no reason to stop borrowing. For the Governor, his only recourse seemed to be to suggest its removal; ‘from being a mere matter of City policy the embargo thus suddenly became a question of high imperial politics’.43 On 11 May, Norman wrote to Niemeyer, explaining his recent difficulties with New Zealand, and warning about ‘the present effects of the Colonial Stock Act in relation to Gold’: Under the Colonial Stock Act, the indebtedness of London to Australasia . . . already considerable, is increasing and is largely needed for the local expansion of credit and currency: it is an immediate menace to our Gold Reserves in precisely the same way as would be the case with Foreign Loans, were we not able to turn them away under present conditions. The orthodox defence against overborrowing . . . is a high Bank Rate: at present, the prospects of such a rate are being hastened more by the effects of the Colonial Stock Act than by the general tendency of the Exchanges.44

While sympathetic, Niemeyer was also alert to the political difficulty in stopping empire loans, ‘partly on sentimental grounds and partly because . . . they are Trustee Securities and therefore slightly more attractive to investors’.45 He advised Churchill, the Chancellor, that ‘we ought 39 40 41 42 43

44 45

Norman diary, 14 April, 1 May 1925. Ibid., 8 May 1925; Norman to Strong, 8 May 1925, BoE G 35/5. Norman diary, 4, 8 May 1925; Norman to Niemeyer, 11 May 1925, T 176/17, part 1. Norman to Blackett, 27 Oct. 1925, in Sayers, Bank of England, III, app. 30, no. 11. Ibid.; also Norman’s note on Nugent to Governor, 15 Oct. 1925, BoE G 1/386. For accounts of this episode, see Moggridge, British Monetary Policy, pp. 206–11; Boyce, British Capitalism at the Crossroads, pp. 95–8. Norman to Niemeyer, 11 May 1925, T 176/1, part 1. Ibid., Niemeyer memo., 13 May 1925 and covering note.

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certainly to do all we can to slow down Colonial loans . . . but it is difficult to do much in the case of the self-governing Dominions’. His best suggestion was that the Bank rely on its traditional methods: I do not think there is any direct action we can take. We cannot repeal the Colonial Stock Act (though there is much that might be said for doing so). Nor I think can we very well ask the Colonial Secretary to hint to the Dominions that it would be agreeable to us if for the next twelve months they reduced their borrowings in London to a minimum. I am inclined to believe that we must trust to such persuasion as the Governor can use in the City and to the repercussions on brokers and issuing houses.

The dependent Empire was far more easily dealt with. On 19 May Niemeyer told Lambert at the Colonial Office that a rumoured issue for East Africa was ‘at the present time virtually impossible’.46 The Dominions, however, remained Norman’s main worry. Here Lambert agreed there was little to be done, telling him at a meeting arranged by Niemeyer on 25 May that he ‘did not think that any action by the Government would do more than make a political question of what was already troublesome enough as a financial one’.47 Norman’s continuing anxieties about London’s ability to stay on gold may have finally changed Niemeyer’s mind.48 On the evening after meeting Lambert, the latter persuaded Churchill to send a telegram to the Dominion Prime Ministers drawing their attention to the strain on London and welcoming ‘any action you can take to diminish for the present your demands . . . for loans’.49 This, however, had to be transmitted by the Colonial Office whose Secretary of State, Amery, was the Cabinet’s leading ‘imperial visionary’. Predictably, he was ‘strongly opposed to any restriction on borrowing’, telling Lambert: ‘we certainly cannot let the whole development of the Empire be stopped’.50 Ultimately, the decision had to be made by Cabinet. At a meeting on 10 June, Churchill read a letter from Norman suggesting three options: a rise in bank rate; an arrangement with the Dominions to reduce their borrowing in London; and the diversion of empire demand to New York.51 A rise in bank rate was the least desirable. The President of the Board of Trade reported that industry leaders had been expressing ‘considerable 46 47 48 49 50 51

Niemeyer to Lambert, 19 May 1925, CO 532/317/25692. Ibid., Niemeyer to Lambert, 22 May 1925, and Lambert minute, 26 May 1925; Norman diary, 25 May 1925. For example, Norman to Strong, 26 May 1925, BoE G 35/5. Niemeyer minute, 27 May 1925, T 176/17, part 1. Amery minute, 4 June 1925, CO 532/317/25692; also see Amery to Baldwin, 6 June 1925, Cambridge University Library, Baldwin papers, 93/136–8. Norman to Churchill, 9 June 1925, T 176/17, part 1; Cabinet 28(25)6, 10 June 1925, CAB 23/50.

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apprehension . . . as to the probable effects of Dominion borrowing on Bank Rate’. After further discussion, ministers agreed ‘that it was necessary to warn the Dominions in regard to the effect of further borrowing’ and authorised Churchill to send the Treasury’s telegram. By now, however, Norman, had taken matters into his own hands. On 4 June, he told Osborne Smith, the London manager of the Commonwealth Bank of Australia, that ‘too many Loans [were] being issued in London’. Anticipating the Cabinet’s decision, he also asked the three brokers to call again a temporary halt.52 Finally, on the morning ministers met, he read Smith his letter to the Chancellor, and the banker agreed to cable the key points to Sydney.53 The Treasury telegram was sent to the Dominions on 15 June. By the end of the month, only Australia and South Africa had indicated that they would need fresh money.54 In July, Norman permitted an Australian issue of £5 million. A larger loan was raised simultaneously in New York.55 But beyond a South African funding loan that month and a conversion operation to meet state government maturities in October, he would go no further, despite considerable pressure from the Australian agents-general.56 If the return to gold was to be credible, however, the embargo could only ever be a temporary expedient.57 On 16 October, a Whitehall committee on overseas loans (see below) recommended that it be lifted and, on 3 November, a cautious Churchill announced in Sheffield that ‘the old and full freedom of the market’ would be restored.58 Moral suasion, 1925–1929 The restoration of free gold was the final step in the Bank’s recovery of control over monetary policy.59 But the persistence of high unemployment meant that Norman was now constrained by the political consequences of changing interest rates.60 Between December 1925 and February 1929, bank rate moved only once, and that was a step downwards. Unable to operate according to recognised gold standard rules, Norman sought alternatives to steady the exchanges and protect 52 54 55 56 57 58 59 60

53 Ibid., 10 June 1925. Norman diary, 4, 10 June 1925. Confidential print no. 95, CO 886/11; Niemeyer minute, c. 30 June 1925, T 176/17, part 1. Attard, ‘Financial diplomacy’, p. 119. Norman diary, 22 June, 9 Oct. 1925; Amery to Churchill, 16 Oct. 1925, T 176/17, part 1. Moggridge, British Monetary Policy, p. 208. Overseas Loans Report, para. 40; Sayers, Bank of England, III, app. 30, no. 13. Peden, Treasury, p. 197. Ibid., p. 203; Kynaston, City of London, III, pp. 27, 125, 129–31, 174, 177–8.

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reserves.61 Some of these expedients had been evident before April 1925. What was striking afterwards were his efforts to extend them to empire borrowers by attempting first to divert some of their demand to New York and then to tighten his control over the timing and terms of their new issues. At its meeting on 10 June 1925, Cabinet also agreed to ask the Committee of Civil Research to report on the country’s capacity to export capital, ‘having particular regard to the requirements of empire development and the maintenance of our export trade’.62 The sub-committee appointed to the task (including Norman and Niemeyer) concluded that London would have to accept a diminished position as an international lender. Overseas investment was exceeding the margin of domestic savings available for that purpose with the result that the market struggled to absorb new issues, domestic borrowing costs rose, and it became difficult to manage the national debt. Even if savings were available, the weakness of the trade balance meant that heavy capital exports would have the same result: gold losses inevitably must be followed by a higher bank rate.63 In these circumstances, no further imperial preference was justified beyond that provided by the Colonial Stock Act.64 Taking the longer view, the committee anticipated: It is not improbable that the requirements of Dominions and Colonies will continue to increase to such an extent that they cannot be satisfied in full by borrowing in the United Kingdom. If this comes to pass, and if the appetite of the American investor for foreign securities grows substantially, as would appear probable, the time may come when the Dominions and Colonies can borrow in the United States of America on terms as favourable as or more favourable than those obtainable here.65

By endorsing American capital in such clear terms, the committee also provided retrospective cover for the position Norman had reluctantly come to during the summer. Since the decade’s start, he had urged foreign borrowers to find money in New York while remaining less enthusiastic about the Dominions taking a similar step, discouraging the Australian Prime Minister as recently as December 1923.66 Smith of the Commonwealth Bank apparently suggested the possibility again in June 1925 during a conversation about the need to slow down Australasian loans.67 Norman recorded in his diary: ‘I express no opinion as to Commonwealth issues in N[ew] Y[ork] wh[ich] is politics’, and stuck to this line 61 62 63 65 67

Ibid., p. 130; Sayers, Bank of England, I, chs. 9, 13; Moggridge, British Monetary Policy, chs. 7–9. Cabinet 28(25)6, 10 June 1925, CAB 23/50. 64 Ibid., para. 44. Overseas Loans Report, paras. 8, 14, 20, 30–34. 66 Kynaston, City of London, III, pp. 59, 87. Ibid., para. 46. Norman diary, 2 June 1925.

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in all subsequent discussions.68 He nevertheless told Sir Joseph Cook, the Australian High Commissioner, that London could ‘no longer afford to finance the Dominions’, and suggested amongst other options offered to Churchill that empire borrowers be invited to raise the greater proportion of their capital requirements in the United States through simultaneous issues on either side of the Atlantic.69 This was to meet Australian concerns that a failure in New York would make it difficult to get back into London.70 But it reflected equally his own dilemma. While sterling remained his first priority, it was also important that the City continued to lend to the Empire. Even when Australia’s negotiations for an American loan were well advanced, he told Smith it was ‘essential . . . a simultaneous issue should be made in London . . . Only by these means was it possible . . . for London to maintain a hold over the issue of Commonwealth Loans’.71 By the end of June, he had finally settled on a policy: any New York loan should be accompanied by a smaller issue in London and the same arrangements should apply to all subsequent empire borrowing once the first American issue had taken place.72 During the summer, he still regarded these arrangements as ‘temporary’, but in October the Overseas Loans Committee recommended them for all future empire borrowing in the United States, ‘rather than that some Dominions or Colonies should sever their connection with the London market altogether’.73 In the event, no general reorientation to New York occurred. Unsurprisingly, there were misgivings in both the City and government about any official encouragement to the Dominions to cross the Atlantic. Lord Glendyne, senior partner of Nivison & Co. (whom Norman had asked to find American money for South Africa), objected point blank, regarding the Governor’s proposals as ‘unwise and unnecessary’; Amery hoped Australia would not make it a permanent practice; the Board of Trade worried that ‘any dependence financially of Australia on America’ would weaken commercial ties and the case for British preferences.74 Finally, only Australia raised large sums in America – drawing one-third of new overseas capital from that source during 1927 and 1928 – but even 68 69 70 71 72

73 74

Ibid., 2, 11, 16 June 1925. Ibid., 11 June 1925; Norman to Chancellor, 9 June 1925, T 176/17, part 1. Norman diary, 11 June 1925; Cook to Prime Minister, telegram 12 June 1925, National Archives of Australia (NAA) A1606, CP 17/1, part 3. Harvey, record of conversation, 29 June 1925, BoE OV 13/32. Ibid., Dominion and Colonial (Trustee) Loans, 29 June 1925 (copies were sent to Niemeyer and Cook, the Australian High Commissioner); Norman diary, 29 June 1925; Niemeyer to Chancellor, c. 30 June 1925, T 176/17, part 1. Overseas Loans Report, para. 46. Norman diary, 29 June, 8 July 1925; Casey to Bruce, telegram 15 June 1925, NAA A1420/2; Chapman to Niemeyer, 24 June 1925, T 176/17 part 1; Boyce, British Capitalism at the Crossroads, p. 97.

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that Dominion continued to rely on the City for the greater part of its requirements.75 Having at least attempted to use New York as a safety valve, Norman turned to the problem of new trustee issues in London. His immediate task was to minimise the disturbance caused by the embargo’s removal, although it soon became apparent that he would have to continue keeping all borrowers on a tight rein. In November 1925, he echoed Churchill that London was a ‘free market’, yet made it clear to all issuers that he wanted them to ‘go slow’, underlining this on 3 December by raising bank rate to 5 per cent.76 He also ceased to make any practical distinction between empire and foreign borrowers. Amery noted in his diary in June 1926 that ‘at present the Treasury policy inspired by the Bank of England is to discourage all empire loans. At the Western Australian dinner Glendyne told me that Norman is working for all he is worth in that direction.’77 To the Australians, he made it clear that he wanted ‘to slow down fresh issues here’ and warned that continued large-scale borrowing ‘might involve consequences detrimental to both borrowers and lenders’.78 He also hoped that the Australian Loan Council, which coordinated public borrowing in the Australian domestic capital market, would slow the pace of state government issues in London.79 In October 1925, he even agreed to a request by S. M. Bruce, the Australian Prime Minister, to block New South Wales after the Labor state premier walked out of the Loan Council insisting on his ‘absolute freedom in raising loans’.80 Overall, the proportion of overseas new issues in London did decline after 1924, as to a lesser extent did the relative level of empire government borrowing after 1925 (see Table 10.1). But both remained significant for the rest of the decade. With the Empire still making considerable demands, Norman attempted to enlist official support for greater coordination and, where possible, widen his control over the terms and size of new issues, explaining to Richard Casey, the Australian government’s liaison officer in Whitehall, in 1929:

75 76 77 78 79 80

Schedvin, Australia and the Great Depression, app. A, table A-1. Norman diary, 5 November 1925; Sayers, Bank of England, I, p. 216. J. Barnes and D. Nicholson (eds.), The Leo Amery Diaries, I: 1869–1929 (1980), p. 456 (1 June 1926). Interview Cook, Smith and Norman, 11 Dec. 1925, BoE G 1/286; Norman to Garvan, 17 June 1926, BoE OV 13/32 (emphasis in the original). Ibid.; Norman to Niemeyer, 12 Dec. 1925, T 176/25A. Norman’s notes, 9 Oct. 1925 on a typed schedule ‘Approximate loan requirements of Australian states to 30th June 1926’, BoE G 1/386; Glendyne–Norman interview, 4 Dec. 1925, BoE G 1/286; B. Nairn, The ‘Big Fella’ (Melbourne, 1986), p. 99.

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Before the War, London had what amounted to unlimited money to lend abroad. This was no longer the case, and considerably more care had to be used in floating loans here – the price and time of the issue had to be right, and there had to be proper co-ordination between borrowers to avoid clashing and spoiling each other’s market.81

The first loan floated after the embargo’s removal happened to be for the Crown Agents. Norman thought the price too high, but told Scrimgeour’s senior partner that ‘he & [the] Crown Agents must decide in a free market’.82 Yet when the issue failed, he immediately complained to Amery, regretting ‘that there should be no co-operation as regards urgency, price, &c., between at least those of your various borrowers who may be called Imperial’.83 Amery – no doubt relieved that British capital was again flowing to the Empire – agreed ‘to look into . . . the possibility of co-ordinating Colonial loans with Dominion loans’.84 However he had no power over the Dominions and, in December, his permanent secretary, Sir Samuel Wilson, concluded a ‘gentleman’s agreement’ with Norman that covered only colonial issues. The Crown Agents would ‘in every case’ consult the Bank through Scrimgeours and Mullens about the terms and timing of new loans.85 Unknown to the Colonial Office, Norman also obtained a separate promise from Scrimgeour ‘to consult regularly & early & to cooperate so as to avoid troubles’.86 The arrangement was an unhappy one. The Crown Agents regarded the Governor’s judgement as poor and believed he was preventing the colonies from borrowing on best terms.87 In May 1928, Wilson was summoned to the Treasury for a second meeting with Norman at which these grievances were aired.88 But this was simply an opportunity for the Governor to tighten the screws. The day after, he called in Scrimgeour and Mullens to tell them ‘that the Trustee Loans (ex Corp[oratio]ns) for which they are responsible & for which price is fixed in London shall be priced in agreement with me’.89 Norman had originally hoped to include dominion loans in any cooperative arrangement with the Colonial Office, but failed to reach an 81 82 83 84 85 86 87 88 89

Casey to Bruce, 17 Jan. 1929, in W. J. Hudson and J. North (eds.), My Dear P. M. (Canberra, 1980), no. 167; Norman diary, 15 Jan. 1929. Ibid., 5 Nov. 1925. Norman to Amery, 10 Nov. 1925, BoE G 1/386; Harding note [31 Dec. 1927], CO 323/1023/26. Amery to Norman, 13 Nov. 1925, BoE G 1/386. Draft, Wilson to Ormsby-Gore, c. 14 Dec. 1927; Wilson note, ‘Raising of colonial loan’, 27 July 1928, CO 323/1023/26; Norman diary, 14 Dec. 1925. Ibid., 8 Dec. 1925. Draft, Wilson to Ormsby-Gore, c. 14 Dec. 1927, CO 323/1023/26. Ibid., Wilson, ‘Raising of colonial loans’, 27 July 1928; Norman diary, 31 May 1928. Norman diary, 1 June 1928.

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understanding with the Dominion that mattered most. According to Wilson: ‘the Australian Governments . . . had refused to consult the Governor as regards the issue prices etc. of their Loans’.90 Norman persisted, although, consistent with his general practice, preferred dealing with another banker – in this case the Commonwealth Bank’s London manager – than a political representative. During a visit to Australia by the Bank’s Comptroller in 1927, the Federal Treasurer agreed that the Commonwealth Bank would keep Norman advised.91 But Australian ministers did not trust the Governor. A year earlier, the Treasurer had sent his department head to London to take charge of the borrowing programme.92 At first, this official stayed in touch with Norman.93 But, ostensibly fearing leaks through the Bank’s Court of Directors, he soon decided to keep the details of new issues secret until underwriting contracts had been signed.94 It became open knowledge that ‘the Australian Governments, which are much larger borrowers than the Colonies, have refused to be trammelled by the advice of the Governor’.95 Throughout 1928, the Bank pressed the Commonwealth Bank to have its rights recognised.96 In August Ernest Riddle, the Commonwealth Bank Governor, explained to the Deputy-Governor: ‘The Commonwealth Government have not yet given way on the question of permitting us to consult with you in regard to the issue of Overseas Loans, and in fact we ourselves have been left in the dark regarding the Government’s intentions respecting the last two loans’.97 The coincidence of three large trustee issues at the end of the year underscored the Bank’s inability to influence the Australians. Between them, India, New Zealand and Australia wished to raise £25 million. Norman agreed the order and timing with the brokers, but the Australians refused to accept an issue price of 971/2 because it was less than that of the New Zealand loan.98 Norman told a Nivison partner ‘he sh[oul]d fight for 971/2’; summoned the Commonwealth Bank’s London manager and repeated that 90 91 92 93 94 95 96 97 98

Ibid., 14 Dec. 1925; draft, Wilson to Ormsby-Gore, c. 14 Dec. 1927, CO 323/1023/26. Harvey to Gibson, 24 Nov. 1927, BoE G 1/286. B. Attard, ‘The Bank of England and the origins of the Niemeyer mission, 1921–1930’, Australian Economic History Review 32 (1992), pp. 70–1. Norman diary, 5 Oct., 1 Dec. 1926; 23 June 1927; 1 Feb. 1928. Harvey to Gibson, 24 Nov. 1927; Riddle to Lubbock, 28 Aug. 1928. BoE G 1/286; Attard, ‘Origins of the Niemeyer mission’, p. 70. Draft, Wilson to Ormsby-Gore, c. 14 Dec. 1927, CO 323/1023/26. Harvey to Gibson, 24 Nov. 1927; Norman to Riddle, 30 April 1928; notes of conversation with Reading, 3 Dec. 1928, BoE G 1/286. Ibid., Riddle to Lubbock, 28 Aug. 1928. Norman diary, 27, 28 Dec. 1928; 11, 15 Jan. 1929.

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he ‘expect[ed] him in one way or another to get it’; and cabled the Bank’s head office in Sydney.99 The Australians thought Norman was trying to help foreign borrowers by moving their loan quickly off the market and refused to accept anything less.100 Eighty-four per cent of the stock was left with the underwriters.101 The day before the issue, Norman tried to impress Casey (and thereby the Australian Prime Minister) with the need for co-operation amongst empire borrowers.102 Yet ultimately all he and the Bank could do was admonish and murmur vague warnings. If the Australian authorities continued to ignore their London advisers, ‘they must not be surprised if they find their appearances in this Market gradually come to be less welcome than we should wish them to be’.103 Whether the Bank could actually stop them was another matter. Conclusion This brief narrative of the Bank’s attempts to use moral suasion to regulate empire borrowing is part of the wider history of the new issue market during the 1920s. It also further illustrates the persistence of the belief within official and financial circles that, in economic management, it was still possible to retain separate spheres for government and ‘the City’, with the former managing the ‘political and fiscal side’, while the latter retained control of ‘the technical and financial side’.104 On the related issues of monetary policy and capital market regulation, once the government had satisfied its immediate postwar funding requirements, the Treasury left the Bank to take charge. For his part, Norman did his utmost to manage the capital market without outside support, restricting his contacts as far as possible to bankers and the issuing brokers. But the very need to define distinct spheres was sufficient evidence of the difficulty in keeping them separate. Quite obviously, Norman’s ability to control empire access to the capital market was politically constrained. As a consequence he had to seek co-operation outside the City to make it effective. His circle of Whitehall contacts widened beyond 99 100 101 102 103 104

Ibid., 11, 12, 14 Jan. 1929; Schedvin, Australia and the Great Depression, pp. 102–4. Bruce to Casey, 18 Jan. 1929, NAA A1420/7. Schedvin, Australia and the Great Depression, app. A, table A-1. Casey to Bruce, 17 Jan. 1929, in Hudson and North, My Dear P. M., no. 167; Norman diary, 15 Jan. 1929. Harvey to Riddle, 24 Jan. 1929, BoE G 1/286. See note of conversation with Snowden, 4 Sept. 1929, quoted in Kynaston, City of London, III, p. 177; also Niemeyer, quoted p. 117, and the same distinction implicit in Hopkins to Norman, 10 Oct. 1928, in Sayers, Bank of England, III, app. 30, no. 16.

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the Treasury; he needed to use political leverage, either over a big issue like the embargo or in connection with relatively minor matters like the loans floated for the Crown Agents; and he came into increasing contact with dominion representatives, some of which he actively solicited. In each instance, however, it was not simply a question of imposing the Bank’s moral authority in the same way as within the City. Browbeating government departments was relatively easy, particularly with Treasury support. The Bank could also obtain the government’s co-operation over larger questions when they could reasonably be viewed as pertaining to its ‘technical’ sphere as the monetary authority. Yet the Bank did not automatically have its way. On the one occasion the Cabinet was asked to adjudicate, the deciding factor was the political priority of domestic economic interests, in the form of a moderate bank rate, over the empire’s demand for capital. And on the fundamental issue of empire privilege in London, not even the Treasury was prepared to follow Norman’s lead in suggesting the repeal of the Colonial Stock Act. Empire development, with its implicit assumption that the Empire would continue to draw on British capital, remained government policy. Amery may have detected some weakening in December 1928, believing that Cabinet was ‘quite prepared to throw out all Dominion securities from the trustee list’, but the Colonial Development Act a year later actually widened its coverage to include the loans of protectorates, protected states and mandated territories.105 If the Bank’s need to seek outside support was one constraint on its ability to regulate the capital market, Norman’s preference – with that of officials like Niemeyer – to leave it in the City’s hands was another, particularly in dealing with dominion governments that considered themselves entitled to the same access as domestic borrowers. This had clearly been evident in its relations with Australia. These had been marked in no small measure on the Australian side by residual mistrust of the City’s private interests. Just as importantly, like other empire governments, the Australians refused to bow unquestioningly to the Bank’s wishes. The New South Wales Agent-General’s comment to Amery in October 1925, after Norman had refused to allow one of the Australian states to borrow, is telling: ‘It was of course assumed that the Governor was speaking on behalf of the Treasury, otherwise no notice would have been taken of his injunction.’106 As long as the market for their stocks remained relatively buoyant, the Australians could afford to do so. 105 106

Amery Diaries, I, p. 574 (12 Dec. 1928); Constantine, British Colonial Development Policy, p. 186. Coghlan to Amery, 27 Oct. 1925, CO 532/325/49086.

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A final point can be made about capital exports to the Empire (at least, when governments were borrowers) in the context of the City’s wider efforts to rebuild its international influence following the First World War.107 The Bank’s principal concern after 1919 was sterling’s restoration as an international currency at the prewar dollar parity. London’s pre-eminence as a capital market was a secondary issue.108 Even if Norman had felt himself free to use bank rate, the weakness of the balance of payments would have forced a decline in capital exports. In the event, he improvised in ways that had the same result. His perspective on the Empire was also probably dominated by sterling.109 During the 1920s he encouraged the creation of independent central banks in the Dominions and India that would be based on the international principles agreed at Genoa in 1922 and be bound in ‘matrimony’ to the Bank of England.110 By inducing empire governments to hand operational responsibility for borrowing to these institutions, he also hoped he could manage their demand for capital more effectively.111 But while Norman may have regarded the City’s monopoly of most empire loans as a legitimate British interest, his immediate priorities were bank rate and the level of gold reserves. When pressed, his first choice was to restrain, diminish and, if necessary, divert empire demand. The proceeds of dollar loans may have been welcome additions to sterling’s reserves, but it is more obvious that Norman viewed empire borrowing in the United States as a regrettable necessity. As always, it is important to emphasise that the City’s interests were not necessarily uniform nor synonymous with those of the Bank. That said, the inner circle of accepting houses still depended on the provision of commercial credits as their staple business and regarded sterling’s recovery equally as the overriding priority.112 They had never played any significant part in issuing colonial loans. From the 1890s, this had been shared almost entirely by two broking firms – Nivison and Scrimgeour – in association with a shifting, but small, group of banking agents.113 By 107 108 109 110 111 112 113

P. J. Cain and A. G. Hopkins, British Imperialism: Crisis and Deconstruction 1914–1990 (1993), pp. 5–6. Ibid., p. 45. L. S. Pressnell, ‘1925: the burden of sterling’, EcHR 2nd ser. 31 (1978), pp. 67–85. Sayers, Bank of England, I, pp. 201–10; Cain and Hopkins, Crisis and Deconstruction, pp. 65–6; for ‘matrimony’, e.g., Norman diary, 4 Dec. 1924. For example, Trotter to Harvey, 25 March 1927, BoE G 1/289. Kynaston, City of London, III, p. 74; Green, ‘Influence of the City’, 199–200, 209; Cain and Hopkins, Crisis and Deconstruction, p. 48. Theodor Schilling, London als Anleihemarkt der englischen Kolonien, Munchener ¨ Volkswirtschaftliche Studien (Stuttgart and Berlin, 1911), p. 46; R. S. Gilbert, ‘London financial intermediaries and Australian overseas borrowing, 1900–29’, Australian Economic History Review 10 (1971), pp. 39–47.

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the 1920s, even the latter was largely out of purely private hands. It was these brokers and the large list of underwriters behind them who stood to lose most from the decline of empire loans. The underwriters remained invisible. The brokers generally submitted to Norman although were never entirely his ciphers. Even taking these firms into account, despite the Empire’s prominence as a borrower, by the 1920s there is no strong evidence of an organised ‘City’ interest that favoured it as a destination for British capital over any other.

11

Government–City of London relations under the gold standard 1925–1931 Robert Boyce

Implicit in the decision to return to the gold standard at the exchange rate of $4.86 in 1925 was the assumption that it would benefit both the City of London and the government. The City would again operate in a currency of unsurpassed prestige, backed by gold and unique among major European currencies in retaining its prewar exchange rate. Holders of sterling and sterling-denominated securities would know that under the gold standard the Bank of England was obliged to exchange sterling for gold at a statutory rate (one standard ounce of gold = 77s 101/2d) and to defend the rate through every means available to it, including adjustment of bank rate and other interest rates. The gold standard also promised to constrain politicians from interfering in the monetary and financial system, which under gold would operate according to supposedly automatic rules. In the event that politicians succumbed to the temptation to over-tax or over-spend, the gold standard would bring them up short when their actions reduced the country’s international competitiveness, weakened its balance of trade and forced the Bank of England to raise interest rates. In fact, the gold standard had an even broader appeal to the merchants, brokers, insurance underwriters, shipowners, financiers and bankers of the City, which was that, in theory at least, it made redundant other restraints upon trade and finance. So long as the Bank of England, a private institution, remained free from government interference and responded in timely fashion to the changing demand for monetary gold, there was no need for trade protection, lending controls or any other interference in the free movement of capital, goods and services. Not surprisingly, therefore, the City regarded the gold standard as an essential tool in its efforts to remain the greatest concentration of markets in the world. The City thus seemed certain to gain from the return to gold, but so too did the government. By increasing confidence in sterling, it promised to reduce the cost of new borrowing as well as servicing the existing national debt, which had been greatly inflated by the recent world war. It also promised to augment national revenue by increasing the City’s 215

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earnings and strengthening the financial foundations of British industry and commerce. And if, as hoped, Britain’s return to gold prompted other countries to follow suit, it would assist the recovery of world trade: a particular benefit, given that Britain’s postwar unemployment was concentrated largely in the staple export industries. More generally it could be expected to restore national prestige, since the country’s reputation included the principle that an Englishman’s word is his bond, and in turn that sterling was – or should be – as good as gold. On these advantages politicians of all parties could agree, but to Conservatives and no doubt many Liberals as well the gold standard had a partisan appeal. For it was their Labour opponents, with their ambitious tax and spending plans, who seemed most likely to be constrained by the return to gold.1 These at least were the expectations. Remarkably, however, almost none of the assumptions on which they were based proved well founded during the six-and-a-half years of the interwar period that sterling remained on gold. City–government relations were not fundamentally altered by the rapid failure of the project, in part because all three major political parties had agreed in principle to the restoration of the gold standard before Baldwin’s second Conservative government took the decision to proceed. Disappointment nevertheless soon became evident on both sides. The City grew impatient at the reluctance of the government to assist in the downward adjustment of wage and price levels, which seemed essential if the gold standard were to be given a chance to work. In turn Baldwin’s government, which held office until May 1929, and the subsequent Labour government grew frustrated by their decline in popularity due to falling price levels, high unemployment and the need to defend the gold standard with exceptionally high interest rates. Until the financial crisis of 1931 actually drove sterling off gold, neither the Conservatives nor Labour were prepared to go back on the decision to restore the gold standard, knowing that even to suggest such action might provoke a run on the pound and the possible collapse of the currency. Nevertheless monetary policy remained more politically charged than anyone had anticipated. The difficulty of maintaining the gold standard in the deflationary conditions after 1925 created a serious rift between the bankers and financiers of the City and manufacturers, trade unionists and other elements of the ‘producing classes’, which the politicians 1

Baldwin described the gold standard as ‘knave-proof ’ in (Conservative Party) Gleanings and Memoranda, Dec. 1925; also National Union of Conservative and Unionist Associations, The Gold Standard, Unionist Workers’ Handbook no.26 (n.d. ?1925).

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felt impelled to address. The Bank of England found its operations constrained, and in turn found it necessary to constrain the international activities of the City. So far from removing the justification for interfering in the movement of capital, goods and services, the return to gold thus actually increased pressure for such interference. This became all too clear once the National government, created in August 1931 to defend the gold standard, abandoned this task the following month and swiftly adopted policies at variance with the City’s interests. Restoration and reaction The ten years between Britain’s entry into the First World War in August 1914 and summer 1924 were a time of extreme adversity for the pound sterling and the City. First came the temporary freezing of foreign assets, the introduction of exchange, capital-lending and trade controls, and the de facto suspension of the gold standard. Then, in the postwar boom that followed the Armistice in November 1918, the gold standard was formally suspended for five years and sterling was allowed to depreciate from near $4.86, where it had been pegged, to $3.20, barely two-thirds its prewar value. The government sought to bring inflation under control by reining in public spending, and in April 1920 the Bank of England raised bank rate to an almost unprecedented 7 per cent, where it remained for the next twelve months. Exports were nevertheless slow to recover, and in January 1924, with the Franco-Belgian occupation of the Ruhr still disrupting trade, the Labour party took office for the first time. Although this was only a minority government dependent upon Liberal votes, and was defeated within nine months, the spectre of Labour exercising real power acutely disturbed the City and increased the appeal of the gold standard. More than ever, a fixed-rate r´egime where interest-rate decisions were taken by an independent central bank seemed essential to safeguard sterling from political influence and constrain politicians from excessive taxation and spending. Mill, City editor of The Times, who frequently acted as the mouthpiece of Norman, the Governor of the Bank of England, made this the main objection to Keynes’s proposal for a more flexible basis of currency stabilisation: A managed currency would be entirely at the mercy of politicians with big programmes . . . In these days of emancipation, and when the idea is widely current that a standard of living can be enjoyed regardless of what is produced, the dangers of a managed currency can hardly be exaggerated.2 2

‘City Notes’, The Times, 19 March 1925.

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Brand of the merchant bank Lazard Brothers, writing after the first Labour government was defeated, stressed the importance of having the gold standard in place before Labour could return to power: It is a very different thing whether a Socialist Finance Minister, with extravagant ideas as to the merits of Government expenditure or the blessings of increased purchasing power, is free to ‘inflate’ under an inconvertible system or whether he can act within the limits of the gold standard. In the latter case, he could not disguise from the public the effects of his policy on the monetary standard, whereas he might do much harm under existing conditions before his sins were discovered.3

Bradbury, the former permanent secretary of the Treasury, put the same point more succinctly: the gold standard was ‘knave-proof’.4 From a low of $4.26 when Labour took office in January 1924, sterling rose to $4.40 on 28 October, the eve of the general election which returned the Conservatives to office, and to $4.801/4 on 29 January 1925. The ascent to within one per cent of the prewar parity, accomplished without an increase in bank rate, appeared deceptively easy. In fact, it involved the Bank of England hiding reserve assets to justify the existing bank rate and quietly re-introducing the capital export embargo. Sterling was also strengthened by several temporary factors, including mild inflation in the United States and the deliberately expansionary monetary policy of the Federal Reserve Bank of New York; the stimulus to British exports, particularly coal, from the disruptive effect of the Ruhr crisis upon German competitors; the flight of capital from the continent to the safety of sterling balances in London; and the quite exceptional volume of American lending since summer 1924. It should have been obvious that sterling’s recovery was a precarious feat and unlikely to last, and indeed behind the closed doors of the Bank’s Court, several directors, including Addis of the Hong Kong and Shanghai Banking Corporation, Revelstoke of Baring Brothers, and Lubbock, the current Deputy-Governor, betrayed their unease.5 The chairmen of several clearing banks, including McKenna of the Midland Bank and Goodenough of Barclays Bank, whose accounts already contained non-performing loans to British manufacturing firms, 3 4 5

‘The gold standard’, March 1925, Brand papers 83B, Bodleian Library, Oxford. The essay appeared anonymously in The Round Table, March 1925. P. J. Grigg, Prejudice and Judgment (1948), p. 183. Sir Charles Addis diary, 8, 9, 21 Jan. 1925, School of Oriental and African Studies, University of London (hereafter SOAS); Lubbock to Norman, no.54, 9 Jan. 1925, Bank of England cables, Federal Reserve Bank of New York [FRBNY]; also P. Williamson, ‘Financiers, the gold standard and British politics, 1925–1931’, in J. Turner (ed.), Businessmen and Politics. Studies of Business Activity in British Politics, 1900–1945 (1984), pp. 7–8.

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also privately deprecated returning to gold amidst the present uncertainties.6 But the only one to express his opposition in public was Needham of the Manchester-based District Bank.7 For the others, the ostensibly natural recovery of sterling had created an opportunity that seemed too good to pass up. The 1920 Act suspending the gold standard was due to expire at the end of 1925. Putting off action beyond then would require its renewal, which might well be construed as an admission of weakness and undermine confidence in sterling. Other countries, including Germany, Austria and Sweden, had already returned to gold, and the unity of the Empire was threatened by South Africa’s announcement of its intention to return in July. Inaction also seemed likely to encourage the monetary radicals such as the banker J. F. Darling, Keynes and supporters of Irving Fisher’s Stable Money Association who advocated a ‘managed’ currency. Once the Chamberlain–Bradbury Committee reported on 5 February in favour of an early return at the prewar parity,8 opinion in the City appeared almost unanimously favourable to this course.9 In contrast to the City, industrial opinion was generally cool to early action on gold. Scarcely any industrialist took issue with the gold standard itself before 1925. But as early as 1918, the Federation of British Industries (FBI), in evidence to the Cunliffe committee on postwar currency and exchange policy, had argued that a strong trade balance should be the engine for restoring sterling to its prewar parity, and that it would be folly to rely upon monetary expedients.10 The Cunliffe committee virtually ignored the Federation’s submission. Nevertheless, when the pound’s slump substantially increased the wage and price adjustments required to regain $4.86, the FBI executive repeatedly appealed to the 6

7 8 9

10

Goodenough strongly deprecated an early return to gold in his evidence to the Chamberlain–Bradbury Committee on the amalgamation of the note issue: minutes of evidence, 11 July 1924, T 160/F7528/02/3, pp. 5, 23–4. He repeated his reservations to Churchill in early 1925: Churchill minute, 6 Feb. 1925, T 172/1499B. However, at the annual general meeting of the bank in January 1925 he advocated early action: The Banker’s Magazine, March 1925, p. 435. McKenna acted likewise, offering reassurances of a soft landing to the AGM of his bank and the commercial committee of the House of Commons, while acknowledging privately to Churchill a fortnight later, ‘There is no escape; you have to go back; but it will be hell’: March 1925, pp. 460–6; Midland Bank Monthly Review, Feb.–March 1925, p. 3; Grigg, Prejudice and Judgment, p. 184. Banker’s Magazine, March 1925, pp. 445–6. Report of the Committee on the Currency and Bank of England Note Issues, Cmd. 2393, p. 4. W. A. Brown Jr, England and the New Gold Standard, 1919–1926 (New Haven, 1929), pp. 221–6; R. H. Hawtrey, Monetary Reconstruction (2nd edn, 1926), p. 155; S. V. O. Clarke, Central Bank Cooperation, 1924–1931 (New York, 1967), p. 71; R. S. Sayers, The Bank of England, 1891–1944, 3 vols. (Cambridge, 1976), I, app. 30. ‘Foreign exchanges after the War’, 19 July 1918, T 188/2. On the FBI’s role in postwar debate, see R. W. D. Boyce, ‘Creating the myth of consensus: public opinion and Britain’s return to the Gold Standard in 1925’, in P. L. Cottrell and D. E. Moggridge (eds.), Money and Power: Essays in Honour of L. S. Pressnell (1987), ch. 7.

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Prime Minister for a new inquiry, this time with better representation for industry. Again in 1924, with plans under way for the amalgamation of the Treasury and Bank note issues, a generally recognised preliminary to the return to gold, the executive wrote to Governor Norman, expressing their apprehension, and followed this with a memorandum setting out the case against early action.11 The Federation’s director, Nugent, and its chief economist, Glenday, shared the view that returning to gold in 1925 would be ‘extremely hazardous’, given that two of Britain’s main industrial competitors, France and Belgium, retained floating currencies, and sterling would be exposed to the United States’ notoriously unstable price level.12 At their instigation, the executive warned Churchill to stay his hand.13 Their warning was echoed by the National Union of Manufacturers, farmers’ representatives, and leading industrialists including Mond and Stamp.14 The newspaper publisher, Beaverbrook, also took their side. An advocate of Imperial unity, he had made his fortune in Canada, mobilising finance for industrial development, and disdained the ‘non-productive’, cosmopolitan character of the City. On 28 January he warned Churchill that returning to gold would mean handing control of British monetary policy to America.15 As events that spring demonstrated, the City exercised overwhelming influence over deliberations on the future of sterling. For twenty years before the war Britain had managed to combine expanding overseas trade, increasing capital exports and stable exchange rates. As a result, the City’s prestige had reached new heights and monetary policy had come to be regarded as an arcane subject, best left to experts in the City. The national press reinforced this view by reserving comment for the City editor who typically worked from separate premises near the Bank of England. Thus even the Daily Mail, the Daily Express and the Morning Post, whose publishers or editors were openly suspicious of ‘cosmopolitan finance’, vigorously supported the gold standard in their City pages.16 This was only one of the advantages the City enjoyed over producer interests. Another was the concentration of mercantile-financial activity in the square mile of London, and the dispersal of manufacturing and extractive industry throughout the country, which ensured that spokesmen for the former were more readily available for interview by the 11 12 13 14 15

Minutes of Committee on the national debt, 23 July 1924, FBI/EA/Glenday/9, Federation of British Industries papers, Modern Records Centre, University of Warwick. Glenday memorandum, 5 Feb. 1925, Nugent minute, n.d., FBI/EA/Glenday/19. FBI letter to Churchill, 17 March 1925, T 172/1499B. R. W. D. Boyce, British Capitalism at the Crossroads 1919–1932. A Study in Politics, Economics and International Relations (Cambridge, 1987), pp. 73–5. 16 Boyce, ‘Creating the myth of consensus’, pp. 185–7. Ibid., pp. 74, 391 f.153.

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national press and closer to the locus of political power. A third was the more confident manner of City men, many of whom were required to take a view on large issues of policy and to deal with a wealthy clientele. Whereas industrialists frequently felt obliged to acknowledge their uncertain grasp of monetary policy, bankers commonly encouraged the opposite impression.17 It no doubt helped that a much higher fraction of them enjoyed the advantage of a major public school and Oxbridge education, and relatively more belonged to the titled classes.18 A fourth advantage was the informal unity and hierarchical character of the City, where directors of the private banks, discount houses and merchant banks enjoyed the highest status and filled most of the places on the Bank of England’s Court of directors. Not until 1928 was an industrialist (Stamp) elected, and not until 1932 a clearing banker. The fifth advantage was the zealous leadership offered by the Bank in the person of Norman. Until the recent war, the governorship of the Bank had been a twoyear, part-time post, held in rotation by senior directors on the Court. However, with Norman’s election to the post in 1920 and subsequent re-election, it became at least semi-permanent. Norman, a bachelor, had severed links with his merchant bank before entering the Bank in 1914 to assist the Deputy-Governor, and was thus able to devote himself wholly to its affairs. As Governor, he demonstrated the Bank’s freedom from political influence by refusing publicly to explain his actions or meet the press. But behind the scenes he flattered City editors into believing they had privileged access to him.19 He also cultivated the friendship of several leading politicians, notably Baldwin and Austen Chamberlain among the Conservatives and Snowden, Chancellor of the Exchequer in the two interwar Labour governments. The City regularly returned Conservatives to its two parliamentary seats. While the evidence is fragmentary, City men probably provided most of the financial resources for Conservative election campaigns.20 Far more important, however, was the City’s remarkable capacity to promote its own interests through the Governor and its numerous articulate spokesmen. But perhaps the greatest advantage the City enjoyed in its pursuit of an early return to gold was the support given by the Treasury. Treasury officials did not deliberately favour the City itself. Yet their responsibility for the national debt brought them into close contact with the Bank 17

18 19 20

This point is nicely developed in E. H. H. Green, ‘The influence of the City over British economic policy, c.1880–1960,’ in Y. Cassis (ed.), Finance and Financiers in European History, 1880–1960 (Cambridge, 1992), p. 202. ´ Y. Cassis, Les banquiers de la City a` l’´epoque Edouardienne 1890–1914 (Geneva, 1984). Boyce, ‘Creating the myth of consensus’, pp. 187–8. Boyce, British Capitalism at the Crossroads, p. 21.

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of England and obliged them to share the City’s preoccupation with the health of the financial markets. For them, the chief appeal of the gold standard was its disciplinary function, together with the ease with which it could be justified from a cursory knowledge of economics. Senior officials in the Treasury’s finance division had the reputation of being the most formidable minds in Whitehall. But with the exception of Hawtrey, a trained economist, they were generalists with degrees in classics or pure mathematics, whose knowledge of economics had been acquired ‘on the job’ and was actually rather modest. It amounted in practice to a conventional view of market relations, wherein factors of production would be fully utilised at any given level of prices, so long as the price mechanism was not impeded by ‘artificial’ obstacles and governments did not attempt to do what markets could do better.21 From this standpoint, industry’s objection to an immediate return to gold seemed unworthy of consideration, for while it would undoubtedly involve firms in some wage and price adjustment, this was only to be expected in a market economy. The existence of friction in making these adjustments reflected the shortcomings within industry, not a failure of the economic system. The gold standard promised to keep British price levels internationally competitive, to constrain public spending and taxation, and to ensure trust in the currency, all of which would benefit industry. If industry failed to seize the opportunity, that was the fault of its management or labour relations. This at least was the Treasury view. Devoted largely to financial accounting and lacking first-hand knowledge of the real economy, they largely overlooked the difficulty industry had already encountered in adjusting to the decline in price levels since 1921. Niemeyer, head of the finance division, knew that American price levels had ceased to rise and were on a downward course before the decision was taken to return to gold.22 He played down the significance of this trend and with Norman continued to press the Chancellor to act. Churchill, with no prior experience at the Treasury and not expecting to receive the post in 1924, relied heavily upon his Treasury and Bank advisers. The Cabinet left him the decision to return to gold, and formed no committee to which he could refer the issue. Through McKenna, Beaverbrook and Keynes’s journalistic writing, however, he soon recognised the risks of precipitate action. In particular, he was impressed by the likely impact upon the export industries, which were already struggling and could not easily adjust to further deflationary pressure. While the City 21 22

G. C. Peden, The Treasury and British Public Policy, 1906–1959 (Oxford, 2000), pp. 178– 80 and passim. Niemeyer to Churchill, 21 April 1925, T 172/1499B.

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would obviously welcome the immediate return to gold, he feared it would increase unemployment and create a dangerous gap between finance and industry. Despite Niemeyer’s and Norman’s efforts to minimise these risks, he was not convinced by their justification of postwar policy, which had consistently favoured a strong exchange rate over a strong trade balance, and whose consequences he summed up in Keynes’s phrase, ‘the paradox of unemployment amidst dearth’.23 He held out until 17 March, when a dinner was arranged with experts to debate the issue. But aside from Keynes, the experts came exclusively from the City or the Treasury, and when McKenna abandoned the struggle, the mercurial Keynes was left to battle on alone.24 Within three days Churchill surrendered, and prepared to announce the return to gold in his forthcoming budget speech.25 As several historians have argued, Churchill enjoyed vigorous debate, and may have sparred with Niemeyer and Norman in order to test the case for restoration in preparation for its defence in Parliament.26 But there was evidently more to it than this. For one thing, since the great preponderance of expert opinion favoured restoration, there is no obvious reason why he should have gone to such lengths to set out the case against action unless he personally identified with it. For another, even after agreeing to act, he betrayed considerable misgivings. Thus, in the same budget speech confirming the return to gold, he announced the reduction of super-tax by an amount equal to the rise in Estate Duty, or £10 million per annum. This, he indicated to the King, was intended to reward ‘the highly paid brain worker’ at the expense of the rentier who would be the chief beneficiary of the return to gold. By the same token, he introduced import duties on silk and artificial silk (rayon), which he described as a tax on luxury, his target again being the rentier class.27 In earlier days Churchill had regarded the gold standard as a natural concomitant of free trade.28 In present circumstances he saw it as a reason for departing somewhat from free trade. Thus from the very outset, the gold standard tended to bring the government and City interests into conflict. Churchill’s announcement of the return to gold on 28 April was warmly applauded in the City and by City editors of the national press, while 23

24 26

27 28

The exchanges between Churchill, Niemeyer and Norman are reprinted in D. E. Moggridge, British Monetary Policy, 1924–1931: The Norman Conquest of $4.86 (Cambridge, 1972), app. 5, pp. 260–76. 25 HC Deb 180, c. 58, 28 April 1925. Grigg, Prejudice and Judgment, pp. 182–4. D. E. Moggridge letter, Times Business News, 24 March 1969; P. F. Clarke, ‘Churchill’s economic ideas, 1900–1930’, in R. Blake and W. L. Louis (eds.), Churchill (Oxford, 1993), p. 82. Churchill to King George V, 23 April 1924, GV K1296/18, Royal Archives. Clarke, ‘Churchill’s economic ideas’, p. 82.

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opponents offered only subdued criticism in face of this fait accompli. Within a few weeks, however, the warnings he had received from Beaverbrook and others appeared to be borne out when falling coal prices threatened to result in a lock-out and possible general strike. As the crisis unfolded in July, Beaverbrook reminded readers of his newspapers that this was precisely the outcome he had predicted from a return to gold. The FBI and the Liberal leader, Lloyd George, similarly pointed up the connection. Churchill vigorously disputed their claims, but was further embarrassed when Beaverbrook serialised Keynes’s ‘Economic Consequences of Mr Churchill’ in the Evening Standard.29 Stamp drew the connection with the overvalued exchange rate in his addendum to the report of the official inquiry into the coal dispute on 28 July.30 Two days later the FBI renewed its criticism of the gold standard decision.31 In public, Churchill had no choice but to defend the restoration and deny any connection between it and the industrial crisis, since to do otherwise would stir doubts about the future of sterling and perhaps trigger a run on the pound. But in private his conviction that he had been drawn into ‘the biggest blunder of [my] life’, prompted him to berate Niemeyer and Norman for allegedly leading him up the garden path.32 Norman, on his weekly visits to the Treasury, appears to have been the frequent victim of Churchill’s withering sarcasm.33 Niemeyer had to endure similar attacks. Preparing his budget speech in April 1926 with the prospect of a general strike only days away, Churchill suggested that Niemeyer might like to contribute a paragraph on the first year’s experience back on gold, perhaps on the lines, ‘At any rate, our prosperity, such as it is, stands on an absolutely sound foundation. Having deliberately jumped out of a top storey window, we have at least the assurance that we can start fair again from the pavement.’34 But the sarcasm stayed within the four walls of the Treasury. When Churchill delivered his Budget speech, he once again spoke like a true believer, affirming that the restoration of the gold standard had been all to the good. At any rate, he concluded, ‘we stand to-day on a basis of reality . . . We may not be soaring in the clouds, but there is at least firm ground under our feet.’35 29 30 31 32 33 34

35

Daily Chronicle, 11 July 1925; The Times, 13, 16 July 1925. Report by a Court of Inquiry concerning the Coal Mining Industry Dispute, 1925, Cmd. 2478, pp. 21–4. British Industries, 30 July 1925, Supplement, viii. C. W. Moran, Winston Churchill: The Struggle for Survival, 1940–1966 (1966), p. 139. Grigg, Prejudice and Judgment, p. 193. M. Gilbert, Winston S. Churchill, Companion volume V, part 1, Documents, The Exchequer Years, 1922–1929 (1980), pp. 685, also 1306–7; Niemeyer to Churchill, 28 April 1927, Churchill to Niemeyer, ‘9.4.27’, 9 May 1927, T 175/11. HC Deb 194, c. 1696–7, 26 April 1926.

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In the wake of the general strike the next month, Amery, the Colonial Secretary, urged Cabinet colleagues to support trade protection, with the introduction of a ‘gold exchange duty’. As he explained, returning to gold had handicapped British industry by increasing borrowing costs and real wages as well as the burden of public and corporate debt, while raising the price of exports and reducing the price of competing imports. A gold export duty would go some way to offset these burdens.36 Churchill, still committed to free trade, refused to accept Amery’s remedy, but found his criticism unanswerable. Within the Treasury he paraphrased Amery’s argument in renewed debate with Niemeyer. Postwar governments, he observed, had heeded their financial advisers on a gold-standard policy. The national credit had been improved and the cost of living reduced, but the cost had been enormous: bad trade, hard times, an immense increase in unemployment, involving costly and unwise remedial measures, attempts to reduce wages in line with the cost of living . . . [and] fierce labour disputes arising therefrom, with expense to the State and community measured by hundreds of millions . . . To sum up, the financial policy of Great Britain since the war has been directed by the Governor of the Bank of England and distinguished permanent Treasury officials who, amid the repeated changes of Government and of Chancellors, have pursued inflexibly a strict, rigid, highly particularist line of action, entirely satisfactory when judged from within the sphere in which they move and for which they are responsible, and almost entirely unsatisfactory in its reactions upon the wider social, industrial and political spheres.37

When, shortly after this exchange, Niemeyer announced he was leaving the Treasury for a post at the Bank of England, Churchill regarded it as a form of betrayal, perhaps part of a long-planned conspiracy.38 His resentment found expression in Cabinet in June 1928, when he surprised colleagues by denouncing Norman.39 Even years later, he referred to the Governor with scorn.40 Churchill was not a man who sought scapegoats for his mistakes. In this case he was convinced he had been wilfully drawn into a calamitous error. So long as Britain remained on the gold standard, Churchill’s bark was bound to be worse than his bite. Yet his bark was serious enough, for it 36 37 38 39 40

Amery to Churchill, 6 Dec. 1926, Amery to Baldwin and Churchill, 10 April 1927, Baldwin papers 28, Cambridge University Library. Niemeyer to Churchill, 9 May 1927, and Churchill to Niemeyer, 9 May 1927, T 175/11. A. Boyle, Montagu Norman: a Biography (1967), p. 230. J. Barnes and D. Nicholson (eds.), The Leo Amery Diaries, I: 1869–1929 (1980), 27 June 1928. See for instance, C. Hassell, Edward Marsh, Patron of the Arts (1959), p. 570; Moran, Winston Churchill, p. 303; Boothby letter, Times Business News, 21 March 1969; Boyle, Norman, pp. 190, 195.

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intimidated Norman into constraining his operational decisions, which in turn affected the activities of the City. It began in July 1925, when Churchill requested Norman to reduce bank rate in order to assist in relieving the industrial crisis.41 Norman initially refused the request, but at Churchill’s insistence he broke off his holiday to return to London and against his better judgement he reduced bank rate on 6 August from 5 to 41/2 per cent.42 This was not the first time a Chancellor had exerted influence over the Bank’s interest-rate decisions, but it flew in the face of City expectations that under the gold standard the government would respect the Bank’s operational control of the monetary system.43 Thereafter the pressure continued unabated. In September, with the industrial crisis still unresolved, Churchill again pressed Norman to reduce bank rate. Norman anticipated a rise in New York interest rates, and in any case wanted to maintain London rates in order to strengthen the Bank’s gold reserves. But since reserves had already risen considerably since April and the London money market had ample short-term funds, he agreed to reduce bank rate on 1 October to 4 per cent.44 The following month he secured the Chancellor’s agreement to lift the embargo on foreign loans. Meanwhile, however, stock-market speculation and higher interest rates in New York had begun to draw balances from London, driving sterling below gold export point and eventually draining £13 million from the Bank’s reserves. When Norman notified the Treasury on 2 December of his intention to raise bank rate 1 per cent the following day, Churchill angrily reacted, telephoning the Bank and threatening to denounce Norman in Parliament for acting without consulting him and against his wishes.45 In the event, Norman proceeded with the rate rise and Churchill refrained from carrying out his threat. Nevertheless, Norman subsequently betrayed the influence of industrial criticism and the Chancellor’s threats of intervention. On occasion he hid assets rather than allowing them to appear in the Bank’s reserves, in order to reduce pressure for lower interest rates. For much of the 41 42 43

44 45

Niemeyer to Norman, 21 July 1925, Norman to Niemeyer, 24 July 1925, T 176/13 Part 2. Addis diary, 28 July 1925, SOAS; Strong to Case, 1 Aug. 1925, Strong papers, 1000.6, FRBNY. D. Kynaston, ‘The Bank of England and the government’, in R. Roberts and D. Kynaston (eds.), The Bank of England. Money, Power, and Influence, 1694–1994 (Oxford, 1995), pp. 27–8, describes the significance of Churchill’s intervention, but dates it only from December rather than July 1925. Norman to Niemeyer, 21 Sept. 1925, T 176/13 Part 2; Norman to Strong, no.18, 22 Sept. 1925, Bank of England cables, FRBNY. Norman diary, 3 Dec. 1925, in BoE; Sir H. Clay, Lord Norman (1957), p. 292; Grigg, Prejudice and Judgment, p. 193; F. W. Leith Ross minute, 3 Dec. 1925, T 176/13.

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time he operated with currency reserves barely above the Cunliffe minimum of £150 million.46 The case for re-imposing foreign lending controls became harder to resist, and he was obliged to act in spring 1929, to the great disappointment of the City’s issuing houses.47 Enthusiasts for the gold standard had assumed it would attract deposits to London and expand the amount available for capital exports. After April 1925 British short-term lending did indeed increase. But instead of a flourishing capital market, sterling limped along barely above gold export point, while the Bank of England maintained interest rates at historically high levels and the Governor applied moral suasion to discourage new overseas loans. This was not the only unintended result of the restoration of gold. Despite the hope that British industry would benefit from the stimulus to lending and greater market stability, industrialists remained frustrated by the high interest rates and the sharply downward trend of wholesale price levels that coincided with its re-establishment. The result, as Churchill had anticipated, was a steadily widening gulf between finance and industry. The decision twice to reduce bank rate in 1925 deflected criticism from the Bank, and in the heightened tensions after the general strike in May 1926 industrialists drew back from openly criticising the monetary authorities. But towards the end of 1926 complaints began to mount from the newer as well as older sectors of industry, and from workers as well as employers, many of whom now believed their interests had been sacrificed for the benefit of the City.48 McKenna’s call for an inquiry into monetary policy in January 1927 prompted a sharp increase in industrial protests.49 The president of the Bradford Textile Society was prompted to write to Churchill, pointing out that he was an active member of the Conservative party and urging him to heed McKenna’s advice before the government broke on the rock of the gold standard.50 Shortly afterwards, the Council of the British Engineers’ Association formally welcomed McKenna’s ‘courageous’ speech and endorsed his call for an inquiry, ‘including the position of the Bank of England as the central institution and custodian of our monetary resources’.51 The FBI’s journal devoted the economic supplement to its spring 1927 issue to 46 48

49 50 51

47 Ibid., III, app. 30. Sayers, The Bank of England, I, pp. 213–14. See for instance the British Electrical and Allied Manufacturers’ Association, Trade Survey 1/1 (Dec. 1926), pp. 5–6 and the petition from fifty-one largely Labour-controlled councils in the industrial north, in The New Leader, 17 Dec. 1926, p. 3; and similar petitions in T 160/384/F9780/1. Reginald McKenna, Post-War Banking Policy (1928), pp. 132–5. The speech was reproduced in numerous journals during March 1927. President, Bradford Textile Society to Churchill, 17 Feb. 1927, T 160/384/ F9780/1. World Power 7 (1927), p. 167; Bremner to Churchill, 15 March 1927, T 160/384/F9780/1.

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monetary policy and its adverse effect upon the British economy since the war.52 Criticism from agricultural and Lancashire industrial interests became especially shrill, and eventually what The Times described as the most important agricultural conference in recent memory was deliberately convened in the City.53 Critics hostile to the City on account of its suspect cosmopolitanism had always existed. Their insinuations now received a new twist amidst evidence that the gold standard had tied British interest rates to American monetary policy. Beaverbrook made this the source of his attack on Norman and his City colleagues in the columns of the Daily Express and Sunday Express. Maxse, editor of the right-wing National Review, mounted an equally strident and occasionally anti-semitic campaign against them.54 Numerous voices on the left such as Mosley and Johnston of the Scottish ILP also denounced ‘the money power’.55 Lloyd George spoke out against the gold standard and, remarkably for a Liberal leader, disparaged a free-trade manifesto prepared in the City as ‘a moneylenders’ circular’.56 Even MacDonald, always a weathervane of political fashion, warned of the growing concentration of power in the City and the danger to industry.57 Presently The Economist took up the issue, asking ‘Is the financier a parasite?’ Predictably the journal answered in the negative.58 Yet the very fact that it should pose the question pointed to the intensity of attacks upon the City for its alleged indifference to British industry and public dissatisfaction with the consequences of the gold standard. The government found itself caught in a dilemma. Having gone down to defeat on a protectionist platform in 1923, Baldwin saw no prospect of successfully re-opening the tariff question when he formed his second administration in November 1924. Nevertheless the Conservative party relied heavily upon the support of the industrial regions, and could scarcely ignore their mounting dissatisfaction. Since Baldwin and his colleagues were not prepared to contemplate a reversal of monetary policy, they therefore found themselves turning back towards trade protection. Safeguarding was the chief topic at the Conservative party conference in October 1927, and the following month a campaign began for the safeguarding of iron and steel, supported by the Morning Post, the National 52 53 54 55 56 57

British Industries, Economic Supplement, 30 April, 30 July, 31 Oct. 1927. Boyce, British Capitalism at the Crossroads, pp. 151–3, 173–4. National Review, Feb. 1926, p. 800. Oswald Mosley, ‘The Labour party’s financial policy’, Socialist Review, Sept. 1927, pp. 18–35. The Liberal Magazine, Aug. 1925, p. 477; The Times, 1 Dec. 1926. 58 14 July 1928, p. 61. Manchester Guardian, 18 Feb. 1928.

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Union of Manufacturers, the Empire Industries Association, and even elements of the trades union movement.59 The Cabinet, however, comprised committed free traders as well as protectionists and sceptics such as Baldwin, who inclined towards protection but doubted that the electorate was yet ready for large-scale intervention. The result was near immobility. On the one hand, the government drew back from substantial concessions to industry: only nine of the forty-nine industries that applied for safeguarding between 1925 and 1929 were successful, and as late as 1929 only just over 8 per cent of British imports were subject to import duties.60 On the other hand, it refused to back City efforts to promote further trade liberalisation abroad. With the possibility that Britain might abandon free trade and retreat into imperial protectionism increasingly recognised abroad, British delegates to the 1927 World Economic Conference were able to use the threat to push through resolutions on freer trade.61 Notwithstanding their success, the government refused to commit itself to the conference resolutions.62 In 1928 ministers agreed that after the next general election they would open the door wider to safeguarding applications. But this still left them in the negative position of favouring neither full free trade nor tariff reform. Lacking a convincing policy, they therefore based their electoral campaign on Baldwin’s reassuring image and imprecise appeal, ‘You trusted me before, I ask you to trust me again.’63 When this proved inadequate and the Labour party regained office, the Conservative party faced intense turmoil over trade policy. Beaverbrook led the way by re-opening the campaign for tariff reform under the new banner, Empire Free Trade. Thus the gold standard once again confounded the expectations of its proponents. They had confidently anticipated that returning to gold would stimulate trade and reduce if not remove altogether the appeal of other forms of economic intervention. But in the event it had intensified pressure for government action, if not to suspend the gold standard itself, then to relieve industry, including agriculture, from the burden of adjustment that the gold standard imposed upon it. When the government found itself unable to respond decisively, it appeared ineffectual and paid the price in electoral 59

60

61 62 63

The Iron and Coal Trades Review, 10 Feb. 1928, p. 191; 6 April 1928, p. 502; 27 April 1928, pp. 607–8; 18 May 1928, p. 762; 15 June 1928, p. 912; J. C. Carr and W. Taplin, History of the British Steel Industry (Oxford, 1962), pp. 466–7. Royal Institute of International Affairs, ‘Interim report on measures taken by the British government to promote exports and protect the home market in force in March, 1932’, table I, p. 43. League of Nations, ‘Report and proceedings of the World Economic Conference held at Geneva, 4 May–23 July 1927’, p. 48. HC Deb 208, c.1827; 209, cc. 519, 521; The Free Trader, Aug.–Sept. 1927, p. 166. K. Middlemas and J. Barnes, Baldwin: a Biography (1969), p. 524.

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defeat. This, however, did nothing to relieve the frustration of industrialists, which was soon to be intensified by the world slump. Labour, the slump and the sterling crisis The second Labour government, formed in June 1929, depended upon Liberal votes to stay in office. But its leaders were in any case essentially conservative men whose chief ambition was to demonstrate that, like their political rivals, they could be trusted with the stewardship of the British state and empire. As leaders of an insurgent party, they employed the rhetoric of radical change. Yet their first occasion in office in 1924 had been sufficient to demonstrate that their talk of socialist transformation was intended largely for their own supporters and not to be taken seriously. Indeed, the Prime Minister, MacDonald, and the Chancellor of the Exchequer, Snowden, now made no effort to hide their conservatism. In December 1929 they received the freedom of the City in a ceremony at the Guildhall, MacDonald for his restoration of friendly relations with the United States, Snowden for vigorously defending British interests in the recent reparation negotiations. Snowden spoke for both of them when he affirmed that it was: one of the greatest honours which could come to any man in recognition of public work . . . The association of the City with our struggles for national liberty, with the growth of our civic institutions, with the development of our trade and commerce, and with the building up of our world Empire, had given it a unique place in British history, and to be a Freeman of the City . . . made one feel a part of that great City and gave one a more definite share in its traditions and its glories. (Cheers.)64

Like ministers in the preceding government, however, they were already finding that the gold standard was proving a false friend. Within three months of taking office, the government faced intense pressure from supporters to intervene with the Bank of England, when the bull market on Wall Street weakened the sterling exchanges and forced Norman to raise bank rate to 61/2 per cent. Snowden’s response was to temporise. Speaking at the Labour party conference in October, he announced plans for a wide-ranging inquiry into ‘all aspects of banking, financial and credit policy’.65 The ostensible purpose was the ambitious one of determining if the monetary and financial system met the needs of industry and what, if any, improvements were required. But as the Daily Telegraph sagely put it, ‘it gets [the Chancellor] out of a very awkward 64 65

‘New Freemen of London’, The Times, 20 Dec. 1929. Labour Party Annual Conference Report, 1929, p. 230.

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hole, for while this inquiry is in progress the wild men of the ILP and others can be held at arm’s length’.66 Lord Macmillan, the distinguished judge who chaired the enquiry, implied something similar to committee members at a private meeting before the public hearings: It is obviously undesirable that anything that this Committee does should disturb the status quo . . . we do not want to reopen any topics which may be considered for the moment closed. One of the things we all want to do is to maintain the stability and confidence of the financial world . . . I think what we say in our Report about the gold standard might be very brief indeed.67

Besides Macmillan, the committee comprised thirteen members, of whom five were prominent bankers, one a City-based company director, and one, Gregory, a staunchly conservative economist. The others included an industrialist, a trade unionist, a leading member of the cooperative movement, a northern coal merchant, an eccentric former Communist and the radical economist, Keynes.68 In view of its heterogeneity and wide mandate, the government could be confident that the committee would deflect criticism from the gold standard and the City for eighteen months or more. This gave it time to cast about for economic initiatives compatible with Snowden’s orthodox financial and free-trade principles. Snowden himself took one initiative in summer 1929, when he attempted to revise the terms of the Young plan at the diplomatic conference at the Hague, in order to secure a larger share of German reparations for Britain. While his abrasive manner and stonewalling tactics earned him plaudits from a now thoroughly frustrated City of London, the concessions he obtained were in fact negligible if not actually negative.69 A second initiative came in September when Graham, the President of the Board of Trade, seized upon a Belgian proposal and persuaded the League of Nations to promote a two- or three-year tariff truce, as the prelude to renewed efforts at trade liberalisation. The first tariff truce conference was duly convened in February 1930, but neither the United States nor any other overseas country sent a plenipotentiary and the European countries refused to tie their hands on trade policy. With hopes fading for a liberal free-trade solution to Britain’s slide into depression, ministers turned not once but several times to protectionist measures. MacDonald, who held no fixed views on economic policy, indicated his willingness to act, so long as it could be presented as an emergency measure.70 But Snowden proved as dogmatic in his defence of free trade 66 68 70

67 Minutes, 10 Jan. 1930, Brand papers, 27. Daily Telegraph, 4 Oct. 1929. 69 Ibid., pp. 210–11. Boyce, British Capitalism at the Crossroads, pp. 280–1. Ibid., pp. 273–5, 311 and passim.

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as of the gold standard, and threatened to resign rather than give way. Lacking a solution of their own, ministers relied upon Norman for help. He in turn encouraged hope in initiatives of two sorts. The first were schemes for ‘rationalising’ struggling sectors of industry, such as cotton textiles and steel-making, which he began in 1929. Ministers were as pleased to be relieved of responsibility for industrial assistance as Norman was to keep the government from interfering in private sector affairs. But in fact he could do little aside from accelerating the closure of nonperforming factories and firms, thus adding to the already embarrassing unemployment problem.71 The second sphere of initiative was central banking co-operation. Here, too, his contribution proved to be wholly inadequate to Britain’s problems. Since becoming Governor of the Bank in 1920, Norman had looked forward to the day when, with the gold standard in place, leading central bankers would effectively control the international monetary and payments system and become the stewards of the world economy. This had proven as optimistic as his dream of autonomy within Britain. Eventually, as part of the reparation settlement, the Bank for International Settlements was formed: a sort of club for central bankers in Basel, where they could meet for private discussion. Norman assiduously attended its monthly meetings. But by the time it opened its doors in May 1930 the world slump was already in full swing. Without large-scale resources or new ideas, it could contribute almost nothing to Britain’s relief. But if Snowden merely folded his arms, his Treasury advisers did not. From spring 1930 the pound sterling remained at or below gold export point against the French franc for weeks on end, causing howls of outrage from City editors.72 The French government, anxious for the future of the entente with Britain, especially after the spectacular gains by the Nazis in the September Reichstag elections, signalled its desire to address British complaints over gold movements.73 The British Treasury immediately proposed parallel conversations between the treasuries and the central banks. Norman however refused to participate, perhaps on account of his deep-seated francophobia, but more likely because he wished to offer the British government no excuse for putting off the retrenchment he 71

72

73

Clay, Norman, pp. 328–35, 358; S. Tolliday, Business, Banking and Politics. The Case of British Steel, 1918–1939 (Cambridge, Mass., 1987), pp. 201, 208; Kynaston, City of London, III, pp. 132, 190–2. See for instance, George Glascow, ‘Foreign affairs’, Contemporary Review, June 1930, p. 783; The Observer, 20 July 1930; The Nation and Athenaeum, Aug. 1930, pp. 39–44; Chamber of Commerce Journal, 8 Aug. 1930, p. 116; Daily Mail, 16 Aug. 1930. Leith Ross to Hopkins, 17 Nov. 1930, and to Hopkins and Pethick-Lawrence, 2 Dec. 1930, T 160/430/F12317/1; Vansittart minute, 24 Nov. 1930, FO 371/14919/W12605/ 12605/17.

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believed was urgently necessary to retain confidence in public finances and the pound.74 Treasury officials therefore proceeded alone, setting out proposals for monetary and financial reforms to their French counterparts.75 The practical result was modest. The meetings nonetheless marked the first time since the return to gold that Whitehall took a direct role in monetary policy. Shortly afterwards, the Treasury also took up the question of tying foreign lending to British exports. Two years earlier the Foreign Office had attempted to raise the issue in Cabinet, hoping it would assist both domestic industry and British diplomatic influence abroad. The Treasury had blocked their path, insisting that City bankers must be allowed to arrange foreign loans without interference from industry or the state.76 But now, two years later with the economy in crisis, the Treasury too was prepared to encroach upon the City’s prerogatives.77 By and large, even in the midst of the slump dissatisfaction with the gold standard and demands for trade protection still found separate expression. Thus, for instance, Beaverbrook remained hostile to Norman and the internationalists of the City, yet he made no mention of this in his campaign for Empire Free Trade. The link nonetheless was always present, and by 1930 there was growing acceptance even in the City that Britain could hope to maintain free trade or the gold standard, but not both. This was acknowledged by the prominent City men who gathered at Hambros Bank in July 1930 to draft a manifesto calling for the introduction of tariff protection with reciprocal preferences if not complete free trade within the British empire, at least for the duration of the crisis.78 By now, with free trade collapsing even in Manchester,79 the Conservative party was ready to adopt a broad policy of imperial protectionism if returned to office.80 Yet the manifesto drawn up at Hambros Bank was nevertheless a remarkable document, coming from directors of many of the leading merchant banks, shipping and insurance companies in the City, and including three directors of the Bank of England who had hitherto been firm adherents of free trade.81 74 75 76 77 78 79 80 81

Waley minute, 30 January 1931, T 160/430/F12317/2. Boyce, British Capitalism at the Crossroads, pp. 294–9. A. Chamberlain memo., 16 Feb. 1929, and Sargent minute, 18 Mar. 1929, FO 371/ 14094/W1846/50. Leith Ross to Sargent, 24 Feb. 1931, FO 371/15675/W2222/50; Leith Ross to Harvey, 20 April 1931, T 160/394/F11324. Bankers’ Magazine, Aug. 1930, pp. 175–9; The Times, 10 July 1930. A poll of members of the Manchester Chamber of Commerce showed a three-to-one rejection of free trade: Chamber of Commerce Journal 6 June 1930, p. 674. Sir K. Feiling, The Life of Neville Chamberlain (1946), p. 181. Bankers’ Magazine, Aug. 1930, pp. 175–85. Amery described this as ‘the biggest leg up since 1903’: Amery to Baldwin, 4 July 1930, Baldwin papers 31.

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Labour ministers were now as frustrated as Conservatives ministers had been a few years before, but like them too divided to act. One junior minister, Mosley, resigned rather than cling to fiscal and financial orthodoxy in face of soaring unemployment. But since MacDonald was not prepared to take a lead and Snowden remained adamantly opposed to any departure from orthodox principles, the government took almost no practical action until the run on the pound in summer 1931 confronted it with the choice of severe retrenchment or allowing the currency crisis to get out of hand. With the Cabinet reluctant to accept spending reductions sufficient to stem the crisis, MacDonald resigned to allow a National government to attempt to restore confidence in the pound. The circumstances surrounding the downfall of the second Labour government led supporters to claim that it had been confronted by a ‘bankers’ ramp’, which dictated the terms of retrenchment and ensured its defeat when it failed to yield the concessions the bankers demanded. The claims are not wholly without substance. Thus, for instance, the Committee on National Expenditure, chaired by the City insurance executive, Sir George May, exaggerated the size of the prospective budget deficit. Thus, too, in the midst of the crisis City bankers pressured the government to balance the budget, and to do so mainly by reducing social expenditure rather than raising tax revenue. British bankers also sought to draw their American colleagues into the campaign for retrenchment. Norman, recuperating in Quebec from a nervous breakdown, went so far as to discourage the Federal Reserve Bank of New York from assisting the government until it agreed to swingeing budget cuts.82 This was a remarkable initiative which, had it become publicly known in Britain, might have had serious consequences for Norman and the Bank of England. In the event, the American bankers wisely left it to their British counterparts to determine what economies were needed. But the fact remains that the pressure on the government was largely self-inflicted, since it remained committed to the gold standard and hence needed to maintain public confidence in sterling by a demonstrated commitment to sound finance.83 The more important point is that for most of the period under the gold standard the pressure came from the other direction, that is from government to the City. In early September the National government introduced a retrenchment programme that seemed capable of balancing the budget 82

83

Diary of events, 23 Aug. 1931, bundle ‘Gold Standard’, Morgan Grenfell papers; Thompson-McCausland memo., p. 35, BoE ATM14/10; minute and memo., 24 Aug. 1931, Harrison papers 3115.2, FRBNY. Boyce, British Capitalism at the Crossroads, pp. 339–55; P. Williamson, ‘A “bankers’ ramp”? Financiers and the British political crisis of August 1931’, English Historical Review 99 (1984), 770–806.

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and restoring confidence in sterling. But by now the gold standard had placed acute strain on relations between the City and producer interests in manufacturing, mining, agriculture and labour. And when the pound was shaken by news of a mutiny in the North Sea fleet, brought on by the announcement of pay cuts, the government drew back from further retrenchment. It was in any case too late, for the Bank’s reserves had already reached danger level and confidence in sterling showed no signs of recovery. The suspension of the gold standard was therefore announced on 21 September 1931. In theory, leaving the gold standard should have made it possible to maintain policies of free trade and free capital movements, with only limited derogations during the crisis. Leading Liberals argued the case once sterling began to float. But such was frustration of six years on gold that the demand to be done with economic internationalism became overwhelming. Thus strict lending controls became a permanent feature of the 1930s, and emergency trade restrictions were followed by a permanent import tariff and imperial preferences, for which the National government could claim to have received a strong mandate in the general election in November 1931. Norman made no secret of his extreme disappointment at this sea change in economic policy, but by and large the City seemed resigned to it and made no protest. While the City continued to exercise some influence over public policy after the abandonment of the gold standard, its ascendancy was ended and for the next twenty-five years it was obliged to accept severe constraints on its international activity.

12

The City, British policy and the rise of the Third Reich 1931–1937 Neil Forbes

The study of Britain’s external financial and economic relations in the twentieth century provides a variety of insights into the nature of the relationship between the City and government. This chapter focuses on an aspect of that relationship which remains highly controversial: the part played by the City in the formulation and conduct of British policy towards Germany in the 1930s. Historians must of course guard against the tendency to regard the City as some kind of homogeneous entity or single interest group. In this respect, even persuasive arguments based on the concept of ‘gentlemanly capitalism’, like those advanced by Peter Cain and Anthony Hopkins, remain open to criticism.1 Dumett, for example, has warned against any analysis of causation which allows the inference to be drawn that City and Whitehall elites were united by ‘likemindedness’ and a ‘common view of the world’. Instead, the investigation of foreign-policy formulation should seek to identify the conflicts and tensions within the decision-making process.2 Michie, similarly, has pointed to the difficulties involved in defining ‘the City’: its very diversity suggests that it was incapable of speaking with one voice.3 Individual parts of the City, on the other hand, were able to develop their own voice: tightly organised banking committees, for example, were well placed to represent the respective interests of their constituent members. As E. H. H. Green argues, this institutional structure allowed bankers, at least, to develop a degree of cohesion far in advance of anything seen elsewhere in the British economy. Yet, if the City has continuously enjoyed a privileged position in terms of influence, the value of any analysis based on The author is grateful to the British Academy for the award of a grant which facilitated the research for this chapter. 1 2 3

P. J. Cain and A. G. Hopkins, British Imperialism, II: Crisis and Deconstruction 1914–1990, (1993). R. E. Dumett (ed.), Gentlemanly Capitalism and British Imperialism. The New Debate on Empire (1999), p. 11. R. C. Michie, The City of London. Continuity and Change Since 1850 (1992), p. 10.

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interest groups is relegated by Green in favour of, among other things, a ‘crucial ideological dimension’ – the debate over British external policy and a bias in strategy towards sustaining an internationally oriented economy.4 Government, too, comprises a variety of interests, and in the interwar years this sometimes took the form of intense rivalries between departments of state. After the First World War economic and financial issues assumed a pre-eminent place in foreign policy-making, but the Foreign Office clashed with the Board of Trade over the supervision of the newly established Department of Overseas Trade and resented the degree of control exercised by the Treasury over the reparations question. One study of diplomacy even suggests that the Foreign Office was unable to defend its ‘administrative domain’ against the inroads made by a suspicious Treasury because of a lack of necessary expertise.5 Indeed, while the Treasury was closely connected to the City,6 the Foreign Office’s relations with the financial authorities were anything but harmonious. Through criticisms voiced to other government departments, Foreign Office officials launched, in 1933–4, what can only be described as a hostile campaign against the City’s position over German credits and the tendency of Norman, Governor of the Bank of England, to conduct foreign policy on his own.7 Born out of frustration over the inability to coordinate financial and economic policies which might have helped to prevent the collapse of the Weimar Republic, the substantive charges made by the Foreign Office against Norman and City bankers were strikingly similar to the more ideologically based critique developed by the Labour Party.8 The inseparability of domestic, especially economic, determinants and international factors, and the significance of the part played by non-state actors in international affairs, are now prominent features in studies of the origins of the Second World War.9 Yet, it is hardly surprising that much of the historical literature should have followed in the tradition of condemning City bankers as the enthusiastic instigators and supporters 4

5 6 7 8 9

E. H. H. Green, ‘The influence of the City over British economic policy, c. 1880–1960’, in Y. Cassis (ed.), Finance and Financiers in European History, 1880–1960 (Cambridge, 1992), pp. 197–8, 213. K. Hamilton and R. Langhorne, The Practice of Diplomacy: its Evolution, Theory, and Administration (1995), p. 170. G. Ingham, Capitalism Divided? The City and Industry in British Social Development (Basingstoke, 1984). For a fuller analysis see N. Forbes, Doing Business with the Nazis. Britain’s Economic and Financial Relations with Germany, 1931–1939 (2000). E. Durbin, New Jerusalems. The Labour Party and the Economics of Democratic Socialism (1985), pp. 81–2, 205. P. Finney (ed.), The Origins of the Second World War (1997), p. 283.

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of appeasement policies, and even as facilitators of Nazi rearmament.10 There is an assumption that, at the very least, the City acted as a powerful pressure group in order to influence the policy of governments in the 1930s.11 More recently, Kynaston has presented an alternative interpretation in his authoritative and comprehensive survey of the City. One of the themes underlying his analysis of the 1930s is that London’s bankers reflected the national mood in being pro-German rather than pro-Nazi.12 Yet this, in turn, assumes that there was a uniform City ‘view’. The intention in this chapter is, therefore, to show that however effective the City was in appearing to be united, in the case of policy towards the Third Reich unity was little more than a fa¸cade behind which lay deep divisions. At the same time, the criticisms emanating from the Foreign Office indicate a surprising failure on the part of government to comprehend the complexity of the structures that comprised City life in the 1930s. Britain’s financial crisis and the ‘German question’ The question of how to satisfy Germany’s demands for the revision of the Versailles settlement and yet ensure a stable and peaceful future for Europe was at the centre of international politics throughout the 1920s. By 1931, as the Great Depression developed into the worldwide financial crisis, the very survival of capitalism seemed to rest upon finding a way out of the interlocking problems of war debts and treaty revision. Indeed, financial and economic diplomacy remained a key aspect of international relations for the rest of the decade.13 With the crisis spreading from central Europe to Germany in mid 1931, and thereby threatening to wreak havoc on a whole swathe of American banks that had granted loans so readily to German borrowers in the 1920s, President Hoover suddenly announced a suspension of all intergovernmental payments for one year. Statesmen were afforded an opportunity to seek a solution to the question of reparations and war debts, but privately contracted obligations were not covered. Consequently, the Hoover moratorium, which took effect in early July 1931, did nothing to hold back the mounting tide of panic among international investors; capital flight and bank closures interacted 10

11 12 13

Among the literature see A. D. Smith, Guilty Germans? (1942); B. J. Wendt, Economic Appeasement: Handel und Finanz in der britischen Deutschland-politik 1933–1939 (Dusseldorf, ¨ 1971); S. Newton, Profits of Peace. The Political Economy of Anglo-German Appeasement (Oxford, 1996). G. Schmidt, The Politics and Economics of Appeasement. British Foreign Policy in the 1930s (Leamington Spa, 1986). Kynaston, City of London, III, pp. 430–4. See, for example, P. Clavin, The Great Depression in Europe, 1929–1939 (2000).

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to deepen the problems of the Weimar republic. With the awful prospect of a total collapse in Germany looming, the seven-power London Conference – quickly convened later in July – recommended that there should be a six-month standstill on international credit to Germany. With the renewal of the central bank credit to the Reichsbank, Germany’s foreign creditors undertook to maintain their short-term positions. This was formalised when, on 19 September 1931, representatives from the ten creditor nations signed the Standstill Agreement. Maintaining this aspect of the international trading system was, in the Bank of England’s view, of fundamental importance if global economic catastrophe was to be avoided. From its inception, therefore, the agreement enjoyed a quasi-official status. To the British creditors, this provided the justification for arguing that government should compensate the banks for any losses incurred on their credits. Yet, while Norman was the moving spirit behind the Standstill, neither he nor the British Treasury was ever prepared to offer any guarantees. Just after the agreement came into effect, attempts to defend the gold standard were finally abandoned and sterling was devalued. Such were the fears among investors over the stability of the financial institutions involved in lending to Germany that London, too, had been hit by the wave of capital withdrawals during summer 1931. Confidence had been so undermined by the crash that no one could be sure that the capitalist system itself would survive. One might assume that in such circumstances creditors would concentrate on what united rather than divided them. There were, however, one or two early indications of the troubles that lay ahead. For one thing, clear differences existed between creditor nations: British bankers, for example, always believed that their lending had been qualitatively different to that undertaken by their American counterparts. In December 1931, Hird, of the Union Bank of Scotland in Glasgow, wrote to Bradburn, general manager of Williams Deacon’s Bank at the head office in Manchester, concerning the British Overseas Bank – founded after the First World War by eight banks including the Union Bank and Williams Deacon’s, although these two and the Prudential Assurance Company had bought out the other banks’ shareholdings in 1924. Hird thought that the British Overseas Bank deserved to have no trouble in freeing-up its German positions because its credits were of the right kind – self-liquidating. He wondered, however, whether the ‘sheep and goats’ would go forward together under the Standstill. Hird took the line that legitimate business ought to get preference over pure finance but, ‘as that would land “our American cousins” rather badly’, he doubted whether it would be possible to carry such views. He continued:

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As to the future, it is, of course impossible to speak regarding any institution, so much depends for all of us on the bigger political matters of international importance being faced honestly and dealt with on sound lines by the various nations involved. It looks like being either the start of better things or a pretty complete smash of the credit system.14

Hidden from public scrutiny but no less significant were the differences between the British creditors themselves. In general, the joint-stock banks (commercial banks) did not build up a large volume of acceptance credits; instead, a limited amount of money was advanced to German banks. By 1937, the British Overseas Bank still had over £1.5 million outstanding in credit lines to both German banks and industry. Yet Williams Deacon’s, one of the British Overseas Bank’s parents, advanced just £42,000 to the Commerz- und Privat-bank and £6,000 to the Dresdner Bank.15 Consequently, one of the problems inherent in the Standstill structure was that frozen within it were various types of credits involving a range of different types of creditors and debtors. Thus, while the Standstill was taken as an emergency and temporary measure in order to try to prevent the economic collapse of Germany, the ulterior purpose was to offer thereby some means of protection for the British merchant banks dangerously exposed by their German credits. In spring 1932 Norman continued to iterate, in the privacy of banking parlours, that it was of utmost importance that the position of London’s accepting houses be protected. He intimated that there were four or five houses which were being assisted and that the joint-stock banks were loyally helping in this respect.16 If anything, this understated the extent of the problem. The Bank itself was supporting the virtually bankrupt Lazard Brothers & Co.17 Those houses most closely connected to Germany such as Kleinwort & Co. and J. Henry Schroder & Co. were among the hardest hit, while Frederick Huth & Co., which combined merchant banking and trading, was also dangerously exposed. The Bank of England calculated that the acceptance credits advanced by Huths stood at £853,000 for Germany, £235,000 for Hungary and £132,000 for Austria.18 Unfortunately, these frozen credits taken together amounted to approximately one-half of the 14

15 16 17 18

Hird (Union Bank of Scotland Ltd.) to Bradburn (Head Office, Manchester), 11 Dec. 1931, The Royal Bank of Scotland Group Archives, London (hereafter RBOS), GB 1502/WD/349/4. RBOS GB 1502/WD/50/6. Memo. of interviews, Glyn, Mills & Co., 6 April 1932, RBOS GB 1502/GM/368. R. W. D. Boyce, British Capitalism at the Crossroads 1919–1932. A Study in Politics, Economics and International Relations (Cambridge, 1987), p. 344. Peppiat (Chief Cashier, Bank of England) to Maxwell (Glyn, Mills), 17 March 1932, RBOS GB 1502/GM/368.

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firm’s total acceptance business. Although given help, Huths was not able to survive beyond 1936. In the immediate aftermath of the 1931 crisis the joint-stock banks certainly did show loyal support to the houses in trouble. Westminster Bank was active in a number of cases; one notable casualty it quietly saved from insolvency was Kleinworts.19 As Ackrill and Hannah noted in their history of Barclays, the City’s code of secrecy ensured that the existence of the rescue operations did not become public knowledge. Throughout the crisis British banks, unlike many elsewhere in the world, were able thereby to preserve their reputation for reliability and solvency.20 Yet, just how willingly the lifelines were thrown out remains something of an open question.21 All City institutions had a stake in trying to ensure that Britain’s financial structures were not further undermined, but that did not necessarily bring to an end competitive rivalry between individual firms. Evidence of this condition is provided by the operation of the Joint Committee of British Short-Term Creditors from 1932. This was formed out of the British Creditors Committee when the Standstill Agreement was first renewed in January 1932, in order to maintain a leading role for the City in the continuing multilateral and international negotiations with Germany. For that purpose, the Creditors Committee (hastily assembled the previous summer by the clearing banks and accepting houses) wanted to enlarge its membership by creating sub-committees to deal with German short-dated state and municipal obligations outside the Standstill and Hungarian short-dated obligations. Beaumont Pease of Lloyds Bank invited, for example, a representative from the Prudential to serve on the Joint Committee, and its joint secretary Ernest Lever was duly nominated.22 In creating an over-arching committee the bankers had another purpose in mind too. Progress towards finding an internationally agreed solution, before the end of the Hoover moratorium, to the debacle of reparations and war debts was painfully slow. In a world in which financial diplomacy had become so important, the different short-term creditors understood the importance of creating a body able to speak to the British government with a single, powerful voice. It was precisely the effect of City influence on foreign policy that Vansittart, Permanent Under-Secretary at the Foreign Office, found so 19 20 21 22

J. Wake, Kleinwort Benson. The History of Two Families in Banking (Oxford, 1997), pp. 243–4. M. Ackrill and L. Hannah, Barclays. The Business of Banking, 1690–1996 (Cambridge, 2001), pp. 106–7. Kynaston, City of London, III, p. 229. Beaumont Pease to Lever, 5 Jan. 1932, ‘British Creditors Committee’, Prudential Archives, London, 2276.

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disturbing. Foreign Office officials wanted to consider how economic concessions to the Weimar republic might be used as a weapon – a ‘political truce’ whereby, for example, reparations would be abolished in exchange for a halt to further German rearmament. In maintaining that Germany should not get something for nothing, officials believed they were in tune with British public opinion. Norman, on the other hand, Vansittart complained in July 1931 to MacDonald, the Prime Minister, was conducting his own diplomacy and advocating a policy of unilateral concessions.23 Naturally, differences of opinion between the bankers were expressed behind the scenes. But it seems likely that the degree of discord has been significantly underestimated. For the Joint Committee was, from its inception, split down the middle over the problem of the Standstill. Tensions had already been generated, of course, between some of the finance houses and the clearing banks when the latter, with the Midland Bank in the lead, began to compete for acceptance business in the second half of the 1920s.24 Given the rates of commission available, the temptation for the joint-stock banks to try to exploit their foreign contacts for this purpose must have been irresistible. Sir Edward Reid, looking back at his long career with Barings Bank, wrote that the German commercial credits were ‘the most profitable business of this kind that the City had ever seen’.25 By creating the Joint Committee, an impression of unity between the different member-institutions was successfully conveyed to the outside world. Yet however grateful the City had cause to be to Frank Tiarks of Schroders, the virtual inventor of the Standstill, when it came to the question of how the agreement should be renewed, some clearing bankers did not take kindly to being effectively ignored by the very houses that they were being asked to save from insolvency. This dissatisfaction first revealed itself in June 1932, on the eve of the Lausanne Conference where reparations were effectively brought to an end. Lidbury, the energetic chief general manager of the Westminster Bank, prepared a briefing note for when his chairman attended a meeting of the London Clearing Bankers on 2 June. Lidbury was annoyed that the accepting houses had agreed to a rate of 5 per cent on cash advances to German banks, when they had very little or nothing of this character themselves and while they still continued to receive 6 per cent. To make matters worse, the clearing banks which had made advances to the big German banks – and 23 24 25

D. Carlton, MacDonald versus Henderson. The Foreign Policy of the Second Labour Government (1970), p. 203. Kynaston, City of London, III, pp. 163–4. Sir Edward Reid memoirs, p. 26, ING Bank NV, London, The Baring Archive (hereafter Barings), DEP 22. xxiii. Reid was a grandson of the first Baron Revelstoke.

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Westminster had no desire to appear before the clearing house as the bank who had made a lot – were not seeing any reduction in their cash advances. On the other hand, through the provisions of one of the original clauses of the agreement, which Lidbury had always found ‘objectionable’, the accepting houses secured material reductions with the cash debtors of commercial houses. Lidbury was completely against allowing a reduced rate on what he termed ‘these absolutely dead Standstill debts’ which not only had not been shifted by one penny but which the German banks were not showing the slightest intention of shifting. He concluded with a rhetorical flourish: ‘Why therefore should we add, by sacrifice of interest which in fact we may take as a reduction of principal debt, to the fund of exchange available for the Accepting Houses to rob us by?’26 At the beginning of 1933 the Weimar republic collapsed. In Britain, the Foreign Office struggled to understand the nature and significance of the Nazi revolution.27 But in the search for some kind of general settlement, the omens were not propitious: in October 1933 Hitler took Germany out of the Disarmament Conference and the League of Nations. Vansittart’s reaction – expressed to Fisher, his opposite number at the Treasury – was unequivocal: ‘I have always thought that financial stringency in Germany was going to be our principal safeguard against wholesale German rearmament, and that we should do all we can to keep Germany lean, even at a cost to certain people here.’28 Not unexpectedly, the City, on the whole, took the contrary view, namely, that a return to prosperity in Germany would help to emasculate the forces of political extremism. But it would be necessary to allow time for this process to work. Indeed, if British bankers assumed that economic and financial factors were of paramount importance in determining the prospects for Germany and the stability of Europe, there were some grounds for optimism in 1933. It was possible that the worst of the financial storm had been weathered.29 The corner of the depression had been turned and the German economy, seemingly in response to the influence of National Socialism, appeared to be reinvigorated.30 The City’s stance on the potential military threat posed by the Third Reich was in accord with the reaction of business interests to the issue of British rearmament. With a tentative 26

27 28 29 30

‘Note for Chairman for Clearing House meeting, 2 June 1932: German Standstill rates on cash advances’, Committee of London Clearing Bankers, RBOS GB 1502/WES/867/1. See, for example, Ralph Wigram minute, Foreign Office papers FO 371/16695/C4949. Wigram became Head of the Central Department in 1933. FO 371/17675/C76, minute (undated) Dec. 1933, to Fisher. See, for example, W. Lionel Fraser, All to the Good (1963), p. 109. Fraser worked for Helbert, Wagg & Co. R. J. Overy, War and Economy in the Third Reich (Oxford, 1994), p. 37.

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economic recovery underway by 1934, the Treasury was keenly aware that any increase in taxation required to pay for rearmament could have severe political repercussions. Similarly, in 1936, the City was worried that a defence loan would be inflationary and hence drive up interest rates.31 The view expressed in May 1933 by Williams Deacon’s principal London office at Birchin Lane was that in general our feeling is still, as it has always been, that we are very unlikely to make a loss upon our German bank business unless the whole of Germany collapses economically and politically. It is true that political developments in Germany have recently given more grounds for doubt about this . . .32

But underlying economic structures had not changed. Like Britain, Germany was an industrial nation with a great, if under-utilized, manufacturing capacity and an appetite for natural resources that domestic sources alone could not hope to satisfy. Williams Deacon’s believed that people like themselves doing reimbursement business ought to be in a strong position because Germany was only too anxious for that kind of business to go on. As the Bank put it, ‘it would be madness for them to deprive themselves of the credit necessary to obtain essential raw materials abroad’.33 Yet the brutal consolidation of power by the Nazis in the course of 1933 and 1934 clearly demonstrated to the world that violence and terror would be the hallmarks of the new Germany.34 Among the victims were, of course, the Jews. Especially vulnerable was the Rothschild family, whose name was almost synonymous with international finance: their properties and foundations were attacked from the outset of the Third Reich.35 From the 1920s N. M. Rothschild & Sons, the London house, had forged the closest possible alliance with Barings and Schroders. The three banks had together formed a powerful cartel which acted as a competitive unit, each taking the lead in a particular country while profits and liabilities were split between them.36 Whatever their Standstill commitments were, the Rothschilds decided, in 1933, to accept payment in Register marks from their German debtors. Register marks – one of the several categories of blocked mark accounts that were to operate under the system of exchange controls in the Third Reich – could be traded on the international market but only at heavy discounts of 31 32 34 35 36

R. P. Shay, British Rearmament in the Thirties (Princeton, 1977), pp. 42, 145. 33 Ibid. Memo., 29 May 1933, RBOS GB 1502/WD/50/6. P. Brendon, The Dark Valley. A Panorama of the 1930s (2000), pp. 243–4. N. Fergusson, The World’s Banker. The History of the House of Rothschild (1998), p. 999. P. Ziegler, The Sixth Great Power. Barings 1762–1929 (1988), p. 351.

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30 per cent or more. Yet the loss suffered was the price the Rothschilds were prepared to pay in order to have nothing more to do with Germany at all.37 This action appears to have been unique: no other British bank broke ranks and withdrew from Germany. Yet there were those who publicly urged them to do just that. One of the most persistent critics of policy towards Germany was Einzig, the financial journalist. Writing in The Banker in early 1934, he reminded readers of a simple truth: credits were frozen from the City’s, rather than the debtors’, point of view. Every three months new import transactions could be financed with the aid of a new batch of bills sent by the debtors. Einzig argued that the continuation of the Standstill was no longer a vital issue for London, and that Germany should be warned that Britain would not suffer if it came to an end.38 Private warnings also reached the Foreign Office about the dangers ahead. In late 1934 Christie, who was a source of much secret intelligence, informed Vansittart that German industrial reinvigoration was self-evidently based on rearmament orders.39 Bonds and bondholders Germany’s international debts comprised a variety of different types of obligation. However, in contrast to the Standstill the part played by Britain’s other commitments in Germany – the long- and medium-term debts – has received little attention from historians. As far as Britain was concerned, this class of securities was, collectively, bigger than the Standstill debt. In mid 1934, long-term debt amounted to more than £60 million whereas the total volume of Standstill bills on the London market represented, at that point, £34 million of British capital.40 There were two categories of long-term debt: the Reich loans, principally the Dawes and Young Loans, and the non-Reich loans floated by German cities, municipalities and utilities. While individual investors and institutions around the world subscribed to both kinds of issues, they differed in one fundamental respect: only the Reich loans were guaranteed by the participating states. Bonds for the Dawes and Young Loans, for example, were issued by the Bank of England; Niemeyer, an adviser to the Governors, was a member of the Council of the Corporation of Foreign 37 38 39 40

Reid memoirs, p. 14, Barings. P. Einzig, ‘Germany’s default’, The Banker 29 (1934), 122. T. P. Conwell-Evans, None So Blind. A Study of the Crisis Years, 1930–1939 (1947), p. 25. Waley and Leith-Ross minutes, 23 June 1934, T 160/534/13460/08. See also memo. by Lever (Prudential), 18 Mar. 1937, BoE OV9/100. By adding in the Potash Loan, the total long-term figure was increased by some £12 million.

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Bondholders.41 Non-Reich loans, on the other hand, enjoyed no such protection. All international creditors of Germany were confronted with a choice: either to liquidate holdings and accept the big losses involved, or to try to work within the constraints imposed by Germany’s exchange controls. There was nothing new about the latter; creditors had to contend with the interruption to the free flow of international payments once they were introduced as an emergency measure in 1931. Under Hitler, however, the system not only became progressively tighter; it also provided a means to exploit and manipulate foreign creditors. More worryingly still, it became clear that exchange controls were being used as an important device for restructuring the German economy in preparation for war: in allocating scarce resources of Devisen (foreign exchange) to pay for imports, raw materials required for rearmament were given priority. On 9 June 1933 the Hitler government proclaimed a law which announced a moratorium on all public and private long-term debts contracted before July 1931. By means of this law a Konversionskasse was created into which the debts were to be paid. Foreign creditors were to receive scrip, or coupons, as part of their interest quotas. This, in turn, they could sell at a 50 per cent discount to the Golddiskontbank for foreign exchange. The creditor countries quickly secured the exclusion of the Dawes and Young Loans from the moratorium, although the threat was renewed the following year. Like the short-term creditors before them, the bondholders were confronted with the need to coordinate action at an international level. With the announcement of the transfer moratorium, the Committee of British Long-Term and Medium-Term Creditors of Germany was hastily set up. Worley of the British Insurance Association served as chairman of the new body. From the start, however, the lead in negotiations was taken by Lever of the Prudential, who replaced Worley in March 1937 when ill health forced the latter’s resignation. The Treasury reacted in a depressed and resigned manner. The German moratorium appeared part of a continuum: firstly a freeze of short-term debts was secured, then reparations payments were ended and now a default on long-term debt was threatened. But, given the City’s assumption that the Reichsbank’s intention was to rebuild resources, the Treasury remained quiescent.42 But the Foreign Office desired action, and not just against Germany. The hostile criticism directed against the 41 42

The Council’s Annual Reports are in Guildhall Library. S. D. Waley memo., 19 June 1933, T 160/465/8797/01.

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City focused, in part, on the comparative status of the two newly formed bodies concerned with the German debts. The bondholders, the Foreign Office assumed, were made up of a mass of private investors; no one could expect them, therefore, to be as effectively organised or to put up as good a fight as the short-term creditors with their influential connections in both Britain and Germany. More than this, by acquiescing in the tactics practised by Hjalmar Schacht – President of the Reichsbank – of discriminating between creditors, British bankers stood accused of ignoring the plight of their fellow, but ordinary, compatriots.43 That, Reid recalled, was precisely what prompted him to become involved in representing the bondholders. Barings had relatively small Standstill commitments and were thus free from the suspicion that in the event of a conflict between the short-term creditors and the investors the latter might be regarded as less important. Tiarks was nominated as the other British representative because Schroders was more intimately acquainted with Germany than any other merchant bank.44 What Reid could not have foreseen was just how much time he would be spending, in London and Berlin, on the affairs of the bondholders. In response to the unwelcome utterances emanating from the Reichsbank, the issuing houses for the London floatations of the German loans held a meeting in late July at Barings. The purpose was to consider the questions arising from the creation of the Konversionskasse. Peacock, a Bank of England director and, like Reid, one of the managing directors of Barings, presided over the meeting. Others present were Robert Brand (Lazards), Anthony de Rothschild (Rothschilds), Henry Tiarks (Schroders), Olaf Hambro (Hambros Bank Limited) and H. F. H. Guinness (Guinness, Mahon & Company). The operation of the Konversionskasse did at least present a new business opportunity for the merchant banks to make a small amount of money. Any British or foreign creditor holding scrip could offer it for sale through the issuing houses and each house would receive 2.5 per cent commission on the scrip bought through it. Schroders was to act on behalf of the houses and keep the Golddiskontbank informed of the amounts of scrip lodged in London awaiting sale. At a subsequent meeting the following month, the decision was taken to send Frank Tiarks and Reid to Berlin. The objective was, as with the Standstill, to try to secure a united front of all the creditor countries, preferably under the City’s leadership. Consequently, what really upset the British bankers was the news that the Reichsbank appeared to be 43 44

Sargent minute, FO 371/16697/C6025. Sargent was made Assistant Under-Secretary in 1933. Reid memoirs, p. 16, Barings.

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offering the Swiss special terms (based on so-called ‘additional exports’ from Germany) and that the latter appeared intent on accepting them.45 Puhl – made a director of the Reichsbank in 1934 and then managing vice-president from 1940 until the end of the war46 – wrote to Tiarks stating that it was open to Britain to decide whether to negotiate on a similar basis to that of the Swiss. But throughout the 1930s British bankers vigorously opposed this option. Tariffs and the departure from the gold standard were the price the City had been prepared to pay in order to try to repair some of the damage wreaked by the depression and financial crisis. But any additional intervention at governmental level, by encroaching on what little economic liberalism was left, might have caused irreparable harm to the City’s prospects for recovery. Reid wrote to Millis, his colleague in Barings that ‘it is so easy for people like Lever and the Board of Trade and the City Editor of The Times to boil with anger’; it was better, rather, for the bondholders to accept 50 per cent than for the country to take the path of the Swiss and plunge deeper into the mire of licensing imports and clearing arrangements.47 If British bondholders seemed reluctant to put pressure on their government to bring trade matters into the negotiations with Germany it was not because they were a poorly organized group of individual investors but because their representatives were of the same stamp as the short-term creditors. The Foreign Office was right to point to the importance of the longterm debts. Excluding the Dawes and Young Loans, the long-term debt held by Britain in 1934 was approximately £32 million – not far short of Standstill debt – of which one half comprised bonds issued on the London Stock Exchange. However, officials seemed unable to understand the structure of holdings. When Reich and non-Reich loans were taken together, British investment trust and insurance companies held about 70 per cent of the total debt.48 Indeed, long-term securities were held by a cross-section of City institutions; joint-stock and merchant banks both subscribed to the various issues. The City of Hamburg Loan of 1926, for example, raised £2 million in London. In February 1939 Schroders received a list from the Hamburg authorities of the banks holding their treasury bills; included were the Hong Kong and Shanghai Banking Corporation, the Royal Bank of Scotland, Barings, the Midland, Westminster and Barclays.49 45 46 47 48 49

Memo. of meetings, 28 July, 23 Aug. 1933, Barings 200575. D. Marsh, The Bundesbank. The Bank that Rules Europe (1992), p. 131. Puhl to Tiarks, 29 Sept. 1933, and Reid to Millis, 21 Oct.1933, Barings 200575. Reid to Dean (Bank of England), 16 Aug. 1934, Barings 200582. Gemeinderverwaltung der Hansestadt Hamburg to Schroders (London), 23 Feb. 1939, Barings 200806. Barclays’ holding, at £175,000, was the largest.

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It should also have been obvious why the British insurance industry wished to be in the forefront of British efforts to defend bondholders. As the tension between Britain and Germany mounted in autumn 1933, Lever wrote to Barings concerning the Prudential and the German coupons. What he had in mind was ‘the operation of large institutions such as ours which by virtue of the nature of their investments in Germany will have large amounts of scrip paid to them direct and which obviously could, if desired, be negotiated direct in Germany’.50 A temporary agreement was reached with the Reichsbank on 31 January 1934, but only after Britain had threatened to impose a payments clearing mechanism on German imports. The creditor representatives, meeting in Berlin, agreed to end discrimination in the second half of the year. Interest payments were to be transferred in the proportion of 30 per cent cash and 70 per cent scrip, but redemption by the Golddiskontbank was increased from 50 to 67 per cent of face value. To the Foreign Office, the moratorium affair was yet another appalling demonstration of the failure to coordinate policy with the City authorities. The Governor’s independent interventions were to blame; Vansittart wished ‘the country were well rid of him – though I suppose that such sentiments are heresy in his City Cenaculum’.51 A further transfer conference was held in May and the provisions which emerged were finally confirmed, after more British threats, by the AngloGerman Transfer Agreement of 4 July 1934. This operated until, in 1938, the Anschluss made revision necessary. Sterling was provided for the purchase of Dawes and Young coupons; interest on loans other than these was paid by means of funding bonds (4 per cent interest, a sinking fund of 3 per cent and a final repayment period of ten years).52 Curiously, while it was Leith-Ross, Chief Economic Adviser to the British government, who made the agreement, it was not the Treasury but Reid who oversaw the implementation in the following years. Still, as one historian of Barings suggests, the bank had frequently been called upon to act almost as an arm of British foreign policy.53 Reid felt that the job fell to him because there was no one else prepared to do it. In an atmosphere that was full of mistrust, negotiating with the obstructive Germans was never easy. But engaging in the intellectual exercise of translating texts helped to improve matters because, he believed, ‘it appealed to the German mentality’.54 50 51 52 53

Lever to Millis, 1 Nov. 1933, Barings 200576. FO 371/17676/C749, minutes, 1/2 Feb. 1934. For details, see E. V. Francis, Britain’s Economic Strategy (1939). 54 Reid memoirs, pp. 17–18, Barings. Ziegler, Sixth Great Power, p. 354.

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In May 1934 Arthur Villiers, a managing director of Barings, considered that the bank had done its share for the common good by letting Reid go to Berlin, although it hardly seemed fair to the bank or to Reid that he should have to be troubled with all the detail without professional assistance. While in Berlin Reid had, however, found new work for his bank. On the instructions of the Golddiskontbank, Barings bought bonds to the value of £12,000. The issue was the City of Cologne Sterling Loan (6 per cent) 1928 and the bonds were sent round to Higginson & Co., the issuing house, for cancellation. The Golddiskontbank had bought scrip and various kinds of blocked marks before, yet up to that point it had always been the German exporter who bought bonds. However, from the point of view of facilitating additional exports, the purchase of the Cologne bonds had been a very profitable transaction for the Golddiskontbank. From Berlin Reid wrote To the extent to which they buy bonds in London, they propose to use Barings. I have said that we should be glad to do the business for them. If it goes on it might mean a reasonable amount of Stock Exchange orders for us, and no publicity or objection in that way to our doing it.

Reid felt that Barings could not go far wrong in doing this particular business. The Golddiskontbank was 95 per cent owned by the Reichsbank and the two institutions were the only banks specifically excluded from the transfer-moratorium law. But Reid ended his letter on a far more sombre note: ‘The outlook is rather murky today, and the difficulties great. The “man in the street” seems very depressed and unhappy and uncertain about the situation in general.’55 Reid continued to hope for orders for bond purchases. Writing from Riga in May 1935, he asked Barings to send bond prices to the Konversionskasse once a week. Reid added wryly that as they were not in the same building as the Reichsbank they did not see the latter’s Times and could not afford one themselves.56 The practice, engineered by Schacht, of purchasing bonds at depressed prices did not escape from harsh criticism. Reid’s defence was a version of the one mounted by many of Germany’s creditors. He argued that the Golddiskontbank had to be allowed to make a profit on bond re-purchases. The profit enabled the German authorities to subsidise exports and it was the foreign exchange provided by exports which enabled the bonds to be purchased. Reid considered that if the Golddiskontbank received only the equivalent of the external market price it would not be able to purchase any bonds.57 55 56 57

Villiers (London) to Reid (Berlin), 16 May 1934, and Reid (Berlin) to Millis, 8 May 1934, Barings 200581. Letter from Reid (Riga) to A. H. Carnworth (Barings), 30 May 1935, Barings 200608. Reid (Aberdeenshire) to Millis, 13 Oct. 1934, Barings 200582.

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But the threat posed by the Third Reich was growing all the time. British bankers struggled to find an answer to two related puzzles: was Schacht, clearly a nationalist and conservative but seemingly not a Nazi fanatic, likely to remain influential in the Third Reich and how could the Standstill debt be significantly reduced without suffering severe losses? On the question of Schacht’s position a clear lead was given by Norman and Tiarks. The Bank clung to the ideal that central bankers represented an international, professional elite able to communicate at a level above that of national politics. Hopes continued to rest on what might be achieved through the agency of the Bank for International Settlements based in Basel. But such convictions only served to expose the contradictions inherent in Norman’s position. He constantly emphasized how important it was for central banks to remain free from governmental control. At the same time, at Basel, politics and international finance were interwoven.58 Norman, writing to Addis, his friend and former colleague, described Schacht as ‘my regular stimulant at Basel but to others an irritant’.59 In December 1935 Tiarks, in Berlin, wrote to Brand that he had found Schacht in great form, full of health and confidence, and that his position was stronger than ever.60 The following March Schacht attended an Anglo-German Fellowship dinner in London. Cobbold, an adviser at the Bank, heard that Tiarks had performed much publicity for Schacht along the lines that the excellent relations between the City and Germany depended entirely on the presence of the Reichsbank president. Indeed, the Bank of England itself did all it could, through staff-exchange visits for example, to foster close relations with the Reichsbank and its officials. On 22 January 1936 Schacht reached the age of sixty. To celebrate the occasion the Bank sent him a clock dated 1815 – a reminder, perhaps, of what Anglo-Prussian alliances could achieve.61 At a meeting of the London clearing bankers in May 1936, Norman opined that Schacht was a barrier between the London banks and the loss of their Standstill money because his departure from financial control in Germany would be likely to lead to chaos. However convincing that 58

59 60 61

P. Geddes, Inside the Bank of England (1987), p. 61; P. L. Cottrell, ‘The Bank of England in its international setting, 1918–1972’, in R. Roberts and D. Kynaston (eds.), The Bank of England. Money, Power, and Influence, 1694–1994 (Oxford, 1995), p. 95. Norman to Addis, 14 April 1935, Sir Charles Addis papers, School of Oriental and African Studies Library, London, PP MS 14/459. Tiarks to Brand, 2 Dec. 1935, Brand papers (uncatalogued), 191, Bodleian Library, Oxford. Cobbold note, 20 Mar. 1936, and note, ‘Reichsbank personalities’, 30 July 1936, BoE OV34/85. Eventually, officials once warmly regarded in London, such as Puhl, were to become estranged as the effects of Gleichschaltung ineluctably changed the character of the Reichsbank.

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particular argument might have sounded to his fellow bankers, Norman was also capable of being misguided to the point of perversity. For he went on to assert that the new arrangement by which Goring ¨ – made Plenipotentiary of the Four Year Plan – was put over Schacht had in fact been intended to strengthen the latter’s hands.62 By late 1937 Schacht himself appeared concerned to point out the reality of certain aspects of life under the Third Reich. On returning from Berlin Tiarks reported to a meeting of the Joint Committee at Martins Bank on 5 October that he had asked Schacht for a reduction in Standstill debt. In turn, the Reichsbank president had enquired whether Tiarks knew Goring, ¨ because he was the man who had to be tackled if any pressure was to be exerted. Schacht also mockingly asked Tiarks whether he thought it likely that even a single penny would be found for the reduction of any external debt at a time when German bread was being adulterated owing to the shortage of Devisen.63 In spite of this, Tiarks still felt able, one month later, to inform the Accepting Houses Committee that he thought Schacht’s position in Germany was better than it had ever been.64 The debate over repayment of Standstill capital began in earnest in October 1936. Lidbury was the leading proponent of repayment.65 His frustration over the direction of the Standstill negotiations reached new heights. He angrily contrasted the two months enjoyed by the accepting houses to consider Standstill matters with the single week afforded the clearing banks because of a delay in notifying the Committee of London Clearing Bankers.66 By 1937 Lidbury and McKenna, chairman of the Midland Bank, were no longer prepared to leave the negotiations for the continuation of the Standstill simply in the hands of the accepting houses.67 The City and the coming of war Little was achieved, however, in securing greater Standstill repayments before the outbreak of the war. In June 1940, with Britain facing the prospect of invasion, the clearing bankers met to ponder the future of the 62 63 64 65 66 67

Scott (Manager, Williams Deacon’s Bank, London office, Birchin Lane) to H. Bradburn (Head Office, Manchester), 7 May 1936, RBOS GB 1502/WD/50/6. Ibid., Scott to Thomson (Head Office, Manchester), 5 Oct. 1937. Note of meeting, 4 Nov. 1937, Brand papers 193. Joint Committee minutes, 14 Oct. 1936, Brand papers 192. Lidbury undated notes on Joint Committee letter, 19 Nov. 1936, RBOS GB 1502/ WES/867/3. Forbes, Doing Business with the Nazis, p. 183; note of Joint Committee meeting, 20 Oct. 1937, BoE OV34/138; Kynaston, City of London, III, p. 439.

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Standstill in the context of collecting debts from neutral countries. The suggestion of Beaumont Pease (now Lord Wardington) to revive the Joint Committee because, as the last chairman, he had been left with Tiarks to carry on with most of the work, was turned down. Private notes by Williams Deacon’s captured the mood of the meetings: ‘It seems that the revival of Tiarks was not considered desirable’; the banks could not do very much for the moment: ‘Still, we shall always keep in the back of our minds that certain German Banks owe us some money although that is not likely to be the hardest thought we shall harbour against the whole crowd of them.’68 Throughout the decade, the British government accepted the conventional view maintained by the Treasury that the administration of official or semi-official financial agreements should be left as far as possible in the hands of those interests directly involved. Early in 1938 Blessing, the future president of the Bundesbank,69 confirmed to the Bank of England that Britain was the only country where Germany negotiated directly with the creditors; in all other countries, the Reich government negotiated with the government of the creditor country.70 Such arrangements left leading City figures in extremely responsible positions and helped to create the impression that bankers were secretively exercising great influence over the government. To suspicious minds in the Foreign Office, greedy and selfish British financial interests were being allowed to take precedence over the pressing and vital needs of the nation’s foreign policy. Yet, even if British bankers occupied influential positions, such criticism neglected to take into account that the City was itself divided over policy towards the Third Reich. Moreover, representing Britain’s external financial interests could be said to involve rather more than the exploitation of short-term opportunities to make money. During the discussions to revise the Transfer Agreement in the aftermath of the Anschluss, Reid wrote to Cobbold, at the Bank of England, to ensure that the principle was upheld that all bonds of an issue made in London by a British issuing house were treated alike; any foreign investor who sent his money to London would obtain, therefore, the same protection as a British holder. Acting on behalf of the nine issuing houses Reid regarded it as important for the good name of the houses and of the City that there should not be any discrimination on account of nationality.71 68 69 70 71

Notes, 6, 7 June 1940, RBOS GB 1502/WD/50/6. On Blessing’s career see Marsh, Bundesbank, pp. 50–6. Gunston memo., ‘German long-term debt negotiations’, 7 Jan. 1938, BoE OV9/100. Reid (Barings) to Cobbold, 20 June 1938, BoE OV6/291.

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As the threat posed by the Third Reich grew ever greater, Britain’s preparations for war came to depend in no small measure on the fourth arm of defence: the nation’s financial and economic reserves and the ability to husband those reserves during the course of a long conflict. Undeniably, therefore, the preservation of the City’s institutional base contributed to rather than detracted from those preparations and enhanced the likelihood of national survival. In analysing Britain’s defence and deterrence policies in the mid 1930s, one historian has pointed to a strategic dilemma: while the Foreign Office was concerned with how to prevent the next war, the worry for the Treasury was how much to pay for its prevention while maintaining normal trade.72 Confronted by an age of economic nationalism, the City struggled to preserve something at least of the cosmopolitan role that it had once enjoyed. In this sense, maintaining commitments outside the Empire held an almost symbolic significance after 1931. Nowhere was this more so than in the case of Germany where so much British capital was tied up as a result of the long-standing and close financial relationship that had evolved. With the rise of the Third Reich, however, the political costs of maintaining those commitments had to be added to the purely financial ones. Unlike other international agreements, the Hitler dictatorship did not resile from the Standstill Agreement. It is questionable, therefore, whether on balance its operation favoured the interests of the Third Reich more than those of Britain. For, as Reid was to conclude after the war, there was no doubt that the Standstill and the moratorium on long-term debt had facilitated German rearmament.73 By being pro-German the City, just like the rest of British society, could not avoid being to some degree also pro-Nazi. 72 73

G. Post, Jr, Dilemmas of Appeasement. British Deterrence and Defense, 1934–1937 (Ithaca, 1993), p. 21. Reid memoirs, p. 14, Barings.

Part V

1945–2000

13

Keynesianism, sterling convertibility, and British reconstruction 1940–1952 Scott Newton

Those who believe that British economic policy in the twentieth century reveals a rift between commercial and industrial capital have pointed to the commonplace view in the City of London, the Bank of England and the Treasury that international financial commitments should take precedence over policies of national economic development.1 Both the return to the gold standard in 1925, on the grounds that this would bring valuable business back to the City after wartime disruption, and the creation of the Sterling Area in the 1930s have been taken as examples of how policy has followed this priority. Another case study cited in recent years has been the attempt to reassert the pound as an internationally convertible trading and reserve currency in the early 1950s, notwithstanding the consequences of this for post-1945 reconstruction with its own imperatives of full employment and economic expansion. Some commentators, notably Middlemas and also Bulpitt and Burnham,2 have challenged this interpretation of external policy in the 1950s, arguing that the sterling liberalisation moves were in fact attempts to galvanise an over-protected, corporatist economy with the discipline of the market. There is no doubt that the Conservative government which came to power at the end of October 1951 was committed to the steady removal of the controls and regulations which had been customary throughout the years since 1940. Yet the performance of the postwar British economy was respectable by comparison with the advanced industrial societies of western Europe. It is maintained here, on the basis of 1

2

See, for example, R. W. D. Boyce, Capitalism at the Crossroads 1919–1932. A Study in Politics, Economics and International Relations (Cambridge, 1987); P. J. Cain and A. G. Hopkins, British Imperialism, 2 vols. (1993); W. Hutton, The State We’re In (1995); G. Ingham, Capitalism Divided? The City and Industry in British Social Development (1984); F. Longstreth, ‘The City, industry and the state’, in C. Crouch (ed.) State and Economy in Contemporary Capitalism (1978), pp. 157–90; S. Newton and D. Porter, Modernization Frustrated. The Politics of Industrial Decline in Britain Since 1900 (1988). K. Middlemas, Power, Competion and the State, II: Threats to the Postwar Settlement: Britain, 1961–74 (1986), pp. 196–204; J. Bulpitt and P. Burnham, ‘Operation Robot and British political economy in the early 1950s: the politics of market strategies’, Contemporary British History 13/1 (1999), 1–31.

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evidence from the Bank of England and especially the Treasury, that there were other motives for the turn to economic ‘freedom’ associated with changes to external policy after 1951. These can be found in a growing anxiety that the future of sterling as an international currency was incompatible with the politico-economic direction taken by Britain during the 1940s. However, the new initiative met stubborn resistance within government and the civil service from those for whom the commitment to full employment took precedence over the restoration of sterling to its prewar eminence. The result was a stalemate, and for a brief time in 1952 the British state hovered between two radically different policy choices. Finally it chose a compromise which was politically acceptable even though it was based on the fantasy of aid from the United States. The battles over external policy discussed here and the method of their resolution in 1952–3 revealed the fragility of the reconstruction consensus in Britain, and possibly entailed serious long-term economic consequences. Keynes and British reconstruction within an international context The collection of social and economic objectives which during the Second World War became grouped under the heading of ‘reconstruction’ had been constructed by many hands.3 One foundation had been laid by Keynes in his General Theory, published in 1936. He argued that if capitalism were to regain public legitimacy after the depression it had to guarantee full employment of resources and an equitable distribution of wealth, and that these objectives could only be achieved by conscious state action. There was however no compatibility between the national economic autonomy required for the pursuit of Keynes’s socialised capitalism, and membership of an international economic order based on gold-standard rules. These rules required adjustment to external disequilibrium via deflation of the home market, so reducing the volume of imports while resources of capital and labour flowed into the export sector whose growth would be stimulated by a fall in domestic prices relative to overseas prices. Even after the forced departure from gold in 1931, the fundamentals of policy had remained unchanged: although the attempt to restore the City to its pre-1914 position had failed, it was replaced by a new role in which Britain dominated a regional economic bloc, based on the 3

See, for example, P. Addison, The Road to 1945 (1975); and Newton and Porter, Modernization Frustrated, chs. 3–4.

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Commonwealth and Empire, whose members continued to use sterling as a trading and reserve currency. Keynes believed that the pursuit of deflationary measures by the British government and by governments worldwide which were suffering from external dis-equilibria was a cause of the depression’s persistence and severity. He called instead for the policy of an autonomous rate of interest, unimpeded by international preoccupations, and of a national investment programme directed to an optimum level of domestic employment which is twice blessed in that it helps us and our neighbours at the same time.4

It followed that governments committed to Keynesianism had either to establish an international economic order where deflation did not follow from external imbalance, or to opt for self-sufficiency, with trade restricted to bilateral, barter arrangements designed to secure commodities which could not be produced or made at home (or if they could, only at very great cost). Although the Treasury had moved towards Keynesian economics by 1939, it had not by any means fully embraced the equilibrium analysis of the General Theory.5 Its qualifications could not survive the coming of the Churchill wartime coalition government and the commitment to a total war which required the full employment of capital and labour. In order to sustain this in the face of inevitable pressures on the foreign exchange reserves, the government introduced measures to tighten official control over the external sector. Sterling convertibility was suspended for the first time since the Napoleonic wars while foreign sterling balances were blocked and bilateral trade and payments arrangements introduced to cover economic relations with neutral states and non-Sterling-Area allies. The City’s merchant banks were no longer able to provide overseas credits and short-term finance for trade. The discount houses found themselves unable to make money from the acceptance business. Between the wars these institutions had helped to maintain London’s role as an international financial centre (albeit second to Wall Street). Now they were driven to dealing in short-term gilt-edged stock and Treasury bills issued to mop up savings.6 It all meant an unprecedented level of state intervention in the City’s activities and their subordination to the demands of the national economy. 4 5 6

J. M. Keynes, General Theory of Employment, Interest and Money (1936; 1973), p. 349. S. Newton, Profits of Peace. The Political Economy of Anglo-German Appeasement (Oxford, 1996), pp. 70–1. R. Roberts, ‘The City of London as a financial centre in the years of depression, the Second World War, and postwar official controls, 1931–61’, in A. Gorst, L. Johnman and W. Scott Lucas (eds.), Contemporary British History 1931–61 (1991), p. 70.

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No such steps had been taken in the First World War. Yet the new measures to insulate domestic production from external financial crisis did not stop Britain from finishing the war as the world’s greatest debtor. Total war generated an unprecedented demand for imports, which were supplied via an increasing reliance on Lend-Lease aid from the United States and through extensive borrowing from the Sterling Area, leading to the accumulation of over £3 billion-worth of sterling balances by 1945. It was obvious that the ambitious reconstruction programmes, with which by 1943 all major political parties were identified to a greater or lesser extent, would maintain this dependence: they needed external supplies of capital goods, raw materials and foodstuffs which Britain would not immediately be able to finance through exports. Indeed at the start of 1945 exports were less than a third of their level in 1938, a year when there were still 1.6 million unemployed.7 How could a ‘national investment programme directed to an optimum level of domestic employment’ be continued in these circumstances? Keynes, by this time the dominant influence in macroeconomic policy, argued that there were two approaches to the problem. The first involved the maintenance after the war of bilateral trade and payments agreements and retention of the wartime machinery to protect external finances. The second centred on a search for external support from the United States in return for concessions to Washington’s determination to build a world economic order characterised by non-discrimination in trade and payments (which meant sterling convertibility for current transactions at least). Not without some misgivings Keynes recommended the latter on the grounds that it would avoid probable reductions in living standards as well as international economic rivalry with the USA. But the results were disappointing. What finally emerged from Anglo-American negotiations in 1944 were the Bretton Woods institutions, the International Monetary Fund (IMF) and the International Bank.8 From the British perspective the key organisation was the IMF, but this was to be largely inactive in the postwar transition period to normal economic relations. Ultimately the best Keynes was able to manage was a loan of $3.75 billion from the United States, plus $650 million as a final settlement of Lend-Lease, and a further loan of $1.25 billion from Canada. In return, Britain agreed to embrace the Bretton Woods obligations of sterling convertibility at a fixed rate of exchange as early as 15 July 1947. 7 8

S. Newton, ‘A “visionary hope” frustrated: J. M. Keynes and the origins of the postwar international monetary order’, Diplomacy and Statecraft 11 (2000), 197. For a full recent account see R. Skidelsky, John Maynard Keynes, 3 vols. (1983–2000), III: Fighting for Britain 1937–46, chs. 6–7, 9–10.

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Both Keynes and Attlee’s Labour government have been criticised for accepting the commitment of convertibility.9 Given the postwar international shortage of dollars, it enabled Britain’s creditors to abandon sterling for dollars rather than hang on to a currency which could not buy them more than a small proportion of their requirements. The resulting dollar drain was so severe that the government suspended convertibility after only five weeks, thereby bringing down the Anglo-American effort to reconstruct the international economy on the basis of Bretton Woods rules. It has been alleged that both Keynes and the government acted irresponsibly, and that events proved correct those in the Bank of England and the Treasury who had shown increasing unhappiness with the direction of foreign economic policy during the war years.10 Superficially the positions taken by the parties to this disagreement are surprising. Against Keynes and his supporters within both the Churchill and Attlee governments there stood a strange coalition uniting the Bank of England, senior members of the Treasury and some old die-hard imperialists centred on Lord Beaverbrook. Beaverbrook argued that commitment to Bretton Woods would repeat the errors of the gold standard: reconstruction would once again be sacrificed for the sake of external financial probity.11 Meanwhile the Bank produced, with some support in the Treasury, its own design for the organisation of postwar trade and payments. This actually envisaged a continuation of the wartime sterling arrangements; a common, dollar-saving, import policy on the part of all Sterling-Area members; and controls on the movement of capital from the area to the rest of the world.12 The Bank believed it would be possible to keep this group in one piece by threatening to block the balances of members who liberalised their exchange controls and failed to discriminate against dollar goods. Its bilateralist strategy was virtually identical to the one seen by Keynes himself as the only alternative to his search for American support which was compatible with salvaging some at least of the reconstruction agenda. In fact the apparent heterodoxy of the Bank should not be taken as a sign that it had abandoned its old commitment to sterling, any more than Keynes’s willingness to establish a new international financial architecture 9 10

11 12

E. Dell, The Chancellors. A History of the Chancellors of the Exchequer 1945–1990 (1996), p. 54. See Sir Richard Clarke, Anglo-American Economic Collaboration in War and Peace, ed. A. Cairncross (Oxford, 1982), ch. 3; and J. Fforde, The Bank of England and Public Policy, 1941–1958 (Cambridge, 1992), ch. 2. D. E. Moggridge, Maynard Keynes. An Economist’s Biography (1992), p. 732. Notes by Robbins and Eady on Bank’s proposal, 26 Feb. 1944, T 273/336.

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in concert with the USA should be taken as a return to the neoclassical economics of his youth. The Bank was aware that in the circumstances of the 1940s maximising sterling’s international role could not be achieved if Britain were simultaneously to embrace both convertibility and the funding of sterling balances. As far as senior executives like Cobbold (executive director 1942–9) and Siepmann (an adviser 1942–5) were concerned, the controlled currency bloc they advocated involved a domestic economic policy which postponed reconstruction plans and put external probity first. This meant, first, no postwar dependence on US credit, and secondly, running down the sterling balances, starting with those belonging to non-Sterling-Area countries (worth £632 million by the close of hostilities) and then those of the larger sterling creditors such as India and Egypt. Informal agreements would be negotiated with the other holders so that they restricted drawings on accumulated balances, tempering domestic policy commitments with this in mind, and held them either in bank accounts at low rates of interest or in the form of Treasury bills. In return there would be a promise to reject formal blocking of balances. The aims were, to start with, the restoration of sterling’s worldwide creditworthiness; in the medium term, the achievement of sterling transferability throughout the non-dollar world; and finally, in a rather remote future, full-scale convertibility.13 The end of the war had brought the City to what Kynaston calls the square mile’s ‘lowest peacetime ebb in living memory’.14 Its domestic orientation, both with the system of exchange control and with maintenance by the government of a firm grip over new issues to guarantee priority to its own borrowing, was set to continue. There was no prospect that London would be able to compete with New York as an international financial centre in the short or medium term.15 But the Bank’s plan for the rehabilitation of sterling was a road-map for reaching such a destination, fully in keeping with the City’s traditional role in the world economy, even if the journey took years. Commitment to this long-term strategy for the reassertion of sterling led to widespread distrust within the Bank and even parts of the Treasury for Keynes and his supporters in the government and the economic section of the Cabinet Office, such as Robbins. Eady, the Treasury’s joint second secretary from 1942 to 1945, accused them of a ‘disparagement of the Sterling Area and consequently a disparagement of sterling’.16 Keynes, however, argued that the Bank’s policy was ‘conceived in 13 15 16

14 Kynaston, City of London, III p. 510. Fforde, Bank of England, pp. 50–2. R. C. Michie, ‘Introduction’, in R. C. Michie (ed.), The Development of London as a Financial Centre, 4 vols. (2000), IV, p. viii. Memo. by Eady, 26 Feb. 1944, T 273/336.

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the interests of the old financial traditions, which pays no regard to the inescapable requirements of domestic politics’.17 He maintained that it was not himself but the Bank which in prioritising international ‘obligations’ over commitments to build a fairer society at home was repeating the error of 1925.18 There was never much doubt that the Bank’s alternative would be rejected. First, leaving aside its implications for postwar relations with the United States, the policy would require not just the indefinite extension of wartime austerity into peacetime but even, given the inevitable scarcity of hard currency in the absence of US aid, its intensification. This was politically unpopular with the leaderships of both the Conservative and Labour parties, aware that a general election was approaching. Secondly, the leading proponents of the reconstruction project – not just Keynes and Beveridge but the most senior figures in the Labour government elected in July 1945 – were what the economist James Meade called ‘liberal socialists’. The category included Attlee and Bevin, the Foreign Secretary (despite some anxieties about Bretton Woods), as well as the two key cabinet ministers responsible for economic policy – Dalton as Chancellor of the Exchequer, and Morrison as Lord President responsible for economic planning.19 They looked not to the establishment of a completely socialised economy but to one characterised by a mixture of public and private ownership, progressive taxation and generous expenditure on housing and social services. The external economic policy which followed from this was therefore incompatible with the bilateralism of the Bank let alone with Beaverbrook’s enthusiasm for imperial and Commonwealth unity. It accepted that there was a place for freedom of choice and that this implied that British costs and prices would have to compete with those prevailing in overseas markets.20 In the circumstances of the time it was believed that the most significant of these was the market in the United States which had been hedged around with tariff barriers prior to the Second World War. In order for these to be removed or at least reduced Britain had to offer something in return, and it therefore seemed to be in the interests of its exporters for government to opt for non-discrimination, provided that mechanisms could be established to guarantee full employment at all times.21 17 18 19 20 21

Quoted in Moggridge, Keynes, p. 734. Keynes to Beaverbrook, 27 April 1944, T 247/40; Fforde, Bank of England, pp. 60–1, quoting Keynes to Beaverbrook, 8 March 1944. James Meade diary, 26 Aug. 1945, Meade papers, British Library of Political and Economic Science. Ibid. This was the view of Cripps, President of the Board of Trade in 1945: see 3 Sept. 1945, FO 371/45698/UE4353/1094/53.

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This was the thinking which led the Labour government to support the loan package that Keynes negotiated at the end of 1945, despite its considerable unpopularity in all political parties as well as in the Bank of England and the Treasury. Keynes himself admitted that the agreement fell a long way short of expectations, but defended it on the basis that it was an attempt to bring closer his goal of ‘international order amidst national diversities of policies’.22 He also understood that if the loan agreement, centred as it was on the convertibility provision, was to work there would have to be some radical alterations to British foreign economic policy designed to guarantee the insulation of the reconstruction programme from external disequilibrium. He proposed substantial cuts in overseas military expenditure in order to conserve foreign exchange, and the blocking for five years of all sterling balances accumulated prior to 31 December 1946.23 The attempt to block the sterling balances failed. First, the campaign took a heavy blow with the sudden death of Keynes in April 1946. Secondly, as far as the Bank was concerned, blocking was incompatible with the restoration of sterling to its prewar international role, and instead of taking unilateral steps it negotiated with creditors on scaling down the balances.24 There was an agreement with Argentina, while Australia and New Zealand each made small gifts equal to a write-off of 15 per cent of their balances. However, both Dominion governments told British Treasury and Bank officials that they would go no further. Larger balance holders were even less willing to make concessions, and the Bank was only able to achieve a series of gentlemanly agreements with them by which accumulated balances were not supposed to be subject to convertibility (to be restricted to the current transactions of residents) after 15 July 1947. The net result of the Bank’s efforts was that the balances were actually higher at the end of June 1947 than they were two years before – £3,557 million against £3,136 million.25 The prevailing worldwide dollar shortage made convertibility in 1947 a gamble anyway, but it is arguable that the Bank’s refusal to compromise on sterling balances doomed the enterprise. Some of the sterling creditors did not make even a formal pretence of honouring the understandings they had concluded with the Bank. During the brief period of convertibility from 15 July to 20 August 1947, India, Iraq and Egypt, out of total balances of £1,576 million, released £112 million.26 Belgium, 22 24 25 26

23 Ibid. Newton, ‘A “visionary hope” frustrated’, p. 201. Hugh-Ellis Rees, ‘The convertibility crisis of 1947’, Treasury historical memo., 1961, pp. 12, 30ff., T 267/3. See Fforde, Bank of England, pp. 101–8; Rees, ‘Convertibility crisis’, 12. D. Wightman, ‘The Sterling Area’, Banca Nazionale del Lavoro 4 (1951), 152.

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although not a member of the Sterling Area, had increased its sterling balances by £21.6 million between 1 January and 30 June 1947 before running them down by £23.2 million between 1 July and 20 August. The Loan Agreement had calculated that the annual rate of release should not exceed more than £43.75 million, and clearly this outflow was a major contributor to the financial crisis which saw net drawings on the gold and dollar reserves rise from $94.6 million in the week ending 5 July to $175.9 million in the five days ending on 15 August.27 To cover the drain Britain drew down the American credit by $450 million during the first two weeks of August. The situation became unsustainable, and it proved necessary to reintroduce the wartime Sterling-Area arrangements to prevent the rapid exhaustion of the entire credit. The failure of convertibility meant the collapse of Keynes’s efforts to establish an international context which would support British reconstruction. The Bank of England, whose priorities and actions had indicated continuing dissent from the reconstruction consensus and preoccupation with the external status of sterling, had played its own part in this fiasco. Sterling inconvertibility, 1947–1951 The return to inconvertible sterling and bilateralism was supported by both the Keynesians and those in the Bank and the Treasury who put sterling first. The differences between the two groups were obscured because each had good reasons for supporting the reconstructed wartime foreign exchange regime. As it had during the war the Bank took the view that bilateralism was an improvement on default, while the Keynesians supported the controls because they insulated the domestic economy from the dollar shortage. However, as sterling once again came under pressure in 1949 this rather superficial consensus started to weaken, until by 1952 it had largely dissolved. British reconstruction made steady progress under the regime of controls. Full employment was maintained and by 1949 exports were financing 85 per cent of imports as opposed to 33 per cent four years earlier.28 But all this was threatened by a new sterling crisis whose origins lay in a short, sharp American inventory recession. This developed in the last quarter of 1948 and lasted until October 1949. The downturn had serious external consequences for the overseas Sterling Area, whose dollar income declined by 21 per cent in the second quarter of 1949, and by 41 per cent in the third quarter. Meanwhile British exports to the 27 28

Dalton memo., CP(47)233, 16 Aug. 1947, CAB 129/20. P. Williams, Hugh Gaitskell (1979), p. 195.

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American market slumped, and by 1 July the dollar deficit was running at an annual rate of $2,900 million (£720 million). In the absence of corrective action the reserves would last just six months.29 The growing crisis left its mark on economic policy. As the amount of hard currency flowing into the Sterling Area declined, so members were forced to reduce imports from the dollar area, by 25 per cent, in July 1949. At the same time the Cabinet embarked on a serious examination of what was called a ‘two-world’ strategy. This was the reverse of the non-discriminatory one-world strategy to which the government had reluctantly committed itself when it signed the Anglo-American Financial Agreement, and which was still its official objective. Two-worldism was an alternative by which Britain would retreat into a fortress sterling bloc supported by bilateralism in foreign trade and payments, and internally by direction of labour and an intensification of rationing. It might offer some security for full employment in Britain against the impact of cyclical recessions in the American economy even though it would have led to the division of the non-communist world into two major trading blocs and to a deterioration of living standards at home. The two-world strategy had little support in the Bank or the Treasury, where the resolution of the crisis was at first seen to lie in deflationary measures. Indeed the consensus around bilateralism which had lasted since 1947 began to break down as the Bank began a reconsideration of the policy. It was troubled by black-market speculation against sterling. The deteriorating external position encouraged this activity, but there was an additional cause for it in releases of sterling balances from accounts which, by agreement with the holders, were not supposed to be used for current transactions. In a growing number of international financial centres, these were in fact being exchanged for dollars at a rate well below the official level. By summer 1949 it became possible to buy dollars even from reputable Wall Street banks at just $3.25 to the pound (the official rate was £1 = $4.03). This ‘cheap sterling’ could then be used for the purchase of British goods, via a European intermediary, at a discount. H. J. Isner of Ullman and Co. suggested that as much as 33 per cent of all British exports to the United States were being financed this way.30 It was a trade which undermined the status of sterling and diverted business away from the international markets in London. On both counts it was alarming to the Bank, and its initial response to these ‘cheap sterling’ transactions had been to extend controls on its use by non-residents. But it began to appear to some of the Bank’s officials that the only sure way of 29 30

Economic Policy Committee (EPC) (49)24, 1 July 1949, CAB 134/22. See Fforde, Bank of England, pp. 234–5.

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halting the speculative activity was by blocking all balances and restricting the use of the pound to the domestic market. Sterling’s international career would be over. If this was where bilateralism was leading, then, as far as the Bank was concerned, there had to be an alternative. This came from Bolton, a long-serving member of the Bank who had become by 1948 executive director. Bolton and his colleagues now believed that it would not be possible for much longer to preside over both blocked balances and an inconvertible currency. Aware that the government was due to approach the USA for assistance, Bolton argued that there were only two viable options, both pointing in a one-worldist direction. The first, based on financial support from Washington beyond Britain’s Marshall Aid allocation, would allow for substantial releases of sterling balances and moving to sterling convertibility at a fixed rate. The other, to be followed if no help was forthcoming, embraced ‘drastic domestic action’ and a return to the 1931–9 era when sterling had been convertible at a floating rate of exchange.31 The US Treasury was reluctant to part with dollars. It argued that the dollar drain was a function of excessive demand generated by Labour’s reconstruction programme: a shift towards the market was required so that British costs would fall and dollar earnings increase.32 In theory this still left a choice between pure two-worldism and Bolton’s alternative of revisiting 1931–9. But fear of the strategic and economic consequences flowing from a breach with the United States made the first of these unacceptable, while on the other hand the Attlee government was never going to resort to measures which brought back memories of the last Labour government’s collapse in 1931. Instead it opted for what Cripps called a ‘compromise’ between the one- and two-world strategies.33 Deflation would be avoided but there was to be a review of public spending and a reassertion of the commitment to sterling convertibility. At the same time the Cabinet devalued to £1 = $2.80, intending to demonstrate its willingness to fall back on the price mechanism rather than the extension of controls as a means of restoring equilibrium to the country’s external finances. This package was put together in the hope that it would placate the US Treasury and unlock financial aid which would swell the Sterling Area reserves to £1 billion, a figure considered to be large enough to support convertibility. But it was not simply a piece of economic pragmatism. The attempt to pursue a middle way between one- and two-worldism also involved choosing to stick by ‘liberal socialism’ and the Keynesian 31 32 33

Ibid., pp. 295–6. Snyder to Acheson, 10 July 1949, Foreign Relations of the United States, 1949, III, pp. 801–2. EPC (49)73, 4 July 1949, CAB 134/222.

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project to locate British reconstruction in an international economic context which always sustained domestic full employment policy. The British attempt to prise extra dollars from the United States did meet with modest success. The Truman government committed itself to a raw-material stockpiling programme which was likely to reverse the decline in dollar income suffered by Sterling-Area members such as Malaya. It also agreed to reduce tariffs and increase foreign investment, as well as to measures designed to stimulate domestic demand. In 1950 Washington guaranteed Britain reimbursement of gold and dollars lost as a result of the use of sterling balances by continental states to reduce debts with the new European Payments Union.34 The British believed that these steps signalled a resumption of wartime AngloAmerican co-operation.35 But in fact the sterling-dollar diplomacy of 1949–50 drew a line under the era which had opened with Lend-Lease. The US concessions had only been produced out of anxiety, felt most strongly in the State Department, that the British economic crisis would lead to a division of the non-Soviet world into two blocs and the frustration of its hopes for a non-discriminatory world. They were not to be repeated. The Bank was not comfortable with the outcome of the 1949 crisis despite good economic progress in 1950, which ended with the Sterling Area as a whole in surplus for the first time since the end of the war. Economic growth had been running at slightly over 3 per cent since 194836 while industrial production was rising at an annual rate of 7.5 per cent, a figure not reached in France, Belgium or Sweden, and on a par with the level achieved in the Netherlands at the time.37 Until 1951 inflation was contained at 3 per cent and it is not evident that the progress of British reconstruction was being held back by suffocating corporatism.38 But these successes in the real economy did not outweigh the Bank’s unhappiness with the government’s reliance on continuing physical controls. In 1949–51 especially it continued to make the case against bilateralism and inconvertibility, and argued in favour of decontrol with greater use of monetary policy in the regulation of demand. The controls were however regarded by senior government figures as an essential feature of economic policy. In their absence (said Cripps’s deputy Gaitskell) it would be impossible to hold the balance of payments position without 34 35 36 37 38

S. Newton, ‘Britain, the Sterling Area and European integration, 1945–50’, Journal of Imperial and Commonwealth History 13 (1985), 176. Franks to Bevin, 19 Sept. 1949, FO 371/75590/UE5984/150/53. R. Middleton, The British Economy since 1945. Engaging with the Debate (2000), pp. 146– 7, table 11.1. S. Lieberman, The Growth of European Mixed Economies (New York, 1977), p. 24, table 1.6. This is the accusation of Bulpitt and Burnham in ‘Operation Robot’, p. 22.

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unemployment in excess of 1 million.39 After becoming Chancellor of the Exchequer himself Gaitskell was increasingly preoccupied with rearmament and the external difficulties which had started to develop as a result of this, and his ideological commitment to controls was reinforced by the objective position of the economy as it lurched back into the red during the course of 1951. Not surprisingly the alternative strategy for sterling advanced by Bank of England staff made little headway while Labour remained in power. The Robot war It was not until the arrival of Churchill’s Conservative government in October 1951 that the advocates of a new external policy were granted a serious political opportunity. The background to the general election had been one of mounting economic crisis. The rearmament programme, which saw defence expenditure rise from 6 per cent to 10 per cent of the national product between 1950 and 1952, diverted production away from exports and stimulated demand for imports at the same time. SterlingArea members which had hitherto looked to Britain for capital goods now turned to the United States, and ran down gold and dollar reserves which had been accumulated during the stockpiling boom. The SterlingArea reserves plummeted from $3.8 billion in June 1951 to $1.8 billion by February 1952 and cheap sterling operations, which had fallen away during the course of 1950, resumed.40 These difficulties were compounded by a leap in the retail price index to just over 10 per cent,41 largely a function of the deteriorating terms of trade provoked by the international demand for raw materials. During the election campaign the Conservatives had made much of a desire to ‘set the people free’. This slogan, which in policy terms implied a retreat from Labour’s reliance on physical controls to regulate the volume of imports and the level of demand in the economy, was not only attractive to middle-class voters weary of rationing and businesses anxious about ‘red tape’ and trade union power. It squared with the Bank of England’s enthusiasm for liberalisation of foreign-exchange policy, which had been reinforced by the reappearance of the cheap sterling transactions.42 The new Chancellor, Butler, followed up the rhetoric with the first increase 39 40 41 42

EPC (50)10, 7 Jan. 1950, CAB 134/225; see also S. Kelly, ‘Ministers matter: Gaitskell and Butler at odds over convertibility’, Contemporary British History 14 (2000), 26–37. S. Newton, Operation Robot and the Political Economy of Sterling Convertibility, 1951–1952 (Florence: European University Institute Working Paper no. 86/256, 1986), pp. 1–3. Middleton, The British Economy since 1945, p. 149, table 11.2. Thompson-McCausland memo., ‘Lessons of the past five years’, 31 Oct. 1951, BoE ADM 14/30.

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in the bank rate for twelve years (from 2 per cent to 2.5 per cent) and indicated that public spending cuts were to be expected. This willingness to use monetary policy and internal measures was encouraging to Bolton, who advised Butler to embark on a policy of ‘progressive convertibility accompanied by a fairly rapid discard of much of the methods and practices of the past 12 [sic] years’.43 Bolton advocated as a first step the introduction of convertibility into the raw-materials trade. This could be followed by measures to bring to an end the era of bilateral payments arrangements. To this end Bolton suggested the provision of gold purchased at the current price on the London bullion market to foreign central banks with sterling balances. Clearly the new policy would put the hard-currency reserves under pressure, and to avert this it would be necessary for Butler to try and negotiate a stabilisation credit, possibly as much as $1 billion, from the USA.44 The problem with this strategy was US refusal to produce more assistance for Britain. The Truman government did not consider sterling convertibility a priority: it was more preoccupied with European integration, rearmament and the Korean war, while the US press made no secret of its frustration with continuing British requests for special treatment.45 Butler failed to secure the credit, and the only further assistance to become available during the course of 1952 was an allocation of $340 million to assist with the defence programme. The absence of significant US aid was not to be a deterrent for the advocates of convertibility. Early in 1952 Bolton, building on his 1949 suggestions about unilateral action in the event of no American support, proposed the introduction of convertibility at a floating rate, with the safeguard of blocked balances to prevent a re-run of 1947, along with spending cuts and increases in the bank rate. This plan received the support of the Bank and of the Overseas Finance Section in the Treasury, and was dubbed ‘Robot’, possibly after the names of its key sponsors (apart from Bolton there were Sir Leslie Rowan and Otto Clarke from Overseas Finance). The Roboteers, having refined the plan so that it rested on a managed float (Bolton suggested between £1 = $2.40 at the lower end and £1 = $3.20 at the upper end),46 non-resident convertibility, and the blocking of 90 per cent of foreign-held and 80 per cent of Sterling-Area sterling balances held on 1 February with funding of the rest, managed to persuade Butler and the Treasury that it should become government policy. 43 45 46

Ibid., Bolton memo., ‘External economic policy’, 16 Nov. 1951. Report of 16 July 1949, FO 371/75580/UE4539/150/53. Bolton memo., ‘External action’, 16 Feb. 1952, T 236/3240.

44

Ibid.

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The Treasury’s support for Robot led to a fierce battle inside the new government. The Robot war is a familiar tale, but some points need to be made. First, the history of the Bank’s attitude to overseas financial policy related here clearly demonstrates the Bank’s long-term commitment to maintenance of sterling’s international role above all else. Robot came out of a genuine worry that this was in jeopardy and could only be salvaged by radical action. The Treasury shared this anxiety: it was suggested that ‘it must be in our interest to have sterling convertible for we cannot possibly trade and ship and insure and all the other things we do unless sterling is convertible’.47 The City’s future as a global financial centre, together with the invisible earnings this brought the UK, was tied to the prospects for sterling. Indeed the stakes were now high enough for Bolton to accept that the floating rate and blocked balances might disrupt the Sterling Area and result in the departure from it of Pakistan, Burma and Cyprus.48 Secondly, Robot was not compatible with the post1944 policy consensus. Although its advocates, and Butler in Cabinet, spoke mollifyingly of letting the exchange rate and not the reserves take the strain of an external crisis, there was little doubt that the introduction of the Robot plan would have been accompanied by sharp deflation. There was no question of permitting a free float: given the deficit this could only be sharply downwards and thus likely to generate a massive move out of the currency by the very foreign holders Robot was supposed to attract.49 It followed that given the considerable balance-of-payments deficit Robot would not be an alternative to but would be complemented by the tighter monetary policy and spending cuts which Rowan, with Bridges and Brittain in the Treasury, had been proposing since the end of November.50 Indeed the plan was sold as a strategy which would end the tendency to suffer from the recurring postwar sterling crises generated by excessive demand. Instead of resorting to tighter import and exchange controls the economy would have to adjust to external disequilibrium via reductions in demand: ‘the basic idea of internal stability of prices and employment which has dominated economic policy for so long . . . will not be maintainable . . . it will not be possible to avoid unemployment’.51 The unleashing of Robot revealed a schism between those who supported the aims of postwar reconstruction and those who did not. Within the civil service the battle-lines set the in-house Treasury and Bank staff, 47 48 49 50 51

Memo. by Clarke, ‘Convertibility’, 25 Jan. 1952, T 236/3240. Ibid., para. 21. Memo. to the Chancellor, ‘Floating Rates’, 24 Feb. 1952, T 236/3240. Minutes of 27 Nov. 1951 meeting, T 236/3240; Newton, Operation Robot, p. 12. Draft memo. 20 Feb. 1952, T 236/3240.

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few of whom had received any formal training in economics,52 against the significant number of professional economists in government service who followed the model developed by Keynes in The General Theory. These included Plowden from the Central Economic Planning Staff, and Hall, director of the Economic Section of the Cabinet Office, along with his colleagues there. Support came from MacDougall, adviser to Churchill’s old friend, the Paymaster-General Lord Cherwell. They opposed Robot on the grounds that it would return macroeconomic policy to the prewar, pre-Keynesian era.53 The introduction of convertibility would also be likely to set off a downward spiral of international trade as countries which were short of dollars focused their trade on earning hard currency and therefore reduced imports from non-dollar countries.54 These criticisms were fed into the ministerial debates through Cherwell and Macmillan, then Minister of Housing, who called Robot ‘a banker’s ramp’.55 They frightened Churchill and in the end the plan was shelved, although it continued to be discussed in the Treasury and the Bank through spring and summer 1952. Compromise The opponents of Robot were themselves divided, between those who argued that the external crisis could be managed via dis-inflation and an intensification of import restrictions (Plowden) and those who supported a radical approach of their own (Hall and the Economic Section). The latter argued that the government should seek to insulate the domestic economy with a new version of the two-world strategy. First, the Sterling-Area gold and dollar reserves should be divided between independent members so that balancing with the dollar bloc could be conducted on a bilateral not on an area-wide basis. Second, import controls on dollar goods should be tightened and gold payments eliminated from intra-European payments settlements, currently being conducted through the European Payments Union. The effect would be to stimulate trade between non-dollar countries, a development more feasible in 1952 than in 1949, given the rapid increase in west European and especially German output in the intervening period.56 It was a package which offered a way out of external crisis which was consistent with domestic 52 53 54 55 56

G. C. Peden, The Treasury and Public Policy 1906–1959 (Oxford, 2000), p. 438. Hall memo., ‘External action’, 23 Feb. 1952, T 236/3240. Hall memo., ‘The future of sterling’, 24 Mar. 1952, T 236/3243. Macmillan memo., ‘The great debate: financial and economic policy’, CP226(52), 4 July 1952, CAB 129/52. See A. S. Milward, The European Rescue of the Nation-State (1994), pp. 126–9.

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expansion. But the plan was shot down. The Bank and the Treasury argued that it would have ‘rendered sterling virtually unacceptable as a means of international payment’.57 The failure to take emergency action did not however prevent an improvement in the reserves during summer 1952. Over the year as a whole the reserves dropped by £175 million, most of which flowed out in the first quarter before the import cuts agreed in the winter began to bite. The passing of the crisis atmosphere indicated that Robot was at root a political plan designed to pitch the country into a one-world policy by taking advantage of a favourable moment – namely the third major sterling crisis since the war. However Robot could not make headway against those forces within government committed to sustaining the 1945 consensus, either from ideological conviction or out of political expediency. At the same time the alternative to Robot which claimed to offer an escape from repeated sterling crises without risking internal instability was unacceptable to the interests aiming to reassert Britain’s standing as a global financial power. The failure of Robot did not mean the abandonment of attempts to rehabilitate sterling as an international currency, but it did lead to the adoption of a new plan which was designed to secure convertibility without jeopardising full employment at home. This was the ‘Collective Approach’, drafted by a working party composed of a mixture of Treasury regulars and Keynesians including Hall and MacDougall.58 Neither of these two were happy with the scheme, which incorporated elements of Robot (the floating rate) but assumed that convertibility would be conditional upon a $2 billion stabilisation credit from the USA to the IMF. It was agreed by Commonwealth prime ministers in December 1952 that Butler would approach the new Eisenhower government with this agenda in March 1953. The initiative was similar to the ‘compromise’ outlined by Cripps in 1949. But it was another non-starter since the United States once again made clear its lack of interest in providing financial support for sterling. The question is: why did London pursue what was really a will o’ the wisp? It was true that a new United States government was now coming into power, but there was no reason to suppose that the Republicans, traditionally less enthusiastic about foreign aid than the Democrats, would introduce a note of change favourable to the British. The problem was the political unacceptability of the alternatives to the Collective Approach which in itself was uncontroversial in the context of the balance of forces within the government, the civil service, the Bank of England, 57

Fforde, Bank of England, p. 489.

58

Peden, Treasury, p. 463.

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and perhaps the electorate. Rather like the ‘neo-classical synthesis’ which became fashionable at about the same time,59 it was a radically flawed compromise between Keynesian and liberal economics – or even between industrial and commercial capital. The respective strengths of the two traditions and of their supporters led to a stalemate whose expression was a variety of international Keynesianism for which no objective basis in fact existed. Thus the failure of the Collective Approach did not stop the British from taking progressive steps towards convertibility, taking care to ensure that these did not upset domestic full employment.60 This proved feasible in the short term thanks to favourable terms of trade and to the narrowing of the dollar gap which followed from the expansion both of US overseas military expenditure and of US multinational corporations in western Europe. Restrictions on the international use of sterling were lifted, the bank rate being used to manipulate the flow of short-term capital, until full convertibility for current transactions was resumed in 1958. In the end one-worldism and reconstruction did prove to be uncomfortable bedfellows. Many historians have argued that there was a connection between Britain’s relatively sluggish growth rates of the late 1950s and into the 1960s, and the efforts of successive governments to protect the international reserve currency status of the pound sterling.61 It is suggested that, at times of external deficit, only deflationary measures would reassure holders of sterling that their assets would not fall in value. More radical steps which in prioritising expansion might have sacrificed Britain’s lingering aspirations to run a global currency were avoided. Yet it may not be enough to invoke the familiar ‘stop-go’ argument in order to explain the chequered economic history of postwar British reconstruction. By holding on to the global vision, the Treasury and the Bank of England steered the British economy away from participation in the European Common Market on the grounds that this was a regional, discriminatory bloc. Their enduring one-worldism could not be squared with the main point of the Treaty of Rome – to entrench a system of intra-European trade, pivoting on the new West German state, which had brought increasing prosperity to its six signatories over the years since 1951.62 Determination to reassert sterling and with it the City’s international role may have excluded Britain from the beneficial effects 59 60 61 62

The concept is discussed in R. Middleton, Charlatans or Saviours? Economists and the British Economy from Marshall to Meade (Cheltenham, 1998). Newton, Operation Robot, pp. 35–6. See Middleton, The British Economy since 1945, pp. 102ff; Newton and Porter, Modernization Frustrated, chs. 5–6; S. Pollard, The Wasting of the British Economy (1984). See Milward, European Rescue of the Nation-State, ch. 4.

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on domestic growth of the foreign trade multiplier, which, operating in the context of a protected market, did much to generate mutually sustaining economic miracles in postwar western Europe. E. H. H. Green’s recent argument that between 1880 and 1960 debates about the evolution of the British economy tended to revolve around the choice between openness and autarky63 oversimplifies the choice facing postwar governments. Yet the Bank and Treasury battle for sterling, starting with opposition to Keynes in 1944 and continuing throughout the period of reconstruction, was an echo of earlier battles over tariff reform, imperial economic unity and the gold standard. In the 1950s the balance of social and political forces combined with the Keynesian revolution to prevent resolution on terms wholly satisfying to the Bank and Treasury. But their struggle for the rehabilitation of Britain’s traditional engagement with the international economy may have set back the cause of continuing domestic modernisation. 63

E. H. H. Green, ‘The influence of the City over British economic policy, c. 1880–1960’, in Y. Cassis (ed.), Finance and Financiers in European History, 1880–1960 (Cambridge, 1992), p. 213.

14

‘Mind the gap’: politics and finance since 1950 Arthur Thomas

Harold Wilson once observed that ‘a week is a long time in politics’. It can be equally telling in the world of finance. The most spectacular stock-market collapse of the postwar period took place within the space of the few days surrounding a weekend in late October 1987. By contrast there are instances of institutional change being very gradual. For example, a broker from the pre-First World War market transplanted to the floor of the Stock Exchange in the early 1980s would have felt entirely at home with the prevailing organisation and practices. Change here has been concentrated into the last two decades, the 1986 Big Bang being followed by further adjustments in response to internal and global financial developments. Changes in the role of the market in meeting the financing needs of British industry over the past fifty years have also been of an evolutionary kind. Before looking at these changes it might be useful to set the pattern of investment finance in a more general framework. In promoting economic growth one important role of the financial system is to facilitate the transfer of savings from surplus sectors of the economy, generally the personal sector, to those in deficit, usually the corporate and public sectors. There are two ways in which funds can be channelled. First, there is the direct route whereby deficit units offer liabilities (bonds or equities) in the primary market, and institutional mechanisms have evolved for this purpose. This may be broadly termed the market model, and the United States and Britain are frequently cited as examples. In this model the secondary market occupies a central role in arriving at prices and ensuring the liquidity of assets taken up by surplus units. The second model involves the indirect transfer of funds. Here, savings are placed with deposit-taking institutions who then either take up liabilities issued by deficit units or make long-term loans. They perform an intermediary function by pooling small savings and making large longterm loans. They offer economies of scale, the transformation of maturities, and risk reduction. This indirect model is usually referred to as 276

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the banking model of financing, Germany and Japan being seen as the obvious examples. Authoritative views of the British market model appeared in two reports, those of the Radcliffe Committee (1959) and the Wilson Committee (1980). As the full title of the former suggests – Committee on the Working of the Monetary System – it was mainly concerned with the banking system and money markets, in particular the role of interest rates and control of the money supply. The Committee heard evidence from the Stock Exchange and other bodies and concluded that industrial firms met most of their financing needs from savings, while the new issue market was seen as ‘another important source’ but bank finance ‘has played little part’.1 The Wilson Committee – the Committee to Review the Functioning of Financial Institutions – had a much wider remit. It examined ‘the role and functioning at home and abroad, of financial institutions in Britain and their value to the economy’ and also reviewed ‘the provision of funds for industry and trade’.2 The Committee’s verdict on the capital market was generally favourable, but it noted certain problems and dangers. In meeting the needs of both savers and borrowers it concluded that a ‘wide range of financial investments is available . . . and that the system has a good record in meeting new requirements’. It examined the criticism that real investment had been constrained by shortages of external finance but found no evidence of this. As to the secondary market, it felt that ‘the pricing of securities in the market is fair and that differences between companies in expected returns and risks are reflected in prices’. However, it warned that the market is not ‘particularly successful at predicting which companies will show substantial profit growth’, and concluded that the ‘level of secondary market dealing may often be more than is required to establish correct relative prices’. It cautioned that high levels of secondary market activity would foster ‘a speculative psychology’, which would inevitably inflate ‘the prices at which new issues can be made’. Finally, the Committee conceded that the threat of takeovers might prompt management to employ resources more efficiently, but added that most had not led to ‘observable increases in efficiency’.3 Not all contemporary observers of the City took such a generous view. The TUC’s evidence to the Wilson Committee struck a more critical 1 2 3

(Radcliffe) Committee on the Working of the Monetary System, Report (Cmd. 827, PP 1958–9, xvii. 389), p. 308. (Wilson) Committee to Review the Functioning of Financial Institutions, Report (Cmd. 7937, PP 1979–80), p. 193. Ibid., pp. 193–4.

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note. Citing Keynes’s famous observation that investment should not be the by-product of the activities of a casino, it went on to recommend the creation of a central fund to boost investment and a minority on the Committee supported this view. The proposed fund’s resources would come from a levy on the inflow of money to the long-term investing institutions, which would then be matched by Treasury funding.4 A majority on the Committee regarded this as far too drastic a suggestion, preferring more practical approaches to improve financing channels. Others had more radical views. Some academic observers, such as Lawrence Harris and Richard Minns, maintained that established methods had failed to boost investment levels, leaving industry unable to compete effectively abroad. British industry had relied on internal savings to finance investment, whereas continental and Japanese firms financed only a third of their investment from internal sources with the rest coming from the banking system.5 The critics contended that the dependence of British firms on internal funds arose from the conservatism of the British financial system. In particular, City institutions looked to liquidity and short-term returns rather than to companies’ long-term prospects.6 Such accusations persisted into the 1980s, and in recent years Hutton and Mayer have voiced the same concerns.7 Moreover, the critics claimed that the supply of domestic savings was further restricted by the abolition of exchange control in 1979. Institutional investors eagerly diversified their portfolios by buying overseas equities, thereby depriving domestic firms of finance and putting up the cost. One solution was to nationalise the banks and the major investing institutions, and ensure that there was a ‘systematic and comprehensive link between long term investment, production and financial strategies’.8 Sources of funds There are obvious dangers in making comparisons over some fifty years. The economy has changed, the composition of the industrial and commercial sector has altered (especially with the addition of privatised corporations from 1982 onwards), manufacturing has shrunk, financial institutions have evolved, and the monetary and fiscal background has been 4 5 6 7

8

Ibid., pp. 266–7. J. Coakley and L. Harris, The City of Capital. London’s Role as a Financial Centre (Oxford, 1983), p. 226. R. Minns, Pension Funds and British Capitalism (1980), p. 61. W. Hutton, The State We’re In (2nd edn, 1996), pp. 154–65; C. Mayer, ‘The assessment: financial systems and corporate investment’, Oxford Review of Economic Policy 3/4 (1987), 1–16. Coakley and Harris, The City of Capital, p. 227.

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Table 14.1 Sources of funds as percentage (rounded) of total sources: averages of periods internal gross trading 1952–5 1956–60 1961–5 1966–70 1971–5 1976–80 1981–5 1986–90 1991–5

72 69 64 59 46 61 67 51 59

profitsa

other current incomeb

total

externalc

21 21 21 22 34 21 21 21 28

93 90 84 81 80 82 88 73 87

7 10 16 19 20 18 12 27 13

a

Net of stock appreciation, before capital depreciation Rent and non-trading income in UK, plus current income from abroad c Capital grants, overseas investment in UK companies, borrowing less liquid assets b

Source: National Income and Expenditure Blue Books

constantly changing. The list is considerable. Nevertheless, it may be useful to indicate the trends in the sources and uses of funds as a background to the role of the stock market. Table 14.1 provides an indication of the main sources of funds available to industrial and commercial companies (ICCs), distinguishing between internal and external funds. Internal funds consist of gross trading profits (net of stock appreciation) together with other current income. External funds are derived mainly from the capital market and the banking system. Over the period companies depended mainly on their own funds. Within internal funds two features may be noted. First, the decline of gross trading profits as a proportion of total sources was arrested and rebuilt to the 60 per cent level. The fall in the period to the mid 1970s reflected the smaller share of total domestic income taken by ICCs. The counterpart to this squeeze on companies was the rise in the share of income taken by employment. Companies’ share of total income fell from 16.6 per cent in the years 1952–5 to 10 per cent in the early 1970s. By contrast, income from employment rose from 66 per cent to 68 per cent, the switch reflecting the change to more competitive conditions, added to which periodic price restraint depressed companies’ share. By the early

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1990s the position had been reversed, income from employment standing at 66 per cent and that of companies recovering to 13 per cent.9 The second feature is the cyclical nature of gross trading profits. This volatility stemmed from that of output. During the economy’s expansionary phase output and selling prices tended to rise faster than costs, especially labour costs, and profits grew apace. In recession, with falling output and rising unit costs, profit margins declined and overall profits fell. However, it was noticeable when profits rose rapidly that their contribution to the supply of overall funds contracted. This was particularly evident in the ‘Lawson boom’ when the proportion fell to 46 per cent of all sources in 1989. In this instance capital expenditure tended to outstrip internal funds, forcing resort to external finance. The fortunes of ICCs are also reflected in the net rate of return on capital employed, with capital measured on a replacement cost basis. During the 1960s rates of return fell from 13.5 per cent to 10.1 per cent by the end of the decade, and then in the first major recession of the period (1974–5) to just over 6 per cent. Recovery was frustrated by the 1980–81 recession but by the mid 1980s rates had recovered to 13 per cent by 1989, only to fall again to 9.3 per cent in the next recession in the early 1990s. Gradual economic recovery over the mid 1990s took the return back to 12 per cent in 1999.10 The variability of the returns and the failure to attain levels recorded by Britain’s trading rivals stemmed from many causes, the most cited reasons being uncertainty generated by successive stop-go cycles and increased international competition especially after entry to the EEC in 1972. Possibly the most important reason was the failure to generate as much output per unit of input as Britain’s main competitors, a failure to secure sustained increases in average productivity caused by ingrained institutional inertia.11 Uses of funds Although there have been variations, current expenditure over the period accounted for around half of total uses (see Table 14.2). The fall in the proportion in the early postwar decades was linked to the declining share of current expenditure absorbed by tax. This reflected the slower rise in internal income compared with increases in total sources, and that companies distributed a large proportion of income thus transferring the 9 10 11

Calculated from factor income tables in the official UK National Accounts published annually. R. Walton, ‘Company profitability and finance’, Economic Trends (Dec. 1999), 37–8. E. F. Denison, ‘Economic growth’, in R. E. Caves (ed.), Britain’s Economic Prospects (1968), pp. 231–78.

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Table 14.2 Uses of funds as percentage (rounded) of total uses: averages of periods Current expenditure

1952–5 1956–60 1961–5 1966–70 1971–5 1976–80 1981–5 1986–90 1991–5 a b

dividends

other interest

profits and taxes due abroad

16 17 20 17 10 9 8 11 21

4 5 8 12 14 16 14 13 15

33b 26b 18b 11 20 15 8 5 5

UK taxesa

11 9 10 18 12 10

total

identified capital expenditure

unidentified

54 49 47 51 54 49 49 44 51

31 44 48 43 45 49 41 46 44

15 7 5 6 1 2 10 10 5

UK taxes on income Profits and taxes due abroad plus UK taxes

Source: National Income and Expenditure Blue Books

tax liability to shareholders. More important was that tax rates fell and successive governments attempted to stimulate investment through use of investment allowances. During the 1980s the proportion absorbed by tax fluctuated as earlier concessions were withdrawn. The other component, profits and taxes due abroad, absorbed a consistently smaller fraction of total uses. Other significant items include the payment of dividends on ordinary shares and interest payments on fixed interest and bank borrowing. In terms of the proportion of total uses there are interesting variations. Immediately after the war the proportion rose gradually, partly reflecting changes in profits, but generally companies allowed dividend payments to fluctuate less than profits. The early caution deserted companies in the 1960s as they realised that accumulations of liquid assets attracted takeover bids. It was also the era of the ‘cult of the equity’, while companies contemplating share issues sought to sweeten their offerings with dividend rises. Further impetus came from the removal of tax discrimination against distributed profits in 1958. But tax policy in this period was remarkably fickle. The introduction of corporation tax in 1965 brought a tax structure that favoured retention. Macroeconomic policy added a further twist in the 1970s with the use of dividend-limitation policies thereby

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keeping dividend levels down until the policy changed some years later.12 The volume of dividend payments has, of course, been influenced by changes in the composition of the ICC sector following the privatisations of the 1980s when some £60 billion of equity was added to the market. Dividend payments as a percentage of total uses rose from 8 per cent over 1981–5 to 21 per cent in the early 1990s.13 Whereas borrowing from the market and banks remained in the shadow of other capital sources during the 1950s and early 1960s, from the mid 1960s interest payments consistently absorbed around a third of current expenditure. After the introduction of corporation tax fixed-interest borrowing surged and, together with more bank borrowing, produced an increase in interest payments. The largest portion came from loan interest as banks adjusted their lending practices to provide more mediumto long-term lending. This arose partly in response to criticism from the Wilson Committee but was also made possible by the adoption of liability management. As the banks increasingly accommodated company needs the bond market remained little used. This also reflected prevailing high interest rates, high inflation and large government debt issues which ‘crowded out’ industrial borrowing. In the mid 1990s, however, the pattern of funding changed and was evident in the growth in interest payments to around £22 billion annually in the early 1990s. With rising profitability and greater stability in interest rates, apart from the early 1990s recession, companies increased their levels of capital gearing by more bond issues. Investment and finance Table 14.3 shows the component elements of capital expenditure and its financing. The investment record of Britain over the past five decades has been fairly consistent, ranging from 16 per cent of GDP in the late 1950s to 19 per cent in the boom years of the early 1970s and the Lawson boom of the late 1980s. In international terms Britain devoted a low ratio of national resources to investment. Over recent decades (1970–99) the British investment/GDP ratio averaged 17 per cent, the US 18 per cent, Germany 22 per cent and Japan displaying a ratio of 29 per cent.14 If investment is one of the main determinants of growth then Britain has certainly suffered from the relatively low proportion of resources committed to investment. Looking at the period 1960 to 1989 one study found 12 13 14

E. T. Blackaby (ed.), British Economic Policy 1960–74 (Cambridge, 1979), pp. 399–400. P. Curwen and K. Hartley, Understanding the UK Economy (1997), pp. 485–6. OECD Economic Outlook, June 2000.

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Table 14.3 Financing of capital expenditure as percentage (rounded) of total capital expenditure: averages of periods capital expenditure

1952–5 1956–60 1961–5 1966–70 1971–5 1976–80 1981–5 1986–90 1991–5

financed by:

gross fixed investment

borrowing/ liquid stock other othere buildinga identifiedb unidentifiedc savingsd assets

45 56 60 63 72 70 58 58 68

8 10 9 8 1 2 −1 2 1

14 20 19 17 24 24 22 22 21

33 14 12 12 3 4 21 18 10

86 81 71 61 56 66 69 51 71

10 14 24 22 23 16 16 36 22

4 5 5 17 21 18 15 13 7

a

value of physical increase in stocks and works in progress investment abroad, purchases of UK company securities and changes in hire purchase credit extended c treated as trade credit to personal sector, small businesses and export credits to the overseas sector d net of stock appreciation e government grants and overseas investment in UK companies b

Source: National Income and Expenditure Blue Books

that two factors explained recorded differences in the level of output per head between countries, namely, the level of capital input and the quality of labour input.15 As to the former, Britain had low levels of capital per head compared to its rivals. The same conclusions emerged in a later study which indicated that workers in manufacturing in Germany, France and the US enjoyed the use of some 50 per cent more capital than British workers.16 The most notable feature of investment was its variability. Investment tended to spurt in a boom as firms installed extra capacity, helped by the stimulus of rising share prices and high profit expectations. In recessions, with rising stock levels, falling profits and share prices, retrenchment followed. The picture was clouded until the mid 1980s by the effects of frequent adjustments in investment allowances and grants, quite apart from the impact of changes in interest rates. The most spectacular 15 16

C. Doughty and D. W. Jorgenson, ‘There is no silver bullet: investment and growth in the G7’, National Institute Economic Review 162 (1997), 57–74. M. O’Mahoney and W. de Boer, ‘Britain’s relative productivity performance: updates to 1999’ (NIESR, March 2002), 9.

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instance of investment swings was seen in the recession induced by the high interest rates needed to keep Britain in the Exchange Rate Mechanism during 1990–2. Over this brief span manufacturing investment fell by 13 per cent. In the ensuing gradual recovery overall investment rose strongly, encouraged by favourable profit expectations and advancing share prices. Within total investment, the services sector has taken a larger share due to the greater capital intensity of service companies associated with new technology and falling capital costs. Net average capital employed in the service industries is estimated to have increased by 64 per cent between 1990 and 1998. By contrast, the comparable figure for manufacturing investment was 16 per cent, a level constrained by more competitive trading conditions, the cost of capital and modest growth in profits.17 Three items make up ‘other identified’ in Table 14.3. Net trade credit is a comparatively small item but with cyclical characteristics, falling in boom years and rising in recessions. The other items, investment abroad and purchases of securities, are of greater interest in the present context. From a few hundred million in the 1960s (some 10 per cent of capital expenditure) investment abroad increased during the 1970s, prompted by the international aspiration of companies, tariff avoidance, reduced transport costs and the search for wider markets as international competition grew more intense. The general removal of capital controls after 1979 greatly helped the process. Later, during the expansive years of the ‘Lawson boom’, investment abroad averaged £14 billion for the years 1986–90, representing some 20 per cent of capital expenditure. In the ensuing recession it reverted to the levels of the early 1980s at around 12 per cent. In contrast to Germany and Japan, merger and takeover activity is a prominent feature of the British industrial and commercial scene. It was given considerable impetus in the 1950s when dividend control, a remnant of wartime restraint, and other factors resulted in share prices failing to reflect asset values. This discrepancy produced the first phase of takeovers based on obtaining quick financial pickings by acquiring companies with liquid assets accumulated because of the tax discrimination against distributed dividends, or where companies had built up assets for future investment. Concern about these practices led to the adoption of the Take-over Code in 1968 and the setting up of the Take-over and Mergers Panel, at the instigation of the Stock Exchange, to administer and interpret the Code.18 The motives for later waves of takeovers 17 18

Walton, ‘Company profitability’, p. 41. R. C. Michie, The London Stock Exchange. A History (Oxford, 1999), p. 428.

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Table 14.4 Borrowing and liquid assets as percentage (rounded) of capital expenditure: average of periods capital issues borrowing less fixed total net acquisition acquisition of ordinary interest banks other a borrowing of liquid assets liquid assets 1952–5 10b 1956–60 6 1961–5 5 1966–70 3 1971–5 5 1976–80 5 1981–5 6 1986–90 8 1991–5 16 a b

4 6 7 2 0 2 5 9

0 9 13 13 37 21 15 28 2

3 3 3 4 2 3 6 8 4

13 22 27 27 46 29 29 49 31

3 8 3 5 22 13 16 13 9

10 14 24 22 23 16 16 36 22

from other financial institutions and public sector ordinary plus fixed interest

Source: National Income and Expenditure Blue Books

and mergers, notably in 1967–9, 1971–4, 1987–90 and 1994–7, were more varied, ranging from marketing considerations, the desire to increase competitive strength, a search for economies of scale, the fear of missing out on short-term valuation discrepancies on the market, and the urge to boost managerial status. Viewed over the half century the dependence on savings to finance capital expenditure fell from over 80 per cent in the 1950s to around 70 per cent in the early 1990s. Such a generalisation, however, hides significant variations induced by industrial and commercial activity during successive booms and recession. The pattern is readily apparent in the chart showing savings/capital expenditure ratios for the period 1952–95. In boom years the contribution of internal funds falls sharply as expenditure outpaces available funds, thus forcing greater reliance on external financing. This came predominantly from the banking system and the capital market (see Table 14.4). Such cyclical swings are readily apparent in the numerous postwar booms. The slackening of investment activity in the downswing re-asserts the dominance of internal funds. Responding to the prevailing philosophy of the 1960s and 1970s, ‘other sources of funds’ increased in importance as the government offered investment grants. It proved a short-lived inducement due to the cost on the Exchequer and the criticism that money went to inefficient as

0

20

40

60

80

100

120

1952 1953

Figure 14.1 Savings/capital expenditure ratios 1952–95. Source National Income and Expenditure Blue Books

1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

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well as efficient firms.19 The other component, ‘overseas investment in the UK’, reflected the growing importance of foreign subsidiaries operating in Britain, particularly after it joined the European Economic Community. Looking at the banking sector, the frequent criticism of the banks’ willingness to assist industry has been refuted by successive inquiries and by the growing importance of bank finance as reflected in the percentage of capital expenditure represented by bank advances. The banks’ contribution changed slowly in the 1950s and 1960s, amounting to some 13 per cent at the end of the latter decade (see Table 14.4). During this period the banks gradually expanded their advances portfolio and readjusted their assets after the effects of wartime distortion. While overdrafts continued to be the main form of lending it was not unusual to roll-over short-term loans. The Radcliffe Committee in 1959 commended the banks’ record, even in the provision of small-firm finance. ‘Competition and Credit Control’ in 1971 ended the long era of quantitative and qualitative restraint on bank lending. In the new competitive environment ‘liability management’ replaced the traditional emphasis on asset management. Banks extended the amount and nature of their lending by competing for fixed-term deposits in the money markets. As a result the Wilson Committee reported that medium-term lending accounted for about half of total non-personal advances. The new freedom was reflected in the sharp increase in bank finance in 1972–3 (the ‘Barber boom’), taking the percentage of bank finance to capital expenditure to a heady 37 per cent. After the expansive episode of the early 1970s bank lending settled at around 20 per cent of capital expenditure. There were singular surges once again, especially in the ‘Lawson boom’, but the trend had been set. However, a marked contrast was presented by the negative figures for the early 1990s, when companies reduced both their indebtedness to the banks and acquisitions of liquid assets. Despite this, the overall judgement must be that banks had become more accommodating in their lending and took Britain nearer to the often admired German and Japanese model of industrial finance. As to the capital market the picture is not one that provides fulsome support for the categorisation of the British system as being solidly ‘market based’. Taking capital issues as a percentage of capital expenditure, the figures in Table 14.4 suggest that both equity and fixed-interest borrowing provided a variable, but not large, proportion of funds for ICCs, except in the early 1990s when the figures were skewed by the unprecedented 19

W. A. Thomas, The Finance of British Industry 1918–1976 (1978), pp. 226–7.

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scale of loan repayment. From a tenth of funds in the 1960s the contribution fell to half that level by the 1970s, when equity markets suffered a collapse in 1974–5, and when interest rates reached double figures for the first time since 1914. The contribution of the capital market saw a recovery in the late 1980s, stimulated by the equity market rise before Big Bang and which continued until the correction of Black Monday in late October 1987, when the market fell by 22 per cent in a few days. The collapse was relatively short-lived and the early 1990s witnessed a surge in equity and fixed-interest borrowing. For the first time in fifty years ICCs secured more funds from the capital market than from the banking system. In the context of government relations with the City there are some interesting features in relation to market borrowing. From 1946 to 1959 access to the capital market was subject to official control, exercised for the Treasury by the Capital Issues Committee. This control dated from 1936, originally as the Foreign Transactions Advisory Committee, but thereafter control was based on the Borrowing (Control and Guarantees) Act 1946 and which applied to all borrowing over £50,000. It proved useful in regulating overseas borrowing, but on the domestic front the Radcliffe Committee found it ‘impossible to resist the broad conclusion that this control had no significant impact on the pressure of total demand’, adding specifically, ‘or even upon the pressure on the new issue market’.20 Its only lasting contribution was that it allowed the Bank of England to regulate the queue of borrowers in the interests of government issues and it helped in the timing of industrial issues. Later criticisms of the market concerned its pricing practices, both for initial offer prices and underwriting. Criticism of the practices of the issuing houses came from academic inquiries into the total costs of issue, this being measured as the conventional costs plus the introductory discount (the excess of the market price over the issue price when dealings began). A notable study, Equity Issues and the London Capital Market, found that for the most frequently used methods of issue, offers for sale and placings, the total costs of issue as a percentage of net issues over the period 1959–63 was 23.3 per cent and 27.8 per cent respectively.21 To remedy the high cost the study advocated greater use of tenders, thus allowing the market to put a value on newly offered shares. A Bank of England survey in 1986 reached broadly similar conclusions as to the 20 21

Radcliffe Committee, Report, pp. 163–4. A. J. Merrett, M. Howe and G. D. Newbould, Equity Issues and the London Capital Market (1967), pp. 180–3.

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underpricing of new issues. A sample of over fifty offers for sale during 1983–6 produced average total costs of 15.3 per cent compared with conventional costs of 10.6 per cent.22 It concluded that tenders produced more accurate pricing of shares. Traditionally, however, the new issue houses prided themselves on declaring an issue fully subscribed, and regarded an introductory discount and a buoyant price in the after-market as a vindication of their practices. One feature of company issues in recent decades has been the increasing dependence on raising capital from existing shareholders. The advantages of rights issues are many: low cost, existing shareholders can protect their equity interest, and a demand from institutional shareholders eager to expand their equity portfolio without pushing up market prices. Over recent years new issue statistics indicate that the proportion of money raised by rights issues has been around a third, testimony to the appeal of this method. While the prominent role of rights issues was recognised by the Wilson Committee, it criticised the use of fixed underwriting fees but nothing was done until the intervention of the Office of Fair Trading in 1995. The Wilson Committee reported that of the underwriting fee of 2 per cent some 0.5 per cent went to the sub-underwriters. The Committee reflected that the activity had been extremely profitable for participants, the fees probably standing at twice the level needed to ensure a fair reward for the risks incurred.23 Earlier Merret, Howe and Newbould came to the same verdict about underwriting commissions generally, concluding that underwriting was a ‘highly remunerative activity . . . and underwriting commissions, though superficially low and substantially below the maximum allowed by law, seem to have been far from justified by the risks involved’.24 The fee took no account of the risks of individual issues or the state of the market. An alternative approach would be to use deep discounting of the share issue price, using a discount of 40–50 per cent rather than the standard level of 15–20 per cent. However, only about 10 per cent of rights issues were made in this way in 1985.25 Companies, no doubt, preferred the prevailing practice, while its main beneficiaries, the institutions, were equally content. Following strictures from the Office of Fair Trading the issuing houses have put sub-underwriting out to tender and produced significant cost reductions.26 22 23 24 25 26

‘New issue costs and methods in the UK equity market’, BEQB 26 (1986), 532–45. Wilson Committee, Report, p. 210. Merrett, Howe and Newbould, Equity Issues, p. 126. ‘New issues cost and methods’, p. 540. Underwriting of Equity Issues: A Report by the Director General of Fair Trading (OFT, March 1995).

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Institutional dominance While Big Bang and improvements in the operational efficiency of the stock market attracted a good deal of attention, another longer-term trend probably had more profound effects on the finance of industry. This was the ‘institutionalisation of the equity market’ that began in the 1950s. The impact which the investment policies of the ‘big four’ institutional investors – insurance companies, pension funds, investment trusts and unit trusts – had on share-ownership is evident in Table 14.5. From holding around 20 per cent of equity in the early 1960s institutions increased their share to 60 per cent by the early 1990s, falling back to around half by the end of the decade. The later reduction was largely due to the imposition of the Minimum Funding Requirement on pension funds in the early 1990s, following the Maxwell affair, and which directed investment into less volatile asset categories. The increased ownership over the postwar period was built up by switching from fixed-interest obligations, by taking up new issues and absorbing personal sector sales of equities. While the number of individual investors increased from around 3 million to some 15 million with successive privatisations and de-mutualisations, nevertheless the sector’s share of market equity fell from about a half to one sixth.27 With the abolition of capital controls in the early 1980s and the globalisation of markets, the share of overseas investors increased from 3 per cent in 1981 to nearly 30 per cent in 1999. The reasons for the above changes are not difficult to discern. Institutional channels offered individuals the benefits of specialised management, pooling of risks and inflation protection. But the main stimulant was the attraction of a tax-efficient means of saving. Contributions to pension funds were made out of pre-tax income, while pension funds investments were free of capital gains tax. Up until the 1986 budget, life insurance policies also benefited from tax privileges. The other collective investment vehicles, investment and unit trusts, also offered small savers risk reduction and specialisation, but the latter could not lay claim to attractive fiscal concessions until the introduction of Personal Equity Plans and, in April 1999, Individual Saving Accounts. The strong demand for old and new equities endowed the London market with depth and liquidity, bringing gains to both shareholders and firms. Certainly, until recently, savers and pension-fund beneficiaries profited from the ‘cult of the equity’. Between 1963 and 1998 pension funds achieved average annual returns of 12.1 per cent, compared with 27

‘Ownership of UK quoted companies at the end of 1998’, Economic Trends (April 2000), 85–7.

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Table 14.5 Share ownership 1963–1999 end year (as percentage) 1963

1975

1981

1989

1999

pension funds insurance companies unit trusts, investment trusts and other financial institutions banks

6.4 10.0 12.6

16.8 15.9 14.6

26.7 20.5 10.4

30.6 18.6 8.6

19.6 21.6 9.7

1.3

0.7

0.3

0.7

1.0

total UK institutions individuals other personal sector public sector industrial and commercial companies overseas

30.3 54.0 2.1 1.5 5.1 7.0

48.0 37.5 2.3 3.6 3.0 5.6

57.9 28.2 2.2 3.0 3.1 3.6

58.5 20.6 2.3 2.0 3.8 12.8

51.9 15.3 1.3 0.1 2.2 29.3

100.0

100.0

100.0

100.0

100.0

overall total

Source: Institutional Investment in the United Kingdom: A Review

inflation of 7.2 per cent over the period.28 The general enthusiasm for equities produced a major financial sector in the form of specialised fund management services, handling over £2,500 billion for home and overseas clients.29 The institutionalisation of the market produced general problems, as well as specific criticisms. One of the earliest concerned the effect of institutional deals on the traditional jobbing mechanism. The market had always enjoyed a large number of two-way transactions from individual investors, but by the 1970s the rise in the average bargain size had induced dealers to seek refuge in various defensive practices such as joint books and price-spread agreements. Equally problematical was the accusation that institutional transactions tended to display ‘follow my leader’ behaviour. Indeed, the Stock Exchange in its evidence to the Wilson Committee spoke of ‘the emergence of an identity of view by the institutions’ and that this had led to a diminution of the two-way nature of the market.30 ‘Short termism’ is a more recent transgression and has attracted widespread comment. When the Radcliffe Committee viewed the beginnings of the institutionalisation of the market it spoke eloquently of matching assets and liabilities and of the attraction of equities for 28 29 30

Institutional Investment in the United Kingdom. A Review (Myners Review) (Treasury, March 2001), p. 28. Ibid., p. 77. Wilson Committee, Evidence on the Financing of Industry and Trade, 8 vols. (London: HMSO, 1977), III, 214.

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protecting the real purchasing power of future endowments. By the time of the Wilson Committee the dominance of the institutions had been established and while it expressed concern that ‘the institutions themselves are not yet always sufficiently active in exercising their responsibilities as major shareholders’, it did not criticise them on grounds of ‘short termism’.31 Returns on equities consist of two components, dividends and capital gain. If dividends follow a steady path there is a temptation to take short-run capital gains, and increased share price volatility may well have spurred on the practice. The more recent allegation is that institutions and fund managers are inclined to sell for quick gains rather than adopt a long-term view of investment and growth. Fund managers are regarded as the main offenders, indulging in churning of assets to secure gains viewed as superior to those displayed by some market benchmark. The practice is seen as the inevitable result of pension fund trustees holding quarterly meetings to review returns. Whilst the Myners Review of Institutional Investment in the United Kingdom (2001) did not seek to ascertain the extent of an ‘excessive focus’ on quarterly performance, it acknowledged that the view existed among fund managers that pension funds did look at short-term results. It recommended that pension trustees should provide fund managers with clear indications as to the period over which their performance would be judged.32 But fund managers are not alone in being held to ransom by short-term reviews. Investment and unit trusts are generally subject to even shorter horizons, often in the form of monthly in-house reviews and external assessment by the financial press. A further criticism concerns the reaction of institutions to takeovers. Offered a price well above previous levels, shareholders find a hefty gain difficult to resist. While company management may be very competent, with admirable long-term investment and growth objectives, such considerations may not be sufficient to counter the appeal of quick gains. But not all institutions behave so mechanically. A Bank of England survey in 1987 found that many institutions, especially life offices, took a long-term perspective during a takeover, listening to both sides but with a preference towards well-proven management. However, some of the smaller institutions were not so restrained.33 With greater price volatility and falling transaction costs, together with more emphasis on performance indicators, the level of institutional turnover of UK equities has increased. Indicators of institutional activity 31 33

32 Institutional Investment, p. 89. Wilson Committee, Report, p. 371. ‘Management of equity portfolios’, BEQB 27 (1987), 258–9. See also ‘Corporate governance and the market for companies: aspects of the shareholders’ role’, Bank of England Discussion Paper, no. 44, Nov. 1989.

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produced by the Bank of England for the early 1980s suggested considerable increases on the part of the Big Four investing institutions.34 While overall activity had gone up differences existed in the turnover of the main groups, with pension funds and insurance companies being more passive. For 1985 the Bank of England estimated that the latter traded shares on average once every five years, whereas in the case of unit and investment trusts, the figures were once every two years and three years respectively. Given the relatively low activity of the former they cannot be accused of an ‘orgy of speculation’, but there seems little doubt that in the realms of fund management accusations of ‘short termism’ have some strength. Institutional activism In 1980 the Wilson Committee concluded that ‘the institutions themselves are not yet always sufficiently active in exercising their responsibilities as shareholders’ and recommended greater use of collective action where company performance fell below market expectations.35 The arguments for intervention were that it would secure better returns for shareholders, while the market and the economy would also benefit. To secure these gains the various Investment Protection Committees and the Institutional Shareholders Committee, set up in 1973 at the initiative of the Bank of England, should be used more vigorously. They should not be involved in day-to-day management but they were urged to exercise their collective influence to secure changes in managerial policy or in the management. Not a great deal happened, but in the unsettling conditions of the early 1980s and with the prevailing philosophy of non-intervention, this was not surprising. The 1987 survey by the Bank of England found that practices remained extremely varied. Disappointed expectations simply induced some fund managers to sell shares, depressing the price and the price/earnings ratio. In other cases institutions indicated their concern to the company’s broker, but they were reluctant to set up a shareholder group. Only when a company ran into severe difficulties did fund managers consider taking steps to nudge the management towards a different course. Others took the view that the benefits did not justify the time spent on intervention, particularly since there were plenty of alternative investments available. Underlying the general inertia lay a widespread view that it was difficult to ‘shake up management which was off-track’, 34

‘Management of equity portfolios’, p. 256.

35

Wilson Committee, Report, p. 371.

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especially when ‘the majority of fund managers did not exercise their votes as a matter of course’.36 The most recent survey of institutional involvement was undertaken by the Myners Review of 2001 and it acknowledged that there had been ‘considerable movement’ in the 1990s influenced by the succession of committees (Cadbury, Greenbury and Hampel) and which led in 1998 to the Combined Code of the Committee on Corporate Governance, designed to bring about a more activist approach by institutional investors.37 While this would produce benefits for shareholders and the economy, the Myners Committee reluctantly concluded ‘that concern about management and strategy of major companies can persist among analysts and fund managers for long periods of time before action is taken’.38 Continuing inertia, the Myners Review suggested, arises from a variety of reasons. First, short-term performance measures in widespread use militate against any intervention which is only likely to produce long-term results. Second, ‘there is a culture in the financial community of wanting to avoid public confrontation with companies’.39 Third, conflicts of interest are present in that fund managers are often part of a financial conglomerate, largely a legacy of Big Bang, which may be seeking to supply banking or insurance services to a faltering management. Finally, there are concerns about the ‘free rider’ issue of other investors benefiting from the exertions of an active institutional shareholder. The commendable verdict of the Myners Review was that appropriate attention was in the ‘best interest of beneficiaries and the market generally, and that institutional investors by virtue of their dominant market position are able to perform that monitoring function on behalf of their beneficiaries’.40 Some microeconomic issues The operational efficiency of a stock market can be assessed by examining the speed of execution and settlement of transactions, and by the levels of commission and dealing spreads. Of course, the most significant event for the Stock Exchange in the postwar period was Big Bang in October 1986, an episode thoroughly chronicled elsewhere.41 Attention here will be confined to some micro issues, with political overtones, which affected the market. 36 37

38 41

‘Management of UK equity portfolios’, p. 257. Committee on the Financial Aspects of Corporate Governance (Cadbury Report) (1992); Study Group on Directors’ Remuneration (Greenbury Report) (1995); Committee on Corporate Governance (Hampel Report) (1998). 39 Ibid., p. 91. 40 Ibid., p. 92. Institutional Investment, p. 89. Michie, London Stock Exchange, pp. 543–95.

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Stamp duty has been a long-standing irritant. A legacy of the Victorian era, the market was greatly annoyed, but not surprised, when Dalton, the Chancellor of the Exchequer, doubled stamp duty on share transfers in 1947. Already at a disadvantage compared to other international centres, mainly New York in those years, the rise produced a 30 per cent drop in transactions in the months after the change.42 The Stock Exchange lobbied persistently for a reduction but its annual pre-Budget submission fell on deaf ears, whether Labour or Conservative. The rate was reduced to 1 per cent in 1963, possibly to deflect criticism of the introduction of capital gains tax. Throughout the 1960s and 1970s the personal sector was a persistent net seller of equities and stamp duty on purchases was of little concern to individual investors, and had no political implications. The incoming Labour government in 1974 appreciated this and put the rate back to 2 per cent. A decade of lobbying was needed to reduce it to 1 per cent in 1984. This was no softening of the Treasury’s position but a sop to soften the impact of the abolition of tax relief on life insurance premiums. The government, eager to encourage wider share-ownership, regarded such relief as unduly favouring institutional as against direct investment.43 To help with Big Bang the Chancellor halved stamp duty in 1986, with the promise that it would be removed if the Stock Exchange brought in paperless settlement. That intention has now been partly fulfilled but the tax remains and yields well over £3 billion a year. Capital gains tax is a more recent imposition. Discussed by a Conservative government in 1961 it was introduced by the Labour administration of 1964. The taxing of nominal gains had much political appeal, especially with the market on a rising trend and displaying occasional speculative surges. The government saw little difference between income and capital gain, although it was careful to exempt gains on gilt edged. After taking inflation into account real gains were modest, especially on a riskadjusted basis. In broad terms the nominal return (capital and dividends) over the period 1950–69 averaged 14.3 per cent and adjusted for inflation gave returns of 10 per cent.44 The Stock Exchange viewed the tax as likely to dampen interest in equities, and that it would lock investors into their holdings thereby reducing switching and turnover. There was some consolation in that losses could be offset against gains and the tax was applied at a minimum threshold. But no element of price indexation was introduced until 1982 and no tapering was allowed for the length of time 42 43 44

Ibid., p. 353. N. Lawson, The View from No. 11. Memoirs of a Tory Radical (1992), p. 355. E. Dimson, P. Marsh and M. Staunton, Millennium Book II: 101 Years of Investment Returns (London Business School, 2001), pp. 261–2.

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shares were held. Some alleviation was introduced in the 1988 budget when the Chancellor brought forward the basic date for calculating tax liability from 1965 to the more realistic base of 1982. The yield from this tax is such that any lobbying, even for alleviation, falls on deaf Treasury ears. Reflections Over the past fifty years industrial and commercial companies have relied heavily on internal sources to finance investment. As to the main external sources, there has been increased dependence on the banking system, thus bringing Britain nearer to the continental model. The capital market has continued to provide an important increment of funds depending upon the state of the economic cycle. In the early postwar decades government involvement in the market’s activities, with respect to the financing of ICCs, was mainly confined to broad macroeconomic areas, largely fiscal intervention through the tax mechanism and intended to induce companies to plough back profits, coupled with an elaborate array of sweeteners to stimulate investment. Not until the appointment of the Wilson Committee, by the then Labour government, was there any sort of official inquest into whether the City was catering adequately for the investment needs of British companies. The Committee found, to the dismay of some City critics and the quiet satisfaction of the Square Mile, that there was no great imbalance between the demand for funds and the supply from the capital market. Certainly, the Wilson Committee shied away from any suggestion that there should be a central fund to finance manufacturing investment. Over the years the ability of the capital market to supply funds became dependent on the ‘institutionalisation of the equity market’, partly encouraged by various fiscal inducements. This produced an underlying demand for equities, creating a sellers’ market for shares and a steady demand for the share-issuing facilities of the City. However, if there was no ‘gap’ in the supply of funds there were other kinds of ‘gap’, and in recent years a succession of inquiries have looked at institutional involvement in the capital market and broader areas of corporate governance. One of the concerns was the charge that the main investing institutions were guilty of ‘short termism’, of looking for quick capital gains and neglecting long-term investment and profit prospects. The second was the other side of the same coin, that is, not taking an active interest in the managerial competence of firms. While there have been improvements the tendency remains to sell shares rather than seek to change management.

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The largely fiscal manipulations of earlier years were replaced in the 1980s by interventions that, broadly, may be given the label microeconomic, and represented attempts to improve the operational efficiency of both the primary and secondary markets. In many ways these were viewed as more intrusive since they were concerned with how the City conducted its business rather than simply looking at broad effects. In fact, they had started before the Thatcher era and culminated in Big Bang in 1986. In the secondary market this led to significant changes in the structure of the market and to reductions in transaction costs. More recently the primary market witnessed interventions designed to remove the old practices of fixed prices and the introduction of competitive practices designed to lower new issue costs. All these developments undoubtedly met with government approval but not to the extent that it is prepared in the foreseeable future to assist the market in bringing about further significant cost reductions that would benefit domestic and international transactions. Irritating ‘gaps’ will remain to dilute the market’s operational efficiency. For the average investor the reduction in stamp duty at the time of Big Bang achieved more than the ending of fixed commissions and despite persistent pleas for its abolition the tax remains. Capital gains tax, mooted in the 1920s but introduced in the 1960s, is a more complicated issue involving questions of equity, but the government has held back from giving due allowance for the length of time investments are held, or removed the discrimination in favour of government stocks. The price for the government of pleasing the City in these areas is too large.

15

Domestic monetary policy and the banking system in Britain 1945–1971 Duncan M. Ross

There were three main phases of monetary policy in Britain in the period between the end of the Second World War and the adoption of Competition and Credit Control in 1971. The first was the era of cheap money, during which the government tried to hold down interest rates in order to encourage investment in reconstruction and enhancement of industrial capacity. The second phase began in 1951 when an increase in bank rate re-activated monetary policy as an instrument of domestic-demand management, and a series of controls was exercised through the banking system. The third phase of policy was in the 1960s. After a brief period in which all constraints had been relaxed, there was a return to controls, guidance and official intervention. There developed in this decade, however, a realisation that targeting the British clearing banks alone was an ineffective way to control domestic demand, but the inflationary, balanceof-payments and current-account pressures of the period were such that the authorities were unable to think their way out of the problem. From the mid 1960s, the Bank of England in particular became convinced that the policy of ‘leaning into the wind’ (purchasing gilts in the securities market) allowed them to stabilise domestic monetary conditions. The emergence of Competition and Credit Control in 1971 – the new regime which monitored the relationships not only between the banks but also between the banks and the Bank of England – greatly increased competition in the banking and credit market, created more equal competitive

This paper reports results from an ESRC-funded research project, no. R000236447, held in collaboration with Forrest Capie and Michael Collins. We are grateful for the research assistance of Miriam Silverman and, particularly for this chapter, Mark Billings. The Bank of England and the major clearing banks, Lloyds-TSB, HSBC, Barclays and National Westminster, and their archivists all provided generous access and assistance with their records. An earlier version of this chapter appears as ‘La politique mon´etaire nationale et le syst`eme bancaire en Grande-Bretagne, 1945–1971’, in Mission Historique de la Banque de France, Politiques et Pratiques des Banques d’Emission en Europe (XVII–XX si`ecle): Le Bicentenaire de la Banque de France dans le perspective de l’identit´e mon´etaire europ´eenne (Paris, 2003), pp. 667–88.

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299

conditions among the various institutions and signalled the beginnings of a move towards money-supply targeting. In all these discussions, however, it is important to remember that domestic monetary policy was never the key focus of government attention in the period. That distinction belonged to the international situation – and in particular the relationship between the balance of payments and foreign reserves. Catherine Schenk has shown that explanations of policy choices which are couched in terms of maintenance of the international role of sterling and fears that the sterling balances (debts denominated in that currency and built up by Commonwealth countries during the war) would bankrupt the economy have greatly overstated the case, but it remains true that the external situation continued to dominate through the 1960s.1 For those who understand the history of the British economy as a series of set-piece conflicts between financial and productive capital, the 1950s and 1960s are ranked alongside the Bank Acts of 1844 and the restoration of the gold standard in 1925 as vital pieces of evidence.2 In this reading, conflict between the City and government exists over relatively minor matters, such as how or how far policy is to be implemented; there are no fundamental disagreements about the direction of policy. It is a view which posits that the interests of finance have essentially captured the policy-making process through a process of infiltration of government by the financial elite. Policy conflicts exist, therefore, between industry on the one hand and the City and government on the other.3 With reference to this particular episode of policy, it is argued that protection of the balance of payments, and maintenance of the international prestige of sterling, contributed to a policy environment dominated by short-term crisis management and deflationary measures. An expressed preference for low inflation and high interest rates meant that the external financial environment dominated investment and production, and that this was a locked-in feature of the institutional structure of the British economy.4 This view of the British economy in the postwar years is not universally accepted, however, and Smith’s review of institutional explanations for decline has pointed to both the variety of 1 2

3

4

C. R. Schenk, Britain and the Sterling Area. From Devaluation to Convertibility in the 1950s (1994). The best review of this literature is G. Ingham, Capitalism Divided? The City and Industry in British Social Development (Basingstoke, 1984); see also S. Newton and D. Porter, Modernization Frustrated. The Politics of Industrial Decline in Britain Since 1900 (1988). This is developed in P. Anderson, ‘Origins of the present crisis’, New Left Review 23 (1964), 26–53, F. Longstreth, ‘The City, industry and the state’, in C. Crouch (ed.), State and Economy in Contemporary Capitalism (1979), pp. 157–90, and T. Nairn, The Break Up of Britain (1981). See for example W. Hutton, The State We’re In (London, 1995), p. 22.

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approaches to growth which were developed by governments in the 1950s and 1960s, and the long-term dynamism and innovatory capacity of the City of London.5 It is clear, nonetheless, that external exigencies constrained the government’s ability to develop its supply-side reforms in the period, and that conflict between the government on the one hand and the financial sector on the other did at times arise. The main problem in the immediate postwar years was the urgent need to constrain domestic demand for consumer goods while encouraging exports: bank credit was seen as the main engine of the former and selective controls over the amount and direction of bank credit, issued by the Treasury and administered by the Bank of England, were used, with the exception of a brief period from 1958 to 1960, from 1946 until 1967. Roger Middleton has divided these decades into three main sub-periods.6 The first, which he describes as a period of consolidation of the postwar settlement, saw general acceptance of the need to respond to external difficulties by constraining domestic demand, but with occasional disputes between the government and the City of London about the extent to which the former could exercise control or leverage over the latter and how this was to be done. The second sub-period, from 1958 to 1966, he characterises as high Keynesianism, and a ‘period of deep frustration as first Conservatives and then Labour were unable to execute a modernising strategy, focused on the supply side’. Part of the explanation for this inability to address the supply-side shortcomings of British industry – whether through long-term planning, the National Economic Development Council or the Department of Economic Affairs – lay in the continual need to exercise short-term demand management as a result of chronic weakness in the balance of payments.7 In particular, he suggests that disillusionment set in after 1966, when the Labour party’s more active agenda of industrial and regional policy had to be abandoned in the face of a series of deflationary budgets designed to protect the external value of the pound. This unequal struggle was of course abandoned with devaluation in November 1967. The relationship between the government and the financial sector in this period needs, therefore, to be understood largely in terms of the conflict between internal and external policy goals. For Geoffrey Ingham and Frank Longstreth the government’s commitment to maintaining Britain’s international position is evidence of its alignment with 5 6 7

M. Smith, ‘Institutional approaches to Britain’s relative economic decline’, in R. English and M. Kenny (eds.), Rethinking British Decline (Basingstoke, 2000), pp. 184–209. R. Middleton, The British Economy Since 1945. Engaging with the Debate (Basingstoke, 2000), ch. 3. Ibid., p. 87.

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the interests of financial capital and the competitiveness of the City of London. For others, the various government-fostered attempts to generate industrial change and a higher rate of economic growth through supply-side reforms (particularly those undertaken by the Labour party) undermines this interpretation, and do suggest some conflict with the financial system. Ultimately, however, external concerns did dominate within the government, and the Treasury prevailed over the Department of Economic Affairs. This essay will examine some of these issues by considering the way in which the government attempted to exercise control over domestic inflationary demand by reining in monetary expansion through the banking system. This did of course induce a number of conflicts between the government and the banking system, as represented by the Bank of England, and these will be alluded to. The peculiar position of the Bank of England as both the banks’ representative when dealing with the government and the government’s in translating policy through the banking system, will at various times be seen as uncomfortable. The chapter will first consider the chronology of the various policy measures through these decades. It will then consider the impact of the particular policy choices on the operation of the Bank of England and – more importantly perhaps – on the banking system. It will present new data from the clearing banks’ archives which allow a more accurate assessment of the position in this period than has previously been possible. Lastly, it will suggest that this rather depressing and unedifying period of demand management both damaged the banking system and revealed the limits to the Bank of England’s (and by extension the government’s) ability to impose its will. Chronology of monetary policy and restrictions The chronology of policy in this period is fairly well known.8 The first response from government in the postwar years was Dalton’s attempt, as Chancellor of the Exchequer in the newly elected Labour government, to force long-term interest rates down to 2.5 per cent.9 This was done for a number of reasons, and was a policy which faced little opposition at 8

9

See, for the earlier period, S. Howson, British Monetary Policy, 1945–1951 (1993). For the 1950s, the material is covered in D. M. Ross, ‘British monetary policy and the banking system in the 1950s’, Business and Economic History 21 (1992), 148–59, and J. S. Fforde, The Bank of England and Public Policy, 1941–1958 (Cambridge, 1992). For the 1960s, the best sources remain J. H. B. Tew, ‘Monetary policy, Part 1’ and M. J. Artis, ‘Monetary policy, Part 2’ both in F. T. Blackaby (ed.), British Economic Policy, 1960–1974 (Cambridge, 1978). See also A. Cairncross, Diaries of Sir Alec Cairncross 1961–1964 (London, 1999). S. Howson, ‘The origins of cheaper money 1945–7’, EcHR 41 (1987), 433–52; J. C. R. Dow, The Management of the British Economy, 1945–60 (1964), pp. 13–19; C. M. Kennedy,

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the time.10 The need to hold down the cost of capital and reduce obstacles to investment, the desire to keep the burden of interest payments on the national debt to a minimum, and the very high levels of government debt contained in the nationalisation and social welfare policies pursued by the government, all tended to find supporters of cheap money. However, the balance-of-payments crisis and the rising level of demand in the economy in the second half of 1947 showed that the straitjacket of physical controls was insufficient to restrain the inflationary pressures inherent in this approach, and alternatives were necessary. One of Jay’s first acts on Cripps’s move to the chancellorship in place of Dalton in November 1947, just before his own appointment as economic secretary to the Treasury, was to draft a memorandum dealing with the inflationary situation, in which he argued that on the government’s side, there has perhaps been too much concentration on the purely budgetary question of interest rates, important though it is, and too little on the volume of bank deposits.11

The Treasury and the Bank agreed upon two objectives in the domestic fight against inflation. In the first place, a budgetary surplus was to be pursued, which would allow the Treasury to repay some of the large floating debt then outstanding. Combined with open-market operations by the Bank to reduce the clearers’ cash reserves, this would reduce the levels of deposits and give an indication that inflation was under control. This policy was pursued vigorously and with some success; budget surpluses were recognised as an essential component of the fight against inflation in these years.12 The second objective, however, was much more contentious. Selective restriction of bank advances had been a feature of wartime policy, and this continued in the postwar years. A memorandum issued by Midland Bank in December 1947 neatly encapsulated the thrust of policy and the role of the clearing banks within it: the responsibility lies upon the banks of reinforcing the discretion of business by refusing to assist, with bank finance, projects which appear to them to contravene the general indications of policy.13

10 11 12 13

‘Monetary policy’, in G. D. N. Worswick and P. H. Ady (eds.), The British Economy, 1945–50 (Oxford, 1952). A. Cairncross, Years of Recovery. British Economic Policy 1945–51 (1985), pp. 429–30. Jay to Cripps, ‘Interest rates, credit inflation and budget surplus’, 5 Nov. 1947, T 233/481. Cairncross, Years of Recovery, pp. 421–4. Midland Bank Board Circular, 22 Dec. 1947, HSBC: Midland Bank Archives (MBA), Intelligence files, advances policy.

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Jay, in particular, was not satisfied with this, and he continually pushed for the imposition of a ceiling on the level of bank advances which the clearing banks could offer their customers. Catto, Governor of the Bank of England, reacted violently: I view such a suggestion with the utmost alarm: it is not practical and would land us in a mess of violent deflation. It is contrary to two fundamental principles of banking and finance: (a) that money must never be made unobtainable. The banks must always be willing lenders, and (b) that disinflationary pressure on the banking system can only be by pressure on the borrower.14

The Bank of England held sway in this policy disagreement, and at a meeting between Cripps, Jay and Cobbold, Deputy Governor of the Bank of England, six days later, it was agreed that restrictions would not be imposed on the banks, but that they should have the gist of policy explained to them, in the hope that they would endeavour to keep advances as low as they felt able ‘without causing disturbance’.15 This set the timbre of policy on bank advances in the entire period up to 1951 and it is clear that despite pushing from the government, the Bank held fast in its opposition to an imposed ceiling on lending.16 Tomlinson has argued that the attitude of the Labour government, in refusing to re-activate other monetary weapons, particularly bank rate, can only be properly understood by acknowledging the position of primacy which the balance of payments held in the decision-making process.17 Abandonment of the structure of low interest rates, which enabled the government to borrow cheaply, would have had disastrous implications for the debt problem. Nevertheless, by the time of the 1951 general election, government debt had increased greatly, balance-of-payments problems were becoming steadily more acute, gold and dollar reserves were falling rapidly and international confidence in sterling was deteriorating.18 Both 14

15 16

17 18

Catto to Cripps, 15 Dec. 1948, BoE C40/685 (emphasis in the original). Catto was seriously ill at the time and marked this memo ‘dictated from my bed’ to show his strength of feeling on the issue. Cobbold memo, 21 Dec. 1948, BoE C40/685. In September 1949, Hall, director of the Economic Section, was clear that on this issue ‘we were defeated by the Bank’; Gaitskell urged him to ‘write a paper and if necessary . . . have a clash with Cobbold [now Governor] and accept his resignation if he offered it’: The Robert Hall Diaries 1947–53, ed. A. Cairncross (1989), p. 88 (29 Sept. 1949). See also Chancellor’s notes on economic policy, 6 Nov. 1950, T 171/403. J. Tomlinson, ‘Labour’s management of the national economy 1945–51’, Economy and Society 18 (1989), 1–24. HC Deb 493, cc. 191–3, 7 Nov. 1951.

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The Economist19 and The Banker20 advocated the re-activation of monetary policy, and attitudes within the Treasury had begun to change: one official noted in a memorandum prepared for the incoming Conservative government that the point had been reached where technical measures were needed to reinforce official guidelines on bank advances.21 The introduction of these measures marks the beginning of the second phase of policy in the postwar years. These were introduced in packages designed to work on the credit basis of the banks on a number of fronts simultaneously.22 Butler, the new Conservative Chancellor of the Exchequer, announced in November 1951 a rise in bank rate from 2 per cent to 2.5 per cent; a short-term funding operation in an attempt to reduce the floating debt in the hands of the clearing bankers; a strengthening of the stringency to be applied by the Capital Issues Committee, which had power to refuse permission to raise capital in the market; and the introduction of a short-term rate of 2 per cent at which advances to the discount market would be made against Treasury Bills.23 This last act effectively removed the tap of credit in the market which had existed as a result of the Bank of England’s willingness to buy unlimited amounts of Treasury Bills at 0.5 per cent. In addition to these technical measures, the Chancellor requested that the banks should intensify their efforts to restrict the granting of credit to essential purposes. In March 1952, bank rate was raised to 4 per cent, other interest rates were also raised, hirepurchase restrictions were imposed, and the requests to the banks were renewed and strengthened. Throughout 1953 and the first half of 1954, a more relaxed attitude to the question of restrictions and demand restraint prevailed and interest rates were reduced. In the latter half of 1954, however, the current surplus on the balance of payments started to deteriorate and the reserves of gold and dollars went into decline.24 Unemployment fell and imports and prices began to rise sharply. In January 1955 bank rate was raised to 3.5 per cent; four weeks later it was further raised to 4.5 per cent. The Treasury Bill rate rose and it was announced that the authorities would support the rate on transferable sterling. This was 19 20 21 22

23 24

The Economist, 5 May 1951, pp. 1053–4; 12 May 1951, pp. 1112–14; 19 May 1951, pp. 1184–6. The Banker, July 1951, pp. 71–83. Trend to Eady, ‘Credit policy’, 25 Oct. 1951, T 233/1684. M. Collins, Money and Banking in the UK. A History (1998), p. 480; (Radcliffe) Committee on the Working of the Monetary System, Report (Cmd. 827, PP 1958–9, xvii. 389), para. 408. HC Deb 493, cc. 204–9, 7 Nov. 1951. M. F. G. Scott, ‘The balance of payments crises’, in G. D. N. Worswick and P. H. Ady (eds.), The British Economy in the Nineteen-Fifties (Oxford, 1962), p. 78; Dow, Management, p. 78.

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done for external reasons. Internally, hire-purchase restrictions were reimposed and both the Capital Issues Committee and the clearing banks were asked for greater stringency. The Governor of the Bank impressed on the clearing banks the need for a reversal in the trend of advances.25 This was not achieved to the Treasury’s satisfaction however, and in July 1955, Butler made explicit his expectation of assistance from the banks: The essential need of the moment is for a reduction in the total demand on the country’s resources. Only a part of that demand is financed by bank advances, but it is an important part and one which, with the cooperation of the banks, can be readily affected by the granting or withholding of credit. I have no doubt that the banks will agree that it is their duty to reduce the amount of bank credit below what they would be glad to give in less difficult times.26

Cobbold asked that considerable reductions should be achieved by December,27 and the banks agreed to seek a 10 per cent contraction in their advances business. In February 1956, bank rate was raised to 5.5 per cent, hire-purchase restrictions were tightened, economies in the programmes of nationalised industries were announced, investment allowances were withdrawn and the Chancellor appealed for continuous efforts from the banks to hold down advances. This appeal was reinforced in July. Pressure was kept up and by the beginning of 1957, some success was being achieved. In February, bank rate was reduced by 0.5 per cent to 5 per cent. With a deterioration in the external situation in summer 1957, however, bank rate was raised to a crisis level of 7 per cent, and the banks were instructed to hold advances over the following twelve months at the level of the previous twelve months. This package also included further restrictions on public-investment programmes and restrictions on the provision of credit for overseas borrowers were tightened. On 1 July 1958 Heathcoat Amory, the Chancellor, announced that he no longer felt it necessary to ‘ask the banks to restrict the total level of advances to any given figure after the end of July’.28 Instructions to the Capital Issues Committee were greatly relaxed, and in 1959 the restraints on hire-purchase operations were finally removed. This relaxation was short-lived, however. In the aftermath of the Radcliffe Committee, the Bank of England developed the new tool of Special Deposits – designed to reduce the clearing banks’ liquidity, and therefore their ability to expand lending to domestic consumers – and 25 26 27 28

Governor’s note, 22 March 1955, BoE C40/688. HC Deb 544, c. 825, 25 July 1955. Cobbold statement at Committee of London Clearing Bankers (CLCB) meeting 26 July 1955, BoE C40/689. Heathcoat Amory to Cobbold, 15 April 1958, T 233/1663.

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these were first imposed in June 1960. This called for the clearing banks to lodge with the Bank of England 1 per cent of their total gross deposits.29 This requirement was quickly raised to 2 per cent of gross deposits and in July 1961 a further percentage point was added. At this date, bank rate was raised to 7 per cent and qualitative constraints on lending were reintroduced. In summer and autumn 1962, some relaxation was countenanced. However, the banks continued to argue that they were being unduly constrained, and they lobbied for a reduction in the minimum liquidity ratio from 30 per cent to 25 per cent. The Bank of England, seeing this as an opportunity to modernise its approach to credit controls – while preferring Special Deposits to variable liquidity rates – took up this issue and spent considerable time and effort trying to persuade the Treasury.30 Some success was achieved, and a de facto minimum of 28 per cent was adopted, but the re-imposition of constraints and controls in response to the crisis of 1964 brought the reactivation of the bankers’ self-denying ordinance and qualitative guidance on lending.31 Maycock, economic advisor to Midland Bank, described how the controls and quantitative ceilings on bank advances in the second half of the 1960s were ‘reinforced to a much greater degree than previously’.32 The severe squeeze continued through to the beginning of 1967, although lending ceilings and some other restrictions did remain in force beyond this date. The shift towards new policy instruments had begun to gain ground, however,33 and both the bank charges report of the National Board on Prices and Incomes and the Monopolies Commission Report on the proposed merger of Barclays, Lloyds and Martins banks contained renewed interest in competition between the banks.34 The new approach to monetary policy began to be signalled from 1968, with Cobbold as Governor of the Bank beginning to acknowledge the force of arguments relating to money supply targeting, and then making it clear that there was no longer a commitment to purchase gilts at any price.35 It can be seen from this chronology, therefore, that the issue of the relationship between the government and the financial system was essentially 29 30 31 32 33 35

The details of this period are contained in R. F. Bretherton, Demand Management 1958– 64 (1999). See e.g. O’Brien note, ‘Banking liquidity’, 7 March 1963 and note of meeting in the Chancellor’s room, 24 May 1963, BoE C40/1203. ‘Treasury directives and notes of guidance on advances, from September 1939 to date’, Barclays Bank Archive 80/1120. J. E. Maycock, ‘Monetary policy and the clearing banks’, in D. R. Croome and H. G. Johnson (eds.), Money in Britain, 1959–1969 (Oxford, 1970), p. 162. 34 Maycock, ‘Clearing banks’, pp. 170–1. Tew, ‘Monetary policy’, p. 239. Governor’s speech to Lord Mayor’s dinner, 17 Oct. 1968, BEQB 8 (1968), 410; BEQB 9 (1969), 17–18. See also Tew, ‘Monetary policy’, pp. 246–7.

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one of how the former could encourage or exercise control over the latter in pursuit of its policy goals. Disputes arose – in 1948 and 1949, again in 1955 and 1957. After the report of the Radcliffe Committee, a search for more technical measures, which would rely less on the Governor’s ability to persuade the banks to follow the government’s policy, was undertaken, but this relationship was exploited once again in the mid 1960s. Effectiveness of policy The effectiveness of policy in this period has been much debated in the literature, and it is clear that the shift towards a new approach in the 1970s is evidence of dissatisfaction with both the methods and the outcomes of the previous decades. In appraising this policy, we should bear in mind the note of caution sounded by Cairncross who suggested that for much of this period ‘domestic monetary policy was something of an afterthought’ and that therefore little was expected of it.36 Nevertheless, this section of the chapter will consider the impact of, first, the quantitative and qualitative guidance issued to banks on the level and direction of their lending. It will examine the balance sheets of the banks in this period and assess the impact of policy on their earning capacity. The strength of the cartel will be noted, but so too will the declining position of the clearing banks vis-`a-vis other financial institutions. Finally, it will briefly consider the relationship between the banks and the Bank of England, and with it, of course, the policy channels from the government, through the Bank to the banking system. It will be suggested that the policy approach was unhelpful both to the banks and to the process of policy implementation. It is clear that by the end of the 1960s a new approach was not only preferable, but absolutely necessary. Pressure on bank advances is perceived as the one area in which the outcome reflected official policy. In estimating the effect of policy variables, Artis concluded that ‘bank lending restrictions proved significant on almost any specification’ of his equations, and that they had an important cumulative effect over time.37 He estimated that the impact of a ‘mild’ request was to reduce overall bank lending by about £70 million, while a ‘severe’ request resulted in a reduction of double this amount. It is not, however, the absolute levels of reduction which most concern us here, but the ways in which the banks responded to the various qualitative requests. Figure 15.1 shows the advances granted by members 36 37

A. Cairncross, Managing the British Economy in the 1960s. A Treasury Perspective (Basingstoke, 1996), p. 254. Artis, ‘Monetary policy’, pp. 263–4.

manufacturing personal and financial

change in classification, 1967

Figure 15.1 Bank advances: proportions of total to favoured and non-favoured sectors. Source British Bankers’ Association Classification of Advances

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of the British Bankers Association to what can be called the most and least favourable sectors. The policy strategy was fairly simple: to encourage manufacturing exports, while discouraging personal and domestic consumption which might have an impact on domestic demand or the balance of payments. To these ends, the advice given to the banks was consistent throughout the period, and Figure 15.1 shows the extent to which they responded to the various requests.38 Personal and Financial Lending was the most frowned-upon avenue of lending, since it was felt that a high propensity to import resulted in domestic spending having a very serious and negative impact on the balance of payments. Restriction of financial loans was essentially targeted at hire-purchase activity for the same reason. Manufacturing, on the other hand, was the most favoured sector, since only by encouraging industry could exports be maintained, or domestic production developed. Winton has previously noted the relationship between these two series for Lloyds Bank,39 and Figure 15.1 shows the extent of acquiescence. A number of crucial episodes are shown clearly in the graph. First, the beginning of a more active policy and more resolute guidance is reflected in the convergence of the data during the period from 1951 to 1958. The relaxation of restrictions in 1958–9 resulted in rapid expansion of personal borrowing round the turn of the decade, but this was then brought under control by the re-imposition of the guidelines through most of the 1960s. Further evidence of the impact of the policy is shown in Figure 15.2, which reveals the proportion of the banks’ balance sheets held as advances and investments through the period from 1920 to 1980. The historically very low levels of advances throughout the 1950s are in part explained by the pressure exerted by the directive monetary policy of the period. The rapid expansion of advances in the 1960s, on the other hand, reflects two things: an attempt to re-establish the primacy of the most profitable component of the balance sheet, and the banks’ response to official support in the gilts market. A very high proportion (in excess of 90 per cent) of the investments held by banks were gilts, and the policy of leaning into the wind throughout the 1960s allowed them to sell these assets in order to expand advances. In particular, the banks were able to sell investments whenever there was a call for Special Deposits. The commentators on this period are agreed: faced with any call for Special Deposits, the banks were able simply to sell bonds and maintain their liquidity levels. As a result, Artis is of the opinion that Special Deposits, one of the key elements in 38 39

For a discussion of this and the position of the banks with regard to the guidance, see O. Franks, ‘Bank advances as an object of policy’, Lloyds Bank Review (January 1962). J. R. Winton, Lloyds Bank 1918–1969 (Oxford, 1982), p. 177.

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Figure 15.2 London clearing banks: advances and investments as a proportion of total assets, 1921–80. Source Annual Abstract of Statistics; Bank of England Statistical Abstract, 1992

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the attempts to control bank liquidity and domestic monetary expansion, ‘were largely redundant as a complement to bank lending requests’.40 The banks, therefore, were being squeezed in two directions; there was no point in competing for deposits because they were unable to use them in the most profitable manner by increasing their lending. Second, they held very high levels of government securities in the 1950s and even after considerable divestment in the 1960s, they were unable to expand advances as fast as they wished to. The discussions noted above about the minimum liquidity ratio and the pressure which the banks felt themselves to be under is revealed in Figure 15.3, however, to have been greatly exaggerated. Again, by making use of internal and unpublished balance sheet data, we can show that the true ratio of liquid to total assets was around 40 per cent, that is, considerably higher than the official published data would indicate. This clearly reveals the difficulty facing both the monetary authorities and the banks themselves. A high level of liquid assets reduced the extent to which the banks could expand their income stream, and at the same time greatly frustrated the intentions of the policymakers. The impact of policy in this period was, then, fairly limited, and the results reported here are in line with those discussed by contemporary commentators. Four elements are germane. First, it is clear that the banks were almost always extremely liquid, and could rearrange their assets fairly easily whenever the need arose. Second, despite the yield differential between advances and gilts, the banks were often constrained from increasing their advances. This is the one area in which the policy appears to have had some success. Third, even after divesting gilts in the late 1950s to accommodate the increase in advances, the banks still held these assets in historically relatively large quantities. They were not anyway inclined to hold more long-dated gilts after their early 1950s experiences (when unrealised losses mounted rapidly) and the yield differential between long and short gilts did nothing to encourage them. Fourth, the policy of leaning into the wind had the effect of insulating banks from fluctuating prices, allowing them to sell off gilts when Special Deposits were called for. It is this relative ineffectiveness of policy in these years that encouraged the generation of an alternative approach in the late 1960s and early 1970s. The impact on the banking system One area in which the policy pursued in this period did have a significant impact, however, is in the competitive position and profit-earning 40

Artis, ‘Monetary policy’, 264.

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capacity of the banks. One of the key conclusions of the National Board for Prices and Incomes inquiry was that bank profits had, throughout the 1950s and 1960s, been excessive, as a direct result of the high average bank rate.41 Some support for this position can be seen in Figure 15.4, which reports rates actually paid on deposits in three of the major banks, and in addition a notional rate calculated as 50 per cent of that reported by Capie and Webber.42 This last, it should be noted, is an arbitrary figure justified by the fact that not all deposits were interest-earning. It is, however, striking that this notional rate crosses the rates calculated in the mid 1940s and remains above thereafter, having previously always been below. This implies that around the time of the crossover, the banks either started to pay interest on a smaller proportion of their deposits than previously, or paid interest at lower rates, or both. Otherwise, the pattern of actual rates paid does generally follow the pattern shown by the notional rate. The conclusions to be derived from this graph are fairly clear, however. First, there is a very high degree of uniformity in average rates paid on deposits. This may confirm the view that the banking cartel in this period was operating fairly powerfully, at least on deposit rates. Second, there is clear evidence of a large endowment effect in the 1950s and 1960s, with the margin between average deposit rates and bank rate at its narrowest in years of low bank rate (1954, 1959, 1963) and at its widest in years of high bank rate (1957, 1961, 1964 onwards). Further evidence of the endowment effect – indeed of its considerable widening in the 1960s – is provided by Figure 15.5. This shows the average margin earned by the three banks for which data are available, and reveals the extent to which the banks were exploiting this endowment effect in periods of rising bank rate by increasing average advances rates by more than average deposit rates. It is interesting to note that, although the Westminster Bank had a consistently higher margin than the others from the 1950s, neither profits nor total assets grew at a faster rate. An explanation for this may be that the Westminster was more constrained by lending controls than other banks, with a higher proportion of their lending being directed towards ‘non-essential’ borrowers. It is clear, however, that the banks were more than happy to exploit both a considerable windfall effect and steadily widening profit margins on advances/deposits business in these two decades, and that they acted in a fairly tightly cartelised manner. These elements were powerful factors in the indictment of the banking system delivered by the National Board 41 42

National Board for Prices and Incomes, Bank Charges (Cmd. 3292, PP (1967), para. 43. F. Capie and A. Webber, A Monetary History of the United Kingdom, 1870–1982, I: Data, Sources, Methods (1985), table III (10), pp. 494–5.

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for Prices and Incomes in 1967 and the Monopolies Commission in 1968.43 The combined effect of these two reports, argued Tew, was to produce a detailed and disturbing critique of the banks and their cartelised mode of operation.44 The main components of this critique were: (a) the cartel had a deeply soporific effect; price competition was marginal at best; and (b) this led to excessive non-price competition, particularly in the spread of branches throughout the country. This meant that the banks’ investment in fixed capital was far higher than it needed to be and an attitude of entrenchment, rather than responsiveness, had been created. Criticisms of this sort had been presaged in the Bank of England as early as 1965. In March of that year, Fforde wrote a long paper in which he discussed the banking system and the need for changes in the competitive environment. His conclusion was clear and unambiguous: The clearing banks do not seem to be motivated by a desire to maximise profits so much as by a desire to provide the maximum of branch banking services at a reasonable price to the customer – consistent with a reasonable growth in profits and an avoidance of any loss. In the circumstances, the result is likely to be an uneconomic use of manpower which cannot be eliminated by ordinary competitive forces.45

This behaviour – in which the banks were happy to accept a fairly steady flow of income, but were relatively unconcerned about the need to deliver efficient or profitable services – was clearly a response to the constraints imposed on competitive actions in the postwar years, but it is also clear that, by the 1960s, the view had formed that the banks were adopting an overly passive approach to the pursuit of new business. Channon refers to the banks in the late 1960s as ‘sleeping giants’46 and notes rising public awareness of the relative unattractiveness of their deposit and advances rates. By this period, British banks were losing business to a wide range of competitors, foreign banks as well as non-banking financial intermediaries located in Britain. The inability of the large British banks to respond to the new environment of the 1960s has been blamed on their ‘administrative heritage’ of managerial and competitive inertia.47 Fforde noted that one third of all outstanding advances to UK residents 43

44 45 46 47

National Board for Prices and Incomes, Report no.34: Bank Charges (Cmd. 3292, PP 1966–7 xliii, 87); Monopolies Commission; Barclays Bank Ltd, Lloyds Bank Ltd and Martins Bank Ltd. Report on the Proposed Merger (PP 1967–8 (319) xxvi, 395). Tew, ‘Monetary policy’, 242. J. S. Fforde memo, ‘Implications of changes in the banking system’, p. 25, 11 March 1965, BoE C40/1205. D. F. Channon, British Banking Strategy and the International Challenge (1977), p. 40. G. Jones, British Multinational Banking 1830–1990 (Oxford, 1993), ch. 10.

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at the end of 1964 was due to American banks, and another third to British banks domiciled overseas: ‘the foreigner has scored a competitive success, and the profits have been remitted abroad. It is not hard to see why.’48 One explanation for this – particularly favoured by the banks themselves, it should be noted – is that the restrictions on lending only applied to the British clearing banks. In giving evidence to the Radcliffe Committee, the Committee of London Clearing Bankers had pointed out that the restrictions on their lending had been counterbalanced by the ease with which alternative sources of credit could be utilised.49 The Committee itself concurred: The joint-stock banks are obviously the dominant source of short-term finance, and the insurance companies, pension funds and building societies, of long-term finance. But . . . there is no firm line of division, as is sometimes supposed to exist, between the market for credit and the market for capital . . . nearly all [financial institutions] are prepared to switch some part of their funds to take advantage of unusually favourable opportunities of short-term or long-term investment. Pressure in one part of the market soon makes itself felt in other parts.50

The distinction between long- and short-term credit was being blurred by the impact of policy, but so too was the traditional institutional ownership of particular sectors of the market. This had particularly serious implications for the ability of the banks to maintain their commanding position in the domestic credit market once American banks started to make their presence in London felt. After robust lobbying by the clearing banks, the Bank of England was persuaded in 1961 of the need to extend the Governor’s requests to constrain lending to encompass a wider range of financial and banking institutions active in the City.51 It did not pass without notice that, of all the groups included in the request of July 1961, only the American banks had failed to achieve a reduction in lending three months later.52 Figure 15.6 reveals the extent to which the clearing banks’ dominance of the entire British banking market declined during the period under discussion. It is difficult to separate the impact of the controls on the banks’ ability to compete with new forms of financial service provision from their unwillingness to do so, but it is difficult to avoid the 48 49 50 51 52

Fforde memo., ‘Implications’, p. 15, 11 March 1965, BoE C40/1205. D. J. Robarts, A. W. Tuke, A. D. Chesterfield, in Radcliffe Committee, Minutes of Evidence, qq. 3540, 3578 (23 Jan. 1958). Radcliffe Committee, Report, para. 315. Treasury and Bank exchanges on ‘Control of financial institutions other than banks’, 2 Nov. 1961 – 8 Jan. 1962, BoE C40/1203. Note, ‘Bank advances’, 2 Nov. 1961, BoE C40/1203.

0% 1951

10%

20%

30%

40%

50%

60%

70%

80%

90%

1960

1965

1970

Figure 15.6 London clearing banks’ share of total British banking market, 1951–1980

1955

1976

% share of advances

% share of deposits

1980

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conclusion that the policy had had some effect.53 Nevertheless, it is clear that, by the end of the 1960s, a very different competitive environment had emerged. The growth of Euromarkets in London and the parallel development of international banking through a range of consortia and joint ventures all combined to focus attention on their ability to respond to very different types of demand at the end of the 1960s.54 Llewellyn’s approach to explaining structural change in the British financial system in the 1980s is couched entirely in terms of competitive pressures undermining cartelised behaviour and forcing the removal of restrictions on the products and services offered by individual institutions.55 A similar approach for the 1960s would see emerging competitive pressures forcing a reappraisal of the approach to monetary policy, while at the same time undermining the deeply entrenched cartel and forcing the banks to reassess their domestic and international strategies. From the authorities’ point of view, sophisticated financial and money markets, populated by internationally competitive institutions, were much more difficult to control or constrain than providers of domestic banking services. Domestic Credit Expansion (DCE) – which focused not only on domestic balance of payments deficits, but included international capital movements – was one response to this greater internationalisation.56 Tew has pointed out, however, that DCE was both potentially unstable and difficult to target effectively, and official interest moved quickly towards adoption of the money supply as the appropriate indicator for demand management purposes.57 By the appearance of Competition and Credit Control in 1971, not only had the previous monetary policy approach greatly weakened the domestic banks, but in addition the ability of the Bank of England to 53

54

55

56

57

Some evidence of how the banks could respond to competitive opportunities and develop new business in periods when restrictions were relaxed is contained in D. M. Ross, ‘Banking enterprise during the window of opportunity, 1958–61’, in A. Slaven and D. Aldcroft (eds.), Enterprise and Management: Essays in Honour of Peter L Payne (Aldershot, 1995), pp. 171–97. See D. M. Ross, ‘European banking clubs in the 1960s: a flawed strategy’, Business and Economic History 27 (1998), 353–66. For a discussion of the emergence and growth of the Euromarkets, and in particular the contribution of British banks to this, see C. R. Schenk, ‘The origins of the Eurodollar market in London, 1955–1963’, Explorations in Economic History 35 (1998), 221–38. D. T. Llewellyn, ‘Structural change in the British financial system’, in C. J. Green and D. T. Llewellyn (eds.), Surveys in Monetary Economics, II: Financial Markets and Institutions (Oxford, 1991), pp. 210–59. For a discussion of Domestic Credit Expansion, see J. J. Polak, ‘Monetary analysis of income formation and payments problems’, IMF Staff Papers 6 (1957); The Banker 118 (Dec. 1968). Tew, ‘Monetary policy’, 247. See also Cairncross, Managing the British Economy in the 1960s, p. 253.

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manipulate the market had declined. Recognition of this dual impact of policy was explicitly incorporated in the public announcements of the new approach, which was, according to the Governor, O’Brien,‘designed to permit the price mechanism to function efficiently in the allocation of credit, and to free the banks from rigidities and restraints which have for far too long inhibited them from efficiently fulfilling their intermediary role in the financial system’.58 Domestic competition between the banks was to be encouraged, but so too was a level playing field between banks and other financial intermediaries – hence the imposition of a uniform minimum reserve asset ratio of 12.5 per cent. Conclusion This chapter has discussed the imposition of monetary restrictions and controls during the period of directive monetary policy in the 1950s and 1960s. Three elements need to be considered. First, it is clear that the banks acquiesced to a considerable degree with the thrust of policy, and the nature and direction of bank lending were significantly adjusted. This has long been seen as one of the few successful aspects of the policy in this period, since attempts to control domestic expenditure and levels of liquidity through Special Deposits and other technical influences on the banks’ balance sheets largely failed. Second, the banks themselves were seriously affected by the policy of constraint and restriction. Unable to expand the most profitable element of their balance sheet, they instead became content to compete through expansion of branch provision while at the same time adopting a fairly tight cartel on prices. A widening margin between deposit and advances rates provided a steady income flow and the entire effect was one of undermining competitiveness. By the end of the 1960s, the clearing banks had lost considerable ground on their foreign and domestic competitors in the British banking market and the inroads of these institutions loosened the authorities’ ability to influence domestic monetary conditions through the conduit of the banking system alone. This is the third important element to which we should pay some attention – the changing nature of the relationship between the government, the Bank of England and the domestic banking system. Long-term controls and administrative guidance to the banks came to be strongly resented and they sought from the 1960s to be given greater freedom to implement more competitive polices. The role of the Bank of England as an intermediary in the monetary policy transmission mechanism came 58

‘Key issues in monetary and credit policy’, an address by the Governor to the International Banking Conference, Munich, 28 May 1971, in BEQB 11 (1971), 198.

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under threat as a result both of the government’s frustrations with their inability to force compliance with their policy goals and the banking system’s declining importance in the monetary markets. As the number of institutions and markets in the City expanded with the influx of foreign banks, domestic controls were no longer reasonable or effective. The policy of Competition and Credit Control introduced in 1971 is well named, since it focused on each of these issues: competition between the banks and between the banking system and other financial institutions, and at the same time the methods by which influence over credit expansion – or as it began to be recognised, the money supply – could be exerted. In so doing, relationships between the government and the City moved on to a very different footing from the informal controls which this period characterised. Appendix Calculation of rates of return on deposits and advances 1. All balance sheet data have been calculated from internal Balance Sheets and Profit and Loss accounts. Each bank had different conventions and approaches to these. 2. Rates calculated on deposits and advances are annual averages based on total earnings/cost per category per year, divided by the average balance sheet total for the category, which has been calculated by taking the mean of the year-end total, the previous year-end total and the half-year total. 3. The average advances data for all banks include ‘Items in Transit’ items in the course of collection and ‘balances with other Banks’. The banks were not consistent in their definition of such items and their inclusion in advances will result in some understatement of the average rate earned on advances, although this will be offset as the balance sheet advances figures were stated after the deduction of bad debt provisions. 4. The figures for deposits exclude hidden reserves, except for Lloyds where they are included, because these cannot be consistently identified. This will impart a slight downward bias to the estimates for Lloyds’ average deposit interest rate. 5. The deposits totals used are for deposit and current accounts. The average rates paid on deposits are therefore composites.

16

The new City and the state in the 1960s Catherine R. Schenk

During the 1960s the relationship between the City and the state underwent a profound change. Through the 1950s the City had emerged only slowly from the controls of wartime. Commercial banks were cushioned in an oligopolistic environment where competition on interest rates was carefully constrained and there were close links between the City and the state (here used to refer to the Treasury and the Bank of England). Gentlemen’s agreements, moral suasion and unilateral edicts were the modus operandi of the Bank of England in their efforts to control the expansion of credit and to protect the exchange rate of the pound through these ‘stop-go’ years. In terms of international finance, sterling policy preoccupied both Treasury ministers and Bank of England officials, and the City usually co-operated with efforts to prop up the pound and to operate the Sterling Area.1 In the forum of foreign investment the government’s Capital Issues Committee vetted all proposals until 1959 and allowed only those whose potential impact on the balance of payments was likely to be positive. During the 1950s there were two aspects of London’s international role that seemed to threaten its prospects, but in the event neither was as important as anticipated. The end of sterling as a reserve currency, predicted in the 1950s to be a death knell for the City, had little lasting impact because it was preceded by the diversification of the City’s activities. European integration, too, seemed to pose challenges and opportunities for the City that in the end were not realised because the European commitment to the liberalisation and integration of financial markets foundered as the international monetary system crumbled. What did change the City and disrupt its relationship with the state was the unexpectedly fast pace of financial innovation. During the 1960s the nature of the City changed in a variety of ways. The activity of the accepting houses soared with financial innovations 1

Sterling Area countries had preferred access to the London capital market compared with European or other foreign borrowers: C. R. Schenk, Britain and the Sterling Area. From Devaluation to Convertibility in the 1950s (1994).

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such as the Eurodollar and Eurobond markets.2 The relatively liberal regulatory environment for non-resident international financial activity attracted banks from around the world, particularly from the USA. The pace of financial innovation accelerated in a way that made it increasingly difficult to control or even to account for flows of international short-term capital. Sterling was no longer the only major currency of the City and this began to drive a wedge between the interests of the City and those of the state as sterling’s viability in world markets deteriorated. These developments undermined the cosy relationship between the City and the state that had developed during and after the Second World War. The Bank and the Treasury were slow to appreciate this new context and did not formalise the system of prudential supervision until after the 1974 domestic and international banking crisis. Underlying these developments was the profound impact of the crumbling of the international monetary system throughout the 1960s. This created a demand for products to spread the increasing exchange and interest rate risk, and to avoid the controls on international financial flows that proliferated as governments sought to insulate their economies from the symptoms of the collapse. In this dynamic and sometimes unstable environment, the services of the City were at a premium: knowledge of international opportunities and dangers, and the ability to arrange international syndication of loans and spread exchange risk. Networks became more important with the growth of the interbank market and sharing of information. The expanding and complex nature of many new facilities enhanced the economies of scale and scope in London. These factors all increased London’s share of international banking; Britain’s share of the world’s deposit banks’ foreign assets increased from just under 20 per cent in 1966 to peak at 26 per cent in 1969. In the 1970s London’s share decreased due to the geographical diversification of financial activity as well as the relaxation of controls on New York as an international banking centre. By 1978, Britain’s share of these assets had returned to 19 per cent. Changes in the City Among the regulators there was remarkable consistency throughout the 1960s. Lord Cromer was Governor of the Bank of England for the first half of the decade. Himself a merchant banker, he publicly promoted 2

The assets of accepting houses increased from £955 million in 1962 to £3,587 million in 1970: (Wilson) Committee to Review the Functioning of Financial Institutions, Evidence on the Financing of Industry and Trade, 8 vols. (1977–8), V, p. 45.

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the internationalisation of the City and pressed consistently for deregulation of capital controls and the stability of sterling. O’Brien, who succeeded him in 1966, had come up from within the Bank and in this sense was less professionally tied to the City. Nevertheless, he continued to promote the City’s interests, particularly stressing its contribution to the balance of payments through the invisible account. He came into sharp and public conflict with the Labour government in the late 1960s over controls on sterling finance. The Chancellors of the Exchequer were a less homogenous group. The Conservatives (Selwyn Lloyd and Maudling) publicly supported the City, but Maudling in particular was privately less enthusiastic about the international role of sterling as the international monetary system collapsed. In contrast, the Labour Chancellors presided over a prolonged crisis for sterling that preoccupied their policy-making. This, along with an ideological antipathy to international finance, meant they gave shorter shrift to calls from the City to liberalise the remaining sterling exchange controls. Although the Bank of England and the Treasury were generally sympathetic to the City, the Treasury was more cautious than the Bank, sometimes complaining that the latter was under excessive influence by financial institutions. Nevertheless, there was a consensus that London should remain an important international financial centre. The various controls introduced by other state authorities to cope with the increase in speculative capital flows considerably enhanced the attractions of London. This was particularly true for London’s main rival New York, which was deliberately and severely hampered by the measures taken to prop up the United States’ balance of payments until 1974. The interest equalisation tax introduced in 1963, controls limiting the activities of foreign banks in New York, and generally tight money prompted many American banks to emigrate.3 Banks were also pulled abroad in these years by the multinational expansion of their corporate customers, the finance for which the US government decided should come from outside the USA. The authorities in London’s European competitors (such as Zurich, Paris and Frankfurt) also aimed to insulate their financial systems from volatile short-term capital flows and imposed a variety of restrictions on their own banks’ activities, further enhancing the attractions of London. These controls included prohibition of interest on nonresident deposits, isolation of domestic markets from foreign investors, and taxes on outward flows of short-term capital. 3

R. Sylla, ‘United States banks and Europe: strategy and attitudes’, in S. Battilossi and Y. Cassis (eds.), European Banks and the American Challenge (Oxford, 2002), pp. 53– 73.

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Foreign banks rushed into London to take advantage of Britain’s relatively relaxed regulatory regime and the economies of scale and scope offered in the City. From 1962 to 1970 the number of foreign bank branches or subsidiaries increased from 51 to 129, most in the second half of the 1960s. From 1965 to 1971, sixty-nine foreign banks opened branches in London, of which almost 40 per cent were US banks. During the 1950s only two US banks opened branches in London, bringing the total to thirteen in 1960, but by 1970 there were thirty-seven branches of US banks in London. In the early 1960s most US banks coming to London were branches of larger banks from New York, Chicago and California. In the later part of the decade there was a rush of smaller regional American banks to take part in the Eurodollar market and to service their multinational corporate customers. In addition to branches, foreign banks also bought interests in traditional British banks. For example, the First National City Bank owned part of M. Samuel and Co. of London, and in 1965 the Mellon National Bank of Pittsburgh bought a 25 per cent stake in the Bank of London and South America (BOLSA). In 1968 Manufacturers Hanover Bank was the first US bank to establish a wholly owned merchant bank subsidiary. The ‘invasion’ of foreign banks into London did not initially concern the authorities so long as they were not involved in supplying domestic credit. The Treasury aimed exchange control at transactions by British residents on their own account, and constrained the use of sterling more generally, but left alone entrepot ˆ finance between non-residents using currency other than sterling. This separation of domestic and international business was further marked by credit controls on domestic lending by all banks operating in Britain from May 1965. Until this time foreign banks had not been constrained by domestic credit restrictions but this was not a large part of their business. Since sterling lending was later confined to an increase of not more than 5 per cent above the level in the period May 1965 to March 1966, foreign banks which had not yet established themselves in the domestic market were effectively squeezed out, concentrating their business on the offshore market, and further reducing the role of sterling in the City. The continued growth in the activities of foreign banks and the relative freedom of their operations compared to domestic banks finally prompted a response from the British authorities at the end of 1971. In October the Competition and Credit Control reforms aimed to increase competition among domestic banks and to put foreign banks on a more equal competitive footing with domestic commercial banks. The interest rate cartel for clearing banks was ended and foreign banks were subjected to the same reserve requirements on sterling liabilities as domestic banks,

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121/2 per cent. This served to increase the sterling business of foreign banks (especially American) during the 1970s. The new actors in the City were among the most innovative and competitive financial institutions in London and quickly came to dominate the Eurodollar market.4 Eurodollar accounts started at the Midland Bank but were quickly adopted and expanded by merchant banks and American banks.5 American banks were also the leaders of other financial innovations including the US dollar Certificate of Deposit. This new competitive atmosphere in the City reduced the extent to which the Bank of England could ‘manage’ the City through informal meetings and Gentleman’s Agreements. The conflict over capital account liberalisation and the question of regulating the Eurodollar market will be used as examples to show the emergence of this new relationship. The decline of sterling and European integration In the 1950s it was often argued that the prospects of the City of London were tightly linked to the strength of confidence in sterling. The cautious and sometimes contractionary policies necessary to support the fixed exchange rate were considered by many to be detrimental to domestic industrial performance and it seemed that the interests of the City were contradictory to those of domestic producers and consumers.6 The tendency to identify the interests of the City with those of sterling gradually disappeared as the international business of the City became increasingly dominated by US dollar and other non-resident currency trading. The dollar superseded sterling as the main reserve currency in the early 1960s and sterling’s role in financing world trade fell from about 50 per cent immediately after 1945 to 35 per cent by 1960 and 25–30 per cent by 1965.7 Michie estimates that by 1970 only 20 per cent of world trade was denominated in sterling.8 4

5 6

7

8

R. Pringle, ‘Why American banks go overseas’, The Banker 116 (Nov. 1966), 784. For a critique of London banks’ unprofessional management practice see ‘Through foreign eyes’, The Economist 26 (Nov. 1966), xxxviii. C. R. Schenk, ‘The origins of the Eurodollar market in London, 1955–1963’, Explorations in Economic History 35 (1998), 221–38. See A. J. Shonfield, British Economic Policy Since the War (1958); A. R. Conan, The Problem of Sterling (1966); S. Strange, Sterling and British Policy. A Political Study of an International Currency in Decline (Oxford, 1971). W. M. Clarke, Inside the City. A Guide to London as a Financial Centre (1979), p. 197. By 1981, 75 per cent of external assets of banks in Britain were denominated in US dollars and only 5.5 per cent in sterling: R. M. Pecchioli, The Internationalisation of Banking. The Policy Issues (OECD, Paris, 1983), pp. 42–3. R. C. Michie, The City of London. Continuity and Change Since 1850 (1992), p. 90.

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While the Bretton Woods system crumbled, the Sterling Area that had propped up the international role of sterling gradually disintegrated. At the end of 1961, sterling still made up 87 per cent of the official reserves of overseas sterling countries, but this share had fallen to 83 per cent in 1964, 75 per cent at the end of 1966 and 65 per cent at the end of 1967.9 However, diversification did not have a significant impact on the overall level of sterling balances because official reserves as a whole increased so that the fall in sterling’s share did not imply a substantial run-down in official sterling balances. The slight decline in official sterling holdings was offset in part by an increase in privately held sterling due to relatively high interest rates and the rise in the absolute value of international trade denominated in sterling. At the end of 1962, Maudling as Chancellor of the Exchequer asserted in an internal minute that he regarded it as ‘a major aim of policy to free the British economy from the inhibitions of reserve currency status’.10 The Bank of England was sceptical. Mynors, its Deputy Governor, argued that monetary authorities and others held currencies in reserve because they were useful in trade; the reserve role of sterling thus derived from its role as transaction currency. In this case, it was the costs and benefits of sterling as a trading currency that needed demonstrating and ‘not the difficulty of “funding the sterling balances”, which is but an echo of lost causes’.11 W. A. Allen predicted that if more limitations were introduced on the use of sterling, the trading community of London would move to another international financial centre and ‘Once out, how do we get them back? And what provides the butter on our cut-loaf then?’.12 This, of course, was in the days before the big surge in the Eurodollar market, when commercial sterling business was still vital to the City’s prosperity. The Bank also argued that because of the lack of international confidence in the US dollar, there was no viable alternative reserve asset to sterling and that eliminating its role would have a contractionary effect on the volume of world trade and international economic activity generally. The time was not ripe for the elimination of the international role of sterling until an alternative source of international liquidity could be devised. This, in turn, depended on international and supranational institutional debate and consensus, and could not be forced by unilateral British action on sterling. 9 10 11

12

The 1967 figure is at the new devalued rate of exchange: Bank paper on ‘The future of the sterling balances’, March 1968, BoE OV53/38. Quoted at top of Mynors’s reply dated 3 Jan. 1963, BoE, OV47/63. Mynors paper, 3 Jan. 1963. This paper was circulated to the Bank of England Common Market Committee for consideration on 18 Jan. 1963 and sent to Maudling on 22 Jan., BoE OV47/63. Mynors paper, 3 Jan. 1963, BoE OV47/63.

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International payments problems continued, however, and sterling suffered from another confidence crisis in summer 1964, prompting the new Labour government to look again at ways to turn short-term sterling liabilities abroad into longer-term debt.13 This time Fforde of the Bank of England noted ‘I do not think that at the highest levels in the Bank there would be dissent from the proposition that to get rid of reserve-currency status while maintaining our trading currency position would be a most desirable achievement.’14 This new attitude was partly influenced by the continuing process of reforming the international reserve system, the failure of Britain’s first effort to join the European Economic Community (in which the reserve role of sterling played a part) and the rise of the US dollar as the currency of the City with the growth of the Eurodollar and Eurobond market. British negotiators in the two applications to join the EEC in the 1960s hoped to avoid involving the role of sterling. Instead, discussions focused on trade issues, but in the end the weakness of sterling and the international obligations its reserve role gave to Britain meant it was drawn in as an obstacle to accession, especially by de Gaulle.15 While the role of sterling in the EEC was problematic, the Bank of England eagerly anticipated the prospect of greater European competition in the City after British accession. In July 1961 the Bank expected some scope for increased importance of the City for banking and the stock exchange. British yields were relatively high, which would attract capital for British industry if inward investment were liberalised.16 The Bank’s Common Market Committee noted in 1963 that ‘taking the field as a whole, there is more reason to regard the prospect with confidence than with apprehension’. The report went on to conclude that to the extent that the infusion of new personalities makes for new ideas and the re-examination of old ones, this should be welcome. In general our institutions and arrangements should stand up to critical examination not too badly; and if the pace of improvement, development and de-ossification (particularly in the Clearing Bank field) can be speeded up in the process, so much the better.17

At the end of 1962 Haslam of the Bank of England toured financial markets in Holland, France and Belgium and reported that 13 14 15 16 17

Thompson-McCausland to Cromer, 11 Dec. 1964, BoE OV53/30. Fforde to Thompson-McCausland, 2 Dec. 1964, BoE OV53/30. C. R. Schenk, ‘Sterling, international monetary reform and Britain’s applications to join the EEC in the 1960s’, Contemporary European History 11 (2002), 345–69. ‘UK accession of the Treaty of Rome: implications for the City’, 8 July 1961, BoE OV47/39. ‘Common Market and take-overs’, paper by Common Market Committee for Governors, 7 Jan. 1963, minuted by Cromer ‘a first class and most interesting paper’, BoE OV47/63.

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The impact of the common market on the exchange markets has so far been negligible. Although there are as yet no moves towards closer integration of markets or standardization of procedures and charges, the banks of the Six fear the competition of London, and the entry of the UK might cause them to look at their systems again.18

The general view that integration would be good for the City prevailed in the second application of 1967, although there was more emphasis on the need to liberalise capital flows to conform to EEC directives.19 By this time, the French government was preparing to establish Paris as an international financial centre. It was noted that in ‘the minds of some Frenchmen, fear of British dominance in the financial field may be a reason for wanting to see us excluded from the Community, but this is not likely to be said openly’.20 The British hoped to appease the French by arguing that linking London with the rest of Europe might consolidate a stronger European banking network that would more effectively balance the power of New York. In the event, the efforts to rehabilitate Paris foundered on the turmoil surrounding ‘les e´ v´enements’ of the summer of 1968. Banks in the City and on the continent had a more active approach to integration, at least in terms of their rhetoric. In 1963 the Midland Bank joined the ‘club des c´elibataires’ and formed the European Advisory Committee, a loosely linked banking group that sought to anticipate the need for an integrated European financial market. Other British banks also paid lip-service to the need to prepare alliances to deal with financial integration, but these efforts were not very successful.21 The rather muted response of the Bank of England and the City was the result of the lukewarm attitude towards financial liberalisation among the EEC members. This in turn was prompted by a desire to insulate themselves from the continuing crisis in the international monetary system by maintaining and increasing capital controls. Meanwhile in Britain the struggle over the sterling exchange rate intensified. Speculative pressure mounted in the second half of 1966, leading to the devaluation of sterling in November 1967. The story of the leadup to the devaluation and its immediate aftermath has been told widely elsewhere, but its implications for the longer-term international role of 18 19 20 21

R. Haslam memo., 3 Dec. 1962, BoE, OV47/62. Stone to Fenton (draft of views of Bank of England for Treasury), 3 June 1965, BoE OV47/63. EEC negotiating brief for the economic committee by W. S. Ryrie, ‘The international role of sterling’, 17 May 1967, T 230/955. D. Ross ‘Clubs and consortia: European banking groups as strategic alliances’ in Battilossi and Cassis (eds.), European Banks and the American Challenge, pp. 135–60.

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sterling are not as well documented.22 In Britain it was hoped that the exchange crises of the US dollar and sterling at the end of 1967 and the beginning of 1968 would provide the crisis required for generating enthusiasm within and outside Britain for a permanent plan to eliminate the international role of sterling. Devaluation of sterling turned attention to a US dollar that was already under speculative pressure. In March 1968 the gold pool collapsed, and the British used this as an opportunity to lobby for a joint support scheme to run down the sterling balances, effectively ending sterling’s reserve role. Cromer went to the key gold pool meeting in Washington in March hoping to garner $5 billion and a public joint declaration of support for sterling, but British assumptions about the importance of sterling to European and American partners had been miscalculated. The Europeans were reluctant to engage in further support after the devaluation and in addition to the facilities that had already been arranged. Cromer came away with only $4 billion (including the existing $1.4 billion IMF standby).23 In May and June 1968, the Hong Kong government led the Sterling Area’s retreat by negotiating a form of exchange guarantee for its sterling reserves. In July, members of the G10 finally agreed to put up $2 billion of support for future diversification, pending negotiations with the overseas Sterling Area. The Second Basel Agreements were finally concluded in September 1968, effectively marking the acceptance of the end of sterling’s reserve role. By this time the increasing role of the US dollar in the City made sterling’s demise less influential. The Eurodollar market The Eurodollar market was the single most important element in London’s revival in the 1960s; once foreign banks became market leaders, it sharpened focus on the new relationship between the City and the state. When the Midland Bank first began bidding for Eurodollar deposits in 1955, the Bank of England was surprised and there was some discussion about how this violated the spirit of the exchange control legislation as well as the interest-rate cartel among commercial banks. In the end, however, the innovation was tolerated since it was not strictly illegal and did attract US dollars into London, thereby helping the balance of payments. Although it was allowed to continue there was no announcement to this effect in the hope that the innovation would spread slowly.24 Burn has 22 23

A. Cairncross and B. Eichengreen, Sterling in Decline. The Devaluations of 1931, 1949 and 1967 (Oxford, 1983). 24 Schenk, ‘Origins’. See correspondence in BoE, OV53/38.

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argued that in the 1960s the Bank of England ‘was primarily concerned to restore the City to its former position as the centre of world finance’ in order to ‘enable financial capital to regain the position of relative independence from the state which it had lost in 1931’.25 He argues that the Bank promoted the Eurodollar market to this end. Certainly, the following analysis will confirm the commitment of the Bank of England to freer capital flows, but it also reveals considerable frustration within the Bank that informal state regulation of the City was no longer feasible. In spring and summer 1962 the Bank of England investigated the possibility of exerting greater monitoring or restrictive control over Eurodollar deposits and their use.26 They had no method of identifying in detail the size of the market or its participants, and feared that the term structure of the deposits vis-`a-vis loans might become precarious. It also seemed possible that the market could disrupt exchange-rate stability. Possible responses included asking for voluntary self-restraint, imposing liquidity ratios, or ‘a hint from the Governor that we are watching the market and request for more detailed and more regular information’.27 O’Brien, Preston and Hamilton agreed that the Bank should approach Sir George Bolton (who in 1957 had moved from the Bank of England to head the BOLSA) for more detailed information on BOLSA’s dealings in Eurodollars, on which basis the Bank could devise recommendations for other banks.28 This was seen as exclusively a Bank of England duty, not for Treasury action. Hamilton noted that although obviously the Treasury could not be ignored I am not anxious for any further papers to be sent to them yet. The fact that the Balance of Payments note of 18 June went to Sir Denis Rickett has already resulted in a 50 minute explanatory talk with Copeman on the telephone.29

The Treasury did not understand the Eurodollar market and the Bank were not keen to explain it to them. At a meeting at the beginning of August 1962 the Bank decided that requesting voluntary self-restraint ‘would be embarrassing to apply’.30 Although this was the usual way that the Bank of England dealt with 25 26

27 28

29 30

G. Burn, ‘The state, the City and the Euromarkets’, Review of International Political Economy 6 (1999), 225–61, at 228, emphasis in the original. In June 1962 the Bank for International Settlements proposed a joint study of the Eurodollar market by member central banks. In August OECD Working Party no. 3 proposed also to study the Eurodollar market. Selwyn note for a meeting in Stevens’s room, 2 May 1962, BoE, EID10/21. O’Brien and Preston notes, both 30 May 1962, BoE EID10/21. For a more detailed account of Bolton’s involvement in the Eurodollar market’s founding see Burn, ‘The state, the City and the Euromarkets’. Hamilton (deputy chief cashier) note, 9 July 1962, BoE EID10/21. Summary of a meeting at the Bank of England, 16 Aug. 1962, BoE EID10/21.

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domestic commercial banks, it was not possible to extend this approach to foreign bankers with whom the Bank did not have longstanding co-operative relationships. Even asking for more information on their Eurodollar deposits was likely to be awkward since ‘to ask them for details is tantamount to saying that we want to make sure they are prudent bankers’.31 This, of course, is the essence of prudential supervision, but the Bank of England did not yet see this as its role. Furthermore, the Bank of England believed that separate liquidity ratios for Eurodollar loans were impossible to enforce for technical reasons. Burn notes that this option was dismissed in March 1962 because it would ‘mean admission of responsibility’ by the Exchange Equalisation Account that it would stand by a bank in default.32 The Bank did not want to become a lender of last resort to the market. Instead Cromer informally approached the leading six or so banks in the market and warned them to keep their positions liquid by maintaining adequate reserve ratios.33 In the end, it was the series of studies of Eurodollar markets commissioned by the Bank for International Settlements from October 1962 that led to the collection of detailed data based on exchange control returns by authorised dealers in foreign exchange. As the value of Eurodollar deposits soared, both players and regulators began to worry that the market was potentially dangerous. At the beginning of 1963 Sir Charles Hambro of Hambros Bank expressed his disquiet to the Bank, prompting a carefully drafted response from Mynors that enthusiastically supported the market. ‘It is par excellence an example of the kind of business which London ought to be able to do both well and profitably. 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.’ Tellingly, however, he continued ‘if we were to stop the business here, it would move to other countries with a consequent loss of earnings for London’.34 In summary, the most important financial innovation in the 1960s was tolerated, although not initially promoted, by the Bank of England. The most immediate reason was that any increased supervision was likely to be ineffective unless it was sufficiently onerous as to pose an insupportable burden on banks. The major obstacle, however, was that imposing new controls on capital inflows would erode the status of London as an international financial centre. As a report by the Bank of England had stated in 1961, ‘however much we dislike hot money we cannot be international bankers and refuse to accept money. We cannot have an international 31 33 34

32 Burn, ‘The state, the City and the Euromarkets’, p. 241. Ibid. Summary of a meeting at the Bank of England, 16 Aug. 1962, BoE EID10/21. Mynors to Hambro, 29 Jan. 1963, BoE EID10/22.

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currency and deny its use internationally’. Furthermore, it was still perceived that the prospects of the City and of sterling were tightly bound: ‘if we take a swipe at London, we shall do lasting damage to sterling’.35 It was not until the domestic and international banking crises of 1974 that the Bank of England was prompted to change its relaxed attitude and to launch more coordinated (although not very successful) efforts at prudential supervision. Once the Eurodollar market was established, the authorities actively promoted the development of the Eurobond market. In mid December 1962 the Treasury outlined the plan for a foreign currency loan to be launched by Warburg and Co., noting that ‘the object of these loans is to make the facilities of the London capital market more widely available and to mop up some of the very volatile Euro-dollars at present in London’. At this point it was reported that the Belgian government had applied to raise $30 million.36 This first proposal fell through in February 196337 but a subsequent loan was completed and this was followed by a loan to IRI of Italy in July. In 1963 the total amount of US dollars raised in international capital markets through Eurobonds was $55.5 million. Thereafter the market accelerated, mainly servicing government or stateowned companies’ demands for medium-term loans.38 In addition to the Eurodollar and Eurobond market, there were other financial innovations in London.39 They included products that sought to spread exchange risk as the pegged rates set by the Bretton Woods system came under increasing pressure (currency basket, currency option, and dual-currency convertible bonds) as well as products to spread interestrate risk between borrowers and lenders, such as roll-over credits. Other innovations increased the use of the US dollar in London. In May 1966 the London branch of the First National City Bank issued the first negotiable dollar-denominated Certificate of Deposit (CD). Until 1968, withholding tax was charged on CDs with a maturity over one year, but after this was removed, the CD market flourished. By the end of March 1968, twenty-six banks (including eleven US banks) had issued CDs and a secondary market had developed.40 35 36 37 38

39 40

JML report for Hamilton, 19 Oct. 1961, BoE EID10/19. Radice draft letter to Rumbold of Commonwealth Relations Office, 13 Dec. 1963, BoE C40/1213. Commonwealth Relations Office to Jamaica, telegram, 11 Feb. 1963, BoE C40/1213. K. Burk (ed.), ‘Witness seminar on the origins and early development of the Eurobond market’, Contemporary European History 1 (1992), 65–87; I. M. Kerr, A History of the Eurobond Market. The First 21 Years (1984). S. Battilossi, ‘Financial innovation and the golden ages of international banking: 1890– 1931 and 1958–81’, Financial History Review 7 (2000), 141–75. ‘Overseas and foreign banks in London’, Bank of England Quarterly Bulletin (1968), 158.

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This section has argued that during the 1960s the business of the City changed and this affected its relationship with the state. The advent of current-account convertibility in 1958 increased the range of business in London, and the tightened regulation of financial centres elsewhere in the world increased the attractions of London. The arrival of new banks, especially from the USA, introduced a more competitive environment that challenged the cosy way the City had operated during the 1950s. The acceleration of financial innovation of products and processes outstripped the pace of supervisory or regulatory reform. While the Bank of England successfully kept the Eurodollar market its preserve, sterling policy was under the control of the Treasury, bringing the two institutions into conflict with each other. The debate over capital controls The issue of whether and when to relax exchange controls on capital flows offers an example of the conflicting positions taken by the City, the Bank of England and the Treasury. Through the postwar period a general move towards freer markets prevailed in international trade, but the enthusiasm for freer capital movements was constrained by the balance-of-payments problems associated with the crumbling of the fixed exchange-rate system through the 1960s. The convertibility achieved in Europe at the end of 1958 was external current-account convertibility only. Capital-account transactions remained closely controlled for a further fifteen to twenty years in most countries. The imbalance in the international economy between surplus and deficit countries under the fixed exchange-rate regime led to sharp increases in short-term capital flows among developed countries in response to changes in short-term interest rate differentials and expectations of changes in exchange rates. This in turn discouraged further liberalisation of capital controls – in the USA and Britain to prevent outflows, and in Germany and Switzerland to prevent inflows.41 Although we have seen that British governments did not impose controls on capital inflows in response to the Eurodollar market, they did retain controls on capital outflows. Indeed, after 1958 leaks of short-term capital became a more prominent target for exchange controls to protect sterling. The Bank of England represented the interests of the City and was almost always in favour of capital account liberalisation, which brought it into periodic conflict with the more protectionist Treasury. 41

OECD, Liberalisation of Capital Movements and Financial Services in the OECD Area (Paris, 1990), p. 34.

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In 1958–9 Parsons of the Bank of England wrote to Rowan at the Treasury passing on the complaints from the City over restrictions on usance facilities for trade involving third countries.42 The City believed that continuing the restrictions harmed sterling because third countries looked for another currency to finance their trade. Moreover this was ‘traditional business for London, and, although the facility is not greatly used, it has considerable prestige value’. The pressure from the Bank often stressed that controls brought sterling into disrepute (an issue close to the heart of the Treasury) as well as hampering the activities of the City (which did not have as great a priority for the Treasury). Many in the Treasury had little sympathy for the City. David Bensusan-Butt, for example, responded that prestige and tradition were not a good enough reason to relax controls that might cause a drain on the reserves if confidence in sterling waned.43 This view prevailed through a series of repeated pleas from the Governor of the Bank of England on behalf of the City, until the controls were lifted.44 At the end of April 1959 Cobbold began his campaign to remove the ban on refinance credit. He made repeated and increasingly urgent demands that ‘the desire of the market to be able to grant refinance credits arises partly from the feeling that it ought to be able to give the full services that is its traditional role and partly from its wish to increase its business’.45 Roger Makins and A. W. France in the Treasury were not convinced. France noted it ‘seems to me that the case for doing this is simply not enough and that we should continue to refuse. There are better candidates [for liberalisation].’46 At the end of June members of the Bank of England and Treasury met to discuss the issue. The Treasury officials suggested that relaxation should wait until after the election in October and the Chancellor agreed. Cobbold was incensed and demanded that he be allowed to quote the Chancellor that it was he who refused to relax these restrictions, thus making public the split between the Bank and the Treasury.47 By October 1959 the Treasury and the Bank were finally agreed that the ban on refinance credits should be lifted since sterling appeared strong, they were an essential part of trade finance, and they were unlikely to 42 43 44 45 46 47

Parsons to Rowan, 22 Aug. 1958, T 231/1034. The controls had been imposed in September 1957 in response to a balance of payments crisis. Bensusan-Butt to Rudd, 29 Aug. 1958, T 231/1034. Parsons to Rickett, 24 Nov. 1958; Cobbold to Makins, 15 Jan. 1959, and to Chancellor of the Exchequer, 28 Jan. 1959, T 231/1034. Governor of the Bank of England to the Chancellor of the Exchequer, 13 Nov. 1959, T 231/1034. France minute on a brief by Glaves-Smith, 12 May 1959, T 231/1034. Makins minute of a Bank–Treasury meeting, 8 July 1959, T 231/1034.

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have a very detrimental impact on the reserves. But the Chancellor of the Exchequer, Heathcoat Amory, continued to refuse to act despite pointed questions asked in Parliament.48 Although his Treasury advisers no longer believed there was a case for singling out this form of credit for a ban, Heathcoat Amory contended ‘I have a feeling that our short term trade credits are likely to continue to rise, and that together with our other overseas commitments are likely to make quite big enough inroads into our reserves.’49 The ban was not lifted until May 1963. Another case was the elimination of security sterling. Non-residents could only sell their sterling securities for ‘security sterling’, which traded at a discount on the official rate. In April 1962 the Bank began its campaign to eliminate this control because having a discounted rate for sterling undermined confidence.50 Their reasoning, however, fell on deaf ears in the Treasury, given the repeatedly parlous state of the balance of payments, and again relations between the Bank and the government became strained. By 1966 Treasury officials agreed with the Bank that the security sterling market should be eliminated, but found it difficult to convince the Labour Chancellor of the Exchequer, Callaghan, and his advisor Thomas Balogh, who were reluctant to relax controls when sterling was under pressure. By this time purchases of security sterling by Hong Kong on behalf of the Bank of China kept the security sterling rate at or near the official rate, which relaxed the pressure to eliminate it. The Chancellor initiated another investigation into unblocking security sterling in February 1967 and it was finally eliminated in the budget of April 1967. This was the only relaxation of capital controls in the budget. In October 1968, the Labour government re-introduced the control on sterling financing of third-party trade that they had imposed in 1957 and removed in 1959. This was part of an attempt to reinforce the impact of the devaluation of 1967, but it provoked considerable outrage within the City and from the Conservative opposition, particularly Reginald Maudling who had been Conservative Chancellor 1962–4. This episode was widely interpreted as exposing an important breach between the Bank of England and the Treasury.51 During a speech a few weeks later O’Brien, the Governor of the Bank, was critical of Labour’s 48 49 50 51

Glaves-Smith to France and Rickett, 9 Oct. 1959; Chancellor minute, 6 Nov. 1959, T 231/1034. Chancellor minute, 24 Nov. 1959, T 231/1034. Rickett to Lee for Chancellor of Exchequer, 13 April 1962, BoE OV47/54. He also advocated relaxing the voluntary July 1961 controls on outward FDI. The Economist, 1 Nov. 1968, p. 65.

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policies and claimed that the City had lost faith in the government. This prompted seventy-six Labour backbenchers to sign a motion to ask for his resignation and the Conservative opposition to defend O’Brien vociferously.52 This analysis rather contradicts Strange’s view that the government promoted the use of sterling as a transactions currency internationally in the 1960s.53 Instead, it seems that the Treasury resisted relaxing controls on short-term capital flows despite pleas by the Bank of England and the City. From 1964, as sterling came increasingly under pressure in international markets, the Treasury became deaf to the pleas from the City for relaxations that could offer a potential leak should confidence worsen. The Bank of England was unable to push the Treasury to change its decision despite the personal intervention of the Governor. The balance of power appears to have swung rather against the Bank of England in these matters in the 1960s. Part of the breach between the Treasury and the Bank had to do with the decline of sterling, both in terms of international confidence and as the only transactions currency in the City. Policies that sought to support sterling were no longer usually in the interests of the City. Conclusions The crumbling of the international monetary system certainly did not inhibit the development of the City of London in the 1960s. The rising volume of global short-term capital flows enhanced the economies of scale and scope that were obtainable in London. The prolonged crisis also encouraged financial innovation to respond to new demands to spread interest- and exchange-rate risk. The defensive and protectionist responses of other states increased the relative benefits that London gained from the British policy of supporting non-resident activity in London, while protecting the balance of payments by restrictions on the use of sterling. The changing nature of the City’s business and membership after the advent of the Eurodollar market meant that the decline in sterling had little impact on the prospects for the City. Indeed, while in the 1950s it was often argued that the prospects of the City depended on the strength of sterling, it was argued conversely in the 1960s that the prospects of sterling depended on the strength and competitiveness of the City. European integration produced considerable soul-searching and some strategic alliances among City institutions, but it was generally 52

Ibid., 16 Nov. 1968, p. 64.

53

Strange, Sterling, p. 236.

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agreed that the City’s dominance would continue and even be enhanced by future financial integration. There were divergent views between the Treasury and the Bank about the activities of the City of London. As in the 1950s, the Bank continued to be the champion of the City, while the Treasury put more emphasis on caution and protection of the central reserves. The rhetoric that the interests of sterling and the City were synonymous continued through the 1960s despite the fact that the Eurodollar market made the US dollar the main international currency in use there. Indeed, the Bank used the rhetoric of the 1950s to try to wrest concessions on capital controls from the Treasury. By referring to sterling and the City almost as patriotic symbols, the Bank hoped to persuade the Treasury to relax its attitude to certain forms of sterling credit. The debate over capital controls between the Bank and the Treasury during the 1960s serves to highlight the different agendas of these institutions. It is probably fair to say that the Treasury had the stronger arm during the 1960s and that this prolonged controls on the use of sterling. Recurring sterling crises and balance-of-payments deficits in this decade strengthened the cautious hand of the Treasury against the more liberal stance of the Bank. In the end this may have hastened but did not cause the switch away from sterling in the City that was already underway before 1958. With its policy focused on sterling, the Treasury was slow to become aware of or involved in monitoring the Eurodollar markets. This tendency was reinforced by the reluctance of the Bank of England to consult the Treasury on this issue, partly because the complexity of the market seemed beyond the expertise of the Treasury, but also because the Bank saw this as a quintessentially banking issue and therefore outside the Treasury’s policy realm. This division of responsibility enhanced the dichotomy of the regulatory system between sterling and offshore business. While the Bank continued to champion the City, its ability to supervise the activities of its constituents through traditional informal methods declined. A major factor in this decline of influence arose from the division between resident business in sterling on the one hand, and ‘offshore’ foreign currency business on the other hand. The former attracted most attention from the Treasury in the form of controls to bolster the exchange rate. The lack of regulatory or supervisory attention to the latter encouraged the immigration of foreign banks and bankers in large numbers that eventually swamped the British banks in the City. This new configuration was not conducive to the informal traditional monitoring techniques that the Bank had employed when the City was a cosier entity. The possible dangers of this new environment were not recognised until the 1974

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domestic and international banking crisis in the City prompted efforts to formalise prudential regulation.54 This analysis has broadly supported Kelly’s view that there was a high degree of continuity between Labour and Conservative governments during the 1960s, both promoting the interests of the City to meet their policy goals of supporting sterling and the balance of payments. It has also, however, highlighted areas of conflict as the interests of the City and the interests of sterling diverged. The Conservative party is usually viewed as having greater empathy for the traditions of the City, although it was seen that Treasury ministers were not as supportive as the Bank of England. Importantly, it was a Conservative Chancellor, Maudling, who was the first to announce internally the intention to abandon the international reserve role of sterling because of the constraint it put on British economic policy.55 The Labour governments after 1964 were more enthusiastic about maintaining controls and resisted the demands from the City to protect their traditional sterling commerce. The influence of the Bank seems to have been weaker under the Labour governments, but in the end the process of liberalisation continued despite the sterling crisis of 1966–7. In 1977 Kelly claimed that ‘if the environment for American banks in Britain has been attractive, it is because of this almost complete agreement, willing or unwilling, that the City depends on its open and international character and that Britain depends on the City’.56 This seems a fair summary of the situation. 54

55 56

C. R. Schenk, ‘Crisis and opportunity: the policy environment of international banking in the City of London, 1958–1980’, in Y. Cassis (ed.), London and Paris as International Financial Centres (Oxford, 2005). It was not until March 1972 that Chancellor Barber made this goal public. J. Kelly, Bankers and Borders. The Case of American Banks in Britain (Cambridge, Mass., 1977), p. 45.

17

The Bank of England 1970–2000 C. A. E. Goodhart

When I first entered the Bank of England in 1968 there was an aphorism which senior management used quite frequently and approvingly, especially to young academic economists such as myself. This was Governor Cobbold’s statement that ‘the Bank is a bank and not a study group’.1 As I understood the essence of this, it implied that the heart of the Bank then lay in its operational links with financial markets and institutions, and not in its contribution to macroeconomic analysis and policy. In 1968, as I shall describe, this was correct. By 2003 the main function of the Bank had become macroeconomic policy analysis, and decisions on interestrate changes within the context of an inflation forecast undertaken by trained economists. In a sense the Bank has become an economic ‘study group’ rather than an operational bank, though that assessment needs, and will be given, considerable qualification. Rather than starting, however, with an assessment of the Bank’s recent role changes in the formulation of macro-monetary policy, though such changes have been major, I shall start with a discussion of the Bank’s role in the maintenance of financial stability. Here there have been veritable revolutions, and, in my view, we have probably not yet reached a steady state. Then I shall turn to the Bank’s (enhanced) role in macro-monetary policy-making. The third main section will cover the Bank’s (diminished) role as a market operator in the City; and the final section will review the Bank’s (again somewhat diminished) role in external affairs. I shall conclude with an uncertain look into the future.

An earlier version of this chapter was given at a Conference on Central Banking History in Frankfurt on 7 November 2002. I am grateful to many colleagues for help and suggestions in its preparation, particularly Bill Allen, David Cobham, Tim Congdon, Peter Cooke, John Flemming, Ian Plenderleith and Brian Quinn. 1

(Radcliffe) Committee on the Working of the Monetary System, Principal Memoranda of Evidence, 3 vols. (1960), I, p. 52.

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Supervision, financial stability and the lender of last resort What is surprising in retrospect was how little formal responsibility the Bank of England either took, or was assigned by the government, for oversight of the British banking and financial system prior to the fringe bank crisis which began in December 1973. The supervisory role in the Bank was restricted previously to one senior official (the Discount Office Principal, at that time J. Keogh), with a handful of supporting officials. The Bank’s money-market dealings were with the discount houses, a set of institutions which had been fostered by the Bank to intermediate between itself and the much larger London clearing banks. The discount houses were highly levered and subject to market-rate risk, and the Bank wanted to be well informed of the positions of its main market counter-parties. Moreover, part of the stock-in-trade of the discount houses continued to be commercial bills, though these had been increasingly dominated in volume by Treasury bills. Such commercial bills were accepted by the accepting houses, i.e. the London merchant banks, becoming two-name bills. As the Bank dealt in such bills with the discount houses, it wanted to be sure of the quality of the business and standing of the accepting houses whose credit also stood behind such bills. For the rest, what was remarkable was how sparse were the formal links between the Bank, the commercial banks, and the rest of the financial system. In this respect the Bank had far less intelligence about, and effectively no supervisory control over, the commercial banking system at this time (late 1960s) than was, I believe, the case either in the USA (where the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation and the State authorities all played a much larger role) or in most continental countries. There was a limited provision of monetary data (mostly provided on a voluntary basis by the clearing banks, more so after about 1963, following the Radcliffe Committee’s recommendations for improving the availability of monetary data), but the Bank did no off- or on-site bank inspections, though it did discuss their annual results with (most of) the banks (with the clearing banks not deigning to talk with anyone other than the Governors). The Bank did not generally license, nor authorise, financial institutions;2 this was done by government (mostly the Board of Trade, which subsequently metamorphosed into the Department of Trade and Industry). 2

The Bank, as agent for the Treasury, did, however, make appointments under the Exchange Control Act, such authorisation being widely regarded as the pinnacle of banking recognition. Also any foreign bank wanting to operate in the London markets had to see the Principal to get his informal permission.

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This lack of formal involvement in the supervisory/stability field was quite largely due to the ‘command and control’ approach to monetary policy which persisted longer in Britain than in most other countries, and so made the need for such supervision less pressing. This approach, in turn, was partly due to the then daunting size of the British national debt, which led governments to be even more concerned about using interest rates flexibly as a policy instrument. Anyhow, with interest-rate increases used somewhat unwillingly, primarily in response to external weakness in the balance of payments, endemic internal inflationary pressure was held in check by direct quantitative constraints over bank lending to the private sector. This policy favoured large manufacturing exporters. The banking sector was, in the years immediately after the Second World War, overwhelmed with government debt, and its ability to assume risky lending was tightly restricted. Such a system gave the Bank an informal role as ‘go-between’ for the government on the one side, and the banks and other financial intermediaries on the other. For its part the government relied on the Bank to introduce, monitor and maintain (if not quite enforce) its commands; while the banks and other intermediaries knew that they had to get the Bank on their side if any (special) pleadings that they wished to make would be taken seriously by government. This role provided considerable informal leadership of the City for the Bank, and a process of similarly informal gathering of information (for example, via City lunches). Insofar as there were any stability-related controls over the banks at this time, they related to liquidity rather than to capital adequacy. In any case outsiders could not assess the capital adequacy of the clearing banks so long as they maintained hidden ‘inner reserves’; discussion whether such opacity was a source of strength, or weakness, to the system was commonplace in the 1950s and early 1960s. Cash and liquidity required ratios were maintained, though whether their function was related to monetary policy or to financial stability was never very clear; nor was their efficacy, in either guise. Assessment of the role of such ratios was a common academic pastime in the 1960s, as a survey of articles written then would reveal. Perhaps largely, certainly partly, because of such credit constraints limiting innovation and risk-taking, banking was an extremely safe, and boring, occupation between 1945 and 1973. There was little credit risk,3 3

As one colleague has put it, ‘essentially the City banks were a club which set lending rates collectively and controlled access in collusion with the Bank. Since the total quantum of lending, and its allocation, were determined administratively, there were really few credit judgments to be made, few loan loss provisions necessary and few credit losses recorded. Nirvana for the commercial banks.’

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though, as shall be described later, there was considerable interest-rate risk, and there were occasions when financial intermediaries became (temporarily in most cases) burnt by this. Nevertheless there were no publicly perceived domestic financial crises worthy of the name. Although Britain has been the home of monetary experts who have expounded on the theory of lender of last resort (with the 200th anniversary of Thornton’s great book4 having been celebrated with a conference in Paris in September 2002), the reality is that the Bank of England has been involved in the last two centuries in very few episodes of lender of last resort, far fewer than in most European countries or in the USA. Those few cases when the Bank was asked to help virtually never involved a pure case of liquidity shortage (money markets could cope with those), but almost always some mixture of liquidity problems and solvency concerns, usually with the latter triggering the former. Sometimes the solution was an arranged merger. When there was a call for the injection of funds, the Bank did not feel capable of putting up more than a small share of the money itself; it had limited capital. In the most serious and dramatic case, at the outbreak of war in August 1914 – a still underresearched episode, though Seabourne5 has done an excellent study – the government took on the burden. In the Barings case (1890 version) the Bank coordinated a consortium of banks in London to provide guarantees that Barings’ debts would be met. The Bank was comfortable with a role as arbiter of concerted private sector responses to a crisis, much less so to act as an independent, sole rescuer. Moreover the club-like ethos in London fostered such a preference; but in truth lender-of-last-resort operations by the Bank had been largely dormant for decades at the start of the 1970s. All this was to change in the 1970s, a frightening decade for central bankers. The decade began with a worldwide boom. In Britain this was amplified by an extremely rapid expansion of credit. Amongst the many problems of a command and control system of direct quantitative constraints is that ‘fringe’ organisations develop whose only rationale is that they are structured so as to avoid those direct controls. This had happened in Britain’s financial system where various kinds of finance houses and ‘fringe banks’ had developed in the 1960s to take advantage of such loopholes, and often these were lightly capitalised and highly leveraged. This distortion of the banking system, and the consequent increasing ineffectiveness of the system of credit controls, was the main reason why 4 5

H. Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802). T. Seabourne, ‘The summer of 1914’, in F. Capie and G. Wood (eds.), Financial Crises and the World Banking System (1986), pp. 77–116.

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the Bank lobbied the government to restore a more competitive financial system. This was achieved by the reform ‘Competition and Credit Control’ in 1971. Competition was immediately redoubled as the main clearing banks sought to regain market share, though more so through interbank loans than by loans directly to the property companies and other customers of the ‘fringe banks’. Meanwhile the boom, especially in the property market, encouraged the fringe banks to expand even faster. Eventually, with the occurrence of the first oil shock, and an upsurge of inflation, the boom ended in a crisis. The property market was struck by a combination of sharp increases in interest rates and additional taxes, and collapsed. This collapse then led to the failure of first one fringe bank (London and County Securities Group), and then partly through a process of reputational contagion (whereby loans to similar institutions were withdrawn), to the closure of a swathe of other fringe banks.6 Without any form of direct supervision in place, the Bank was short of basic intelligence. The fringe banks, being initially small upstarts, had to clear their payments through a much larger correspondent clearing bank. The Bank then asked the relevant clearing bank, which had a correspondent relationship, in each arising case to assess whether the associated fringe bank was insolvent or salvageable.7 When the fringe bank was assessed as salvageable, then the Bank coordinated injections of liquidity via a ‘lifeboat’ to which all the major clearing banks and the Bank contributed (together with related interests, e.g. large shareholders of the affected fringe banks),8 probably with the correspondent taking the major share and others on a pro-rata basis (and the Bank of England 10 per cent). The collapse in asset prices, and in the economy, in 1973–5 was extremely steep, and their lifeboat contributions were an unwelcome added burden to the clearing banks. At one stage there were even published rumours about one of the clearers (National Westminister).9 So the clearing banks in due course informed the Bank that they were no longer willing to contribute new money. The Bank then had to go it alone;10 it has not been reported whether the Bank received any offers of potential support, or an indemnity from the Treasury (i.e. the government), in this role. By the time this stage had been reached, however, the crisis was on the wane, and relatively little new money (from the Bank) was in fact required. 6 7

The fullest available record of this event is M. Reid, The Secondary Banking Crisis 1973–75 (1986). 8 Ibid., pp. 98–9. 9 Ibid., p. 123. 10 Ibid., p. 138. Ibid., p. 90.

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What this episode revealed was that there was little, or no, prudential control, or supervision, of the banking (or wider financial) system, and that, in the new competitive, and thereby riskier milieu, such oversight was (felt to be) necessary, and would need an associated regulatory dimension. The immediate result was a reorganisation in the Bank. Initially a nucleus of a new specialised department was established in the Discount Office, which absorbed staff and resources rapidly. Thereafter this became a separate department, devoted to banking supervision and regulation (initially under George Blunden, who handed it on to Peter Cooke in 1976), culminating in the Banking Act (1979) which gave formal powers to the Bank to authorise, monitor, supervise, control and, under certain circumstances, to withdraw prior authorisation (which was tantamount to closure) for banks.11 No such powers had been available before that date. Meanwhile other financial intermediaries, such as building societies or insurance companies, remained (lightly) regulated by various government departments (apart from quite restrictive constraints on the assets that some of these non-bank financial intermediaries could hold and activities in which they could engage). The fringe bank crisis was almost entirely domestic, i.e. confined to British headquartered companies. Meanwhile, however, the onwards march of liberalisation, involving the removal of direct controls, notably exchange controls in 1979, and of information technology were leading to a growing internationalisation of financial business. For a variety of reasons, mostly relating to the innovation of the Eurodollar and Euromarkets, London regained its role as an international financial centre in the 1960s, and thus international monetary problems became of particular importance to the Bank, which took a leading role in such issues from the 1970s onwards. The Herstatt failure in June 1974 was, perhaps, the first with major international implications (though the Franklin National failure in the USA in 1973 was the first to shatter the calm). The German authorities had shut this bank after financial markets had closed in Germany, but before foreign-exchange transactions, in which Herstatt had participated in quite large amounts, had been settled in New York, causing a degree of chaos there. Growing internationalisation, in this and many other respects, now led to a need for a common meeting place to discuss 11

There were still a number of odd quirks in the Act, notably a division of deposit-taking institutions into two tiers, of which the first represented first-tier banks, whereas the second could only describe themselves as licensed deposit-takers. This (reputational) distinction was not widely understood, and was subsequently abandoned. It was an administrative nightmare and was leading to perverse results as banks took on business they were unsuited for to qualify for recognised bank status.

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such supervisory and regulatory issues. Central bankers had met regularly at the headquarters of the Bank for International Settlements (BIS) in Basel for many years. It was, therefore, a logical step for supervisory officials also to come together at Basel on regular occasions to discuss matters of common interest. Thus was born (in 1974), as a result of an initiative from Gordon Richardson, the Basel Committee on Banking Regulation and Supervisory Practices. For the first fifteen years of its existence, it was chaired by the participant from the Bank of England, and was usually known by his name; thus the Blunden Committee (1974–7) gave way in due course to the Cooke Committee (1977–88). The failures of Franklin National and Herstatt prompted the First Basel Concordat which allocated responsibility for supervising internationally active banks to home and host authorities. The next important milestone was the collapse of Banco Ambrosiano in 1981, an Italian bank with supposed connections both to the Vatican and to (right-wing) subversive groups, but the important feature – from a regulatory viewpoint – was its structure, with a holding company in Luxembourg, and two main subsidiaries, one in Italy and one, dealing in international business, headquartered in Panama. It was not supervised in Luxembourg, because it did no banking business there, and supervisors in Rome and in Panama could only see part of the overall picture, a picture that the bank could retouch to taste by transfers of assets/liabilities between its two parts. The need was to establish consolidated supervision at the headquarters of any international banking business. This required international agreement, monitoring and potential sanctions; these latter were that any bank that did not submit to consolidated supervision might be excluded from operation in the main international financial markets, notably New York, London and Tokyo. This Committee was in no position to pass binding laws. The Basel Concordat and other Basel Committee initiatives were statements of principle to which those participating were prepared to be bound; some countries did pass legislation as the only way to give them effect, notably via EEC directives. But they had no legal standing in themselves. Indeed there is no real international law in this field.12 However the committee can recommend measures, and sanction banks failing to adopt them by excluding them from its members’ markets. This amounts to ‘soft law’. So by the mid 1970s, a need was perceived for banking supervision both at the domestic and, via consolidation, at the international level. 12

R. M. Lastra, Central Banking and Banking Regulation (Financial Markets Group, London School of Economics, 1996); J. Norton, ‘The EC banking directives and international banking regulation’, in R. Cranston (ed.), The Single Market and the Law of Banking (1991).

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The purpose of these initiatives was to clarify where responsibility lay for the supervision of international banks, to prevent fragile, and possibly fraudulent, banking leading to avoidable failures and potential systemic crises. But what was the analytical and conceptual basis on which financial regulation and subsequent supervision was to be applied? Initially there was little, or no, formal analysis. Apart from a concern to mandate sufficient liquidity to deter runs (an approach with its roots in the nineteenth century), the main approach seemed to be to examine the procedures of those banks commonly regarded as following ‘best practice’, and then encouraging all other banks to do the same. Some time in the 1970s and early 1980s, however, attention began to swing from liquidity to capital, as being the touchstone for ensuring safe and prudential banking practices. It would be a nice exercise in the history of economic thought to explore that process. In a sense it is obvious that a bank (with limited liability) whose capital (and franchise value) had been eroded to a low level would be much more prepared to gamble for resurrection than a better capitalised bank. Also, the greater the capital, the greater the loss that could be absorbed. On those simple insights a huge regulatory edifice has subsequently been erected. An initial impetus to the case for strengthening bank capital was the pressure on the balance sheets of ‘good’ banks (prominently including the major American banks and the British clearers) from the recycling of oil surpluses from the Middle East back to New York and London. This concern, based on the very rapid growth in the dollar liabilities of these banks, surfaced quite strongly as early as late 1974. Much, perhaps most, of the early concern about capital adequacy occurred in the USA, especially in the Office of the Comptroller of the Currency. A further spur to that process was provided by the less-developed countries’ crisis in 1982. The need to recycle petro-dollars from oil-exporting to oil importing countries in the 1970s had encouraged a major growth in international bank lending, and successfully so during this inflationary decade, with its associated low, often negative, real interest rates. But when Volcker changed monetary policy in October 1979, real interest rates rose sharply and commodity prices slumped. Mexico, Argentina and Brazil then found themselves unable to refinance their borrowing in 1982. If the loans to these countries had been marked to market, some, perhaps a majority, of the major money-centre international banks in the world, and especially those in New York, would have been (technically) insolvent, and the world’s financial system would have faced a major crisis. It was, almost certainly, the most dangerous financial occasion of the second half of the twentieth century, much worse than October 1987 or August to October 1998.

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One lesson that the world’s central bankers took from that episode was that bank capital ratios had been diminishing (under the pressure of competition), were insufficient and needed to be rebuilt. Competition was now, however, international. In particular Japanese banks, sitting on large capital gains from their equity portfolios, and state-guaranteed banks (notably in France) could undercut interest rates by trading on the basis of lower basic (tier 1) capital. The need was to get international agreement to establish a common minimum level of capital adequacy ratios. The Basel Committee worked to this end from 1982 till 1988 under the leadership of Peter Cooke, while Quinn from the Bank of England, and Taylor and subsequently Corrigan from the New York Federal Reserve Bank maintained close bilateral relationships between the UK and USA. The eventual result of the inevitable haggling over detail13 was the 1988 Basel Accord. One key feature of this was an acceptance of the reasonable view that the amount of capital that a bank required should be weighted by the relative riskiness of its assets. That, however, took the Basel Committee down the complex route (is it a dead-end?) of trying to measure such relative riskiness. The 1988 accord did so in a broad-brush manner and hence not only laid itself open to arbitrage, but also artificially encouraged some continuing market trends, e.g. securitisation. Basel II is trying to repair the shortcomings of its predecessor (Basel I), but many fear that Basel II will similarly introduce unfortunate side-effects (e.g. enhanced pro-cyclicality and excessive prescription). Despite the growing number of bank supervisors, and notable success in reversing prior declines in capital ratios, the history of banking during the subsequent decades in Britain was spotted by occasional bank failures. Unlike the fringe bank crisis none was, or was allowed to become, systemic, nor did individual depositors lose any money, except in the case of Bank of Credit and Commerce International (BCCI), and even in that case the deposit protection scheme provided some relief. The JohnsonMatthey failure (in 1984), BCCI (in 1991) and Barings (in 1995) were all isolated cases of bad, in some respects fraudulent, banking. In the adverse macroeconomic context of 1990–2, with high interest rates, a weakening economy and a collapsing housing/property market, and in the febrile market conditions of autumn 1998, the British banking and financial system remained robust. In so far as the main purpose of banking supervision 13

Much of the controversy was over the question of what should count as capital in banks. The Japanese inclusion of unrealised equity gains was debated heatedly. Much ingenuity and time was spent by the investment banks in devising ever more complex instruments purporting to be acceptable capital in the balance sheets of banks.

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is to prevent systemic problems (and/or to protect depositors), then the Bank performed effectively. Unfortunately the adoption of hands-on supervision will be interpreted by public, politicians and press as involving a responsibility for preventing any failure. It is arguable that the objective of enforcing good behaviour on all individual bank managements, especially when they have consciously decided to behave fraudulently (BCCI) or to avert their eyes, and fail to apply adequate internal control mechanisms, to investigate inexplicably good trading results in distant countries (Barings), could only be prevented by such nannying, invasive supervision that the private banking system would be smothered under public sector intervention. Nevertheless, despite all protestations that supervision neither can, nor should, prevent all (bank) failures, that was the way that it was publicly perceived. Meanwhile, the Bank’s role as lender of last resort was becoming subject to change, and some further attenuation. In the case of JohnsonMatthey Bankers (JMB), a small bank, which failed in 1984 after using up much of its capital in bad loans to two West African traders, the Bank first tried to get the parent conglomerate to rescue it. When that did not work, the Bank turned to its usual stratagem of encouraging the commercial banks in London to ‘volunteer’ to contribute to support the bank in trouble. But now the large, incoming US banks refused to play, citing legal problems in the USA if they were perceived as using shareholder funds for extraneous purposes. If the US banks would not contribute to the Bank’s begging bowl, it was only amour propre for the other foreign banks to refuse too. Eventually the British clearing banks acceded to the Bank’s requests, but only grudgingly and, it was clear, ‘for the last time’. Moreover, at one juncture in this episode the Bank felt that it needed to go ahead and place a sizeable deposit (£100 million) with JMB, and did so on its own accord, only bringing Lawson, the Chancellor of the Exchequer, and the Treasury into the loop at a later stage, by which time the commitment had been given against the time constraints of the market opening in Asia. Time constraint excuses, or not, the Chancellor was furious.14 What became obvious after this event was that any funds risked by the Bank itself during a rescue were in a very real sense ‘public moneys’, ultimately owed to the taxpayer. From this date onwards no significant lender-of-last-resort commitment could be contemplated without the prior consent of the Chancellor (and Treasury), who would in turn have to answer to Parliament. The old image of the Bank able

14

N. Lawson, The View from No. 11 (1992), ch. 32.

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to dispose of unlimited lender-of-last-resort funds, as a deus ex machina, always invalid, was now even further from the truth.15 Each failure led to recriminations, the establishment (in two cases) of a formal inquiry and, after JMB, a new Banking Supervision Act in 1987. Thus by the mid 1990s the conduct by the Bank of its direct supervisory duties was not assessed by the general public or the politicians as notably successful. Meanwhile, the conduct of regulation and supervision for the financial system elsewhere, e.g. in securities’ business, by the Securities and Investments Board and its various subsidiary Self Regulatory Organizations (SROs), was assessed as even worse, for example for failing to spot and to end the pension mis-selling scandal. The Labour party in opposition, prior to its election as government in 1997, had made it clear that it would introduce an Act to put financial regulation on to a firmer statutory basis and to get rid both of the SROs (and of the associated concept of practitioner-based supervision), amalgamating all the SROs into a single, hopefully more efficient, body; but it had made no mention of incorporating banking supervision into what then became a unified and comprehensive Financial Services Authority (FSA). So when the party did so, at the start of its period in office (May 1997), it came as something of a shock. Since this latter step had not been publicly debated, it not only came as rather a shock, but it is also not yet possible to discern all the arguments that led to this policy decision. Amongst them, however, were the facts that the demarcation lines between banking, securities business, and insurance had become blurred, so that supervisory unification should enhance efficiency and commonality of treatment; and that the conduct of banking supervision had not enhanced the reputation of the Bank. What was less clear was whether removing supervision from the Bank was in some sense a quid pro quo for giving it operational independence in setting interest rates, as discussed below; perhaps on the grounds that a Bank with too many functions could be too much of a power centre within the democratic system, or could, in theory, become subject to conflicts of interest. Be that as it may, the role of lender of last resort could hardly also be transferred to the FSA.16 Moreover, responsibility for the (smooth) 15

16

Neither BCCI nor Barings was a standard retail bank; furthermore any rescue of BCCI depositors would have generated much moral hazard, given its reputation and need to offer higher interest rates to depositors. Moreover deposit insurance, introduced as part of the 1979 Banking Act, partially protected the ‘widows and orphans’. So the Bank eschewed any commitment of its own funds in these two cases. See C. A. E. Goodhart, ‘The organisational structure of banking supervision’, Financial Markets Group, Special Paper no. 127 (2000), republished in Economic Notes 31 (2000), 1–32.

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operation of the payments system and the main financial markets remained with the Bank. So it retained responsibility for ‘financial stability’, though exactly what that meant remains somewhat fuzzy. In practice, it tends to mean that the Bank shares responsibility for regulatory changes, for example through the Basel Committee and the various European fora with the FSA, and still tends to lead on international monetary issues in discussion in the various G groups (for example G7, G20, etc.) and with the International Monetary Fund (IMF) and other international financial institutions. Meanwhile urgent domestic financial issues, for example the prevention and resolution of crises, are handled through a tripartite standing committee, involving the FSA, Bank and Treasury. Moreover, the chairman of the FSA and the Deputy Governor of the Bank responsible for financial stability are members of each other’s respective Boards as a further means of getting the exchanges of information channelled efficiently. How well all this will work in a crisis remains to be seen, since the economic and financial conjuncture since 1997 has remained comparatively calm and stable. The conduct of monetary policy In the 1960s there were three main instruments of monetary policy, i.e. direct quantitative controls on bank private sector lending; interest rates; and variations in the required down-payment on hire-purchase,17 plus another instrument, debt management, which has both monetary and fiscal aspects; this latter is discussed separately below. Whether variations in down-payments on hire-purchase should also be seen as a fiscal, or a monetary, instrument remains moot. Such down-payment conditions form part of the family of margin, or loan to value, requirements that are, from time to time, advocated on either prudential or monetary policy grounds. After fairly extensive use in the 1960s, the variation of such requirements has rather fallen out of favour for either purpose, perhaps unduly so, and will not be further discussed here. As noted earlier, the Bank, which was the body charged with the task of operating, monitoring, and trying to enforce the quantitative credit controls, was more alive to their shortcomings and limitations than the Treasury. It campaigned against their continuing use, and eventually won that battle in 1971 with the publication of ‘Competition and credit control’,18 seen in the Bank as a real landmark. Unfortunately it coincided 17

18

Monetary base control (MBC) was never used as an instrument. For a note of record on the discussions about MBC at the start of the 1980s, see C. A. E. Goodhart, ‘The conduct of monetary policy’, Economic Journal 99 (1989), 293–346. ‘Competition and credit control’, BEQB 11 (1971), 189–93.

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with the occurrence of a worldwide boom in 1972–3. Whereas competition in credit expansion and (wholesale) fund attraction, e.g. via the new techniques of issuing Certificates of Deposits (CDs), proceeded apace, the application of credit control through the market by means of interestrate variation was not undertaken sufficiently aggressively to check the asset price-credit boom, to offset the concurrent expansionary fiscal policy, or to deter the subsequent oil-inflation shock. Given the change in the regime, the scale of the shocks at the outset of the 1970s, and the history of reluctance to use interest-rate variations to achieve either internal or external price stability, this was, with hindsight, perhaps not so surprising. But it was detrimental not only to the economy but also to moves towards a more effective regime for the conduct of monetary policy. In the event Heath, the Prime Minister, instructed the Bank in late autumn 1973 to constrain credit expansion/monetary growth, but without any further increase in interest rates. Bereft of market instruments of control, this diktat enforced a return to direct credit control mechanisms. The Bank had, however, recently got rid of direct restrictions on bank lending, amidst considerable self-congratulation, and a return to the status quo ante would have been a real blow to its pride. Hence we devised ‘the corset’, which imposed ascending penalties on the growth of interest-bearing eligible liabilities. By making it marginal, and focusing on the liability side of the balance sheet, it deflected attention from the reality that it acted, in practice, as a penalty on the expansion of bank lending to the private sector. Apart from two brief periods in the middle of the 1970s (February 1975 to November 1976, and then again from August 1977 to June 1978), in both cases when the economy and monetary growth became so depressed that the corset was no longer binding and was removed, it was in place thereafter until its final abolition in June 1980. Like all such mechanisms of direct control, the corset was subject to avoidance (the bill leak for example19 ), and how much of the slower growth of the monetary aggregates, especially in its second application at the end of the 1970s, was just cosmetic was very hard to assess at the time. Let us turn next to the third, and key, instrument of monetary policy, the Bank’s control over interest rates, achieved by setting the moneymarket rate at which it will allow the commercial banks access to the high-powered money base. There are two separable aspects to the 19

Commercial bills were marketable. Hence banks could induce their larger depositors, via minor changes in relative interest rates, to switch out of deposits into holding bills directly, a form of dis-intermediation that reduced both bank lending to the private sector, deposits and interest-bearing eligible liabilities, and the constraint of the ‘corset’ simultaneously.

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interest-rate decision, first the policy regime that determines the framework for such decisions, and second the political-economy modalities of such a decision-making process. The choice of policy regime is naturally, and properly, a decision for government to make, though the Bank could, and did, develop and express views on the appropriate regime. At the start of my period, the late 1960s, the Bretton Woods pegged exchange-rate system constrained monetary policy, especially in the years 1968–9 when Britain needed to borrow from the IMF (in support of its 1967 devaluation), and was subject to Fund conditionality (notably domestic-credit expansion limits)20 . Under the Bretton Woods system interest rates were raised to protect the exchange rate, usually when the trade deficit worsened, and lowered to support investment and growth when the external constraint was removed. The resulting ‘stop-go’ outcome was widely held to be a brake on Britain’s growth, and many (much more so outside the Bank than inside) saw this as a reason to welcome the collapse of Bretton Woods in the early 1970s. This collapse did remove that apparent constraint, and there were certainly some in both main political parties who saw this as an opportunity to make a dash for a higher rate of growth. The resulting rapid expansion of 1972–3 was, however, soon brought to an end by inflation. The fashionable academic nostrum of the 1970s was monetary targetry. The Labour government that had been elected in 1974 was unenthusiastic, and some elements were set against it. The Bank was doubtful whether velocity would be stable enough (given its experiences in 1973) to support a rigid monetary target, but did want some anchor for accountability and control purposes – as is shown in Governor Richardson’s 1978 ‘Mais Lecture’.21 Moreover the experience of other countries, e.g. Germany and Canada, suggested that a discretionary, or pragmatic, application of monetary targets could be beneficial. In the context of the balance-ofpayments crisis in 1976, and resulting IMF pressure, the Labour government did introduce a version of monetary targetry (with the support and encouragement of the Bank), but once the balance of payments, the economy and the gilts market all recovered in 1997, it ceased to represent much of a constraint on policy. Meanwhile the Conservative opposition, under the influence of Keith Joseph, had come to interpret the inflation of 1973–4 not only in terms of a purely monetary causation, but also in terms of one key monetary 20 21

‘Domestic credit expansion’, BEQB 9 (1969), 363–82. G. W. H. Richardson, ‘Reflections on the conduct of monetary policy’, the first Mais Lecture, published in BEQB 18 (1978), 31–7.

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aggregate, £M3, a broad monetary aggregate.22 When it was re-elected in 1979, the incoming Conservative government, under Thatcher and Howe, made a target for £M3 the centre-piece of its medium term financial strategy. The Bank argued, mostly in private, that this placed far too much weight on a suspect and unreliable economic relationship, the demand for money function23 and the predictability of velocity. One problem for the Bank was that the predictable breakdown of this relationship could be (partly) ascribed to the Bank’s own failings. Exchange control had been abolished in 1979, and once it was gone disintermediation around the corset would become all too easy, so it too was ended in June 1980. Nobody, however, knew by how much it had distorted the monetary (and credit) data. We, in the Bank, had made a guess of slightly over 2 per cent. When the data came in for the month following the abolition, the statistic rose by over 5 per cent, blowing a huge hole through the monetary target. Thatcher was furious. Meanwhile, however, fiscal policy was kept tight, the exchange rate rocketed (partly under the influence of North Sea oil), interest rates remained high, and inflation dropped as sharply as anyone could have wanted. For several years, some, especially in the Treasury, waited with bated breath to see if the monetary ‘overhang’ would feed through into greater inflation. (For reasons partly related to financial innovation, there was a major kink in the trend growth of M3 velocity just about then.) Then some of Thatcher’s monetarist advisers, notably Niehans in an influential, but unpublished, paper24 argued that Britain had been concentrating on the ‘wrong’ aggregate, and if we only had looked at the correct, narrower one we would have appreciated that British monetary policy was too tight, not too loose. So, with ever-decreasing enthusiasm, the government moved to a multiplicity of monetary aggregate targets, with broad money (£M3) partly restrained by the tactic of over-funding the government’s fiscal deficit. The idea was that debt sales to non-banks would be paid by the buyers reducing their bank deposits. The counter-argument was that, in order to encourage this, yields on longer-dated gilts would have to rise (relative 22

23 24

The greater emphasis on broad, than on narrow, money dated back to 1968 when the IMF imposed a domestic credit expansion limit on Britain. This fitted, in the British context, more easily into a broad money framework. Moreover, the surge in £M3 in 1972–3 clearly led the sharp rise in inflation in 1974–5, whereas any such linkage between M1 or M0 and subsequent inflation was much harder to perceive. The distinction between £M3 and M3 was largely technical, and needs no discussion here. ‘The demand for money in the United Kingdom: experience since 1971’, BEQB 14 (1974), 284–305 J. Niehans, ‘The appreciation of sterling: causes, effects, policies’, Money Study Group Discussion Paper, mimeo (February 1981).

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to short rates). This would deter corporate debt issues and encourage private-sector borrowing from banks; hence bank lending to the private sector would rise, offsetting some (unknown fraction) of the direct effect of the debt sales on M3. Thus, it was argued (but without much empirical evidence either way), that over-funding was quasi-cosmetic. Anyhow by now both the Treasury and the Chancellor were becoming sceptical of the (causal) effects of such a change in broad money on nominal incomes, at least in the short to medium term, while in the longer-run trends in velocity had changed (around 1979–80), and could well change again. Attempts by monetarists, such as Allan Meltzer,25 to advocate more flexible forms of targetry, to take account of such unpredictable shifts in trends, came far too late to hold back the growing tide of scepticism about monetary targetry, especially when achieved by a tactic such as ‘over-funding’. In all this, the Bank played a relatively small role; it was in Thatcher’s bad books; Governor Richardson was perceived as not being ‘one of us’, while his successor Leigh-Pemberton made no claim to being a monetary expert. Meanwhile the Treasury was run during most of these years by Nigel Lawson who was supremely confident in his own monetary (and fiscal) expertise. Eventually in 1985–6 Lawson became thoroughly disenchanted with the whole exercise of monetary targeting, and the monetary aggregates, once the cynosure of policy and attention, became relegated to the role of supplementary data (if that). Looking for another anchor for monetary policy, Lawson turned back to an external peg, notably the deutschmark. Thatcher, however, was opposed to joining the Exchange Rate Mechanism (ERM), until bullied into it in October 1990. So Lawson (unofficially and without any public statement or, at least initially, even a private warning to the Prime Minister26 ) just followed the policy of shadowing the deutschmark, until his disagreement with Thatcher. Political pressures to join the ERM continued, and we joined finally, when John Major was Chancellor in October 1990. Again the Bank played very little role, its views were anyhow mixed; it recognised the risks of a pegged, but adjustable, exchange rate; on the other hand there was a need for a nominal anchor for policy, and Britain’s position, of being a member of the European Monetary System (EMS) – but not of the ERM – was widely felt to be anomalous. 25

26

A. Meltzer, ‘Limits of short-run stabilization policy’, Economic Inquiry 25 (1987), 1–13; A. Meltzer and K. Brunner, Money and the Economy. Issues in Monetary Analysis. The 1987 Raffaele Mattioli Lectures (Cambridge, 1993), ch. 4. See M. Thatcher, The Downing Street Years (1993), pp. 699–702.

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Exit from the ERM in 1992 left Britain without a monetary regime. Both monetary targetry and an external peg had been tried, and had been seen to fail. After a pause for reflection, and no doubt discussion, the next move was to a regime of direct inflation targeting. This had been adopted earlier by New Zealand (in 1989) and Canada (1991), and was advocated by many academics and commentators. The Bank surely approved. One problem, however, was that the government in Britain by now had a credibility problem. For years, perhaps decades, government ministers had been claiming that their policies would defeat inflation, whereas success had been at most partial. Why should the public believe them any more just because they were now trying to target inflation directly? This brings us back from the underlying monetary regime to the process of how interest rates are set, and by whom. Under the gold standard, before 1914, the Bank set interest rates directly, though usually informing the Chancellor of the Exchequer beforehand. During the First World War responsibility for all aspects of policy, including interest rates, effectively passed to the government, with consultation, of course, in the monetary sphere with the Bank. In the interwar period, the initiative for proposing changes shifted back to the Bank, but with the important qualification that no change could be undertaken without the Chancellor’s agreement.27 Exigencies during the Second World War and the nationalisation of the Bank in 1946 shifted responsibility further towards the government. The Bank could, and did, advise and propose, but the Chancellor was now treated as the absolute arbiter of the decision to set interest rates. He could, and did, overrule the Bank’s advice, and set interest rates as he saw fit, subject to maintaining the support of Prime Minister and Parliament. The Chancellor had his own staff of economists and advisers, of course, and they provided him with forecasts and projections that formed the quantitative base for policy decisions, on both monetary and fiscal policies. The Bank increasingly recruited economists into its Economic Intelligence Department, and they also produced (internal) forecasts. These were not then (i.e. in the 1970s and 1980s) allowed to be published, however, partly because it was argued, no doubt correctly, that all that outside commentators and journalists would explore would be the (overblown) differences between the two forecasts. Moreover, having both monetary and fiscal policies determined by one decision-maker (i.e. the Chancellor) 27

The balance of power in setting interest rates moved towards the Bank in the run-up to, and restoration of, the gold standard, 1925–1931, and back to the Treasury and the Chancellor after its abandonment: see S. Howson, Domestic Monetary Management in Britain 1919–38 (Cambridge, 1975), p. 95; E. T. Nevin, The Mechanism of Cheap Money. A Study of British Monetary Policy 1931–39 (Cardiff, 1955).

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on one set of forecasts (i.e. the Treasury’s) was said to enhance the proper coordination of the various arms of policy.28 Of course, the Chancellor was apprised of, and could in principle have adopted, the Bank’s forecast in place of the Treasury’s. In practice, given the Chancellor’s close working relationships with his own advisers and economists, this virtually never happened, though the Treasury could be persuaded by professional arguments on occasion to shade their own views; there was a fair amount of academic interchange at working level. That said, the Bank’s economists were largely neutered by the inevitable tendency of the Chancellor to work with the Treasury projections, so much so that the Bank used in the 1970s to run simulations, etc., on the basis of the Treasury’s forecasting model (as well as on its own), while the Treasury paid little attention to the Bank’s work in this field. Under these circumstances in policy discussions with the Chancellor the Bank used to play to its strengths, which was a greater ‘feel’ for market reactions and responses. The Bank would often seek to get its way by claiming that whatever the, inherently uncertain, forecasts might suggest, markets would, in their view, react in this, or that, way to a proposed change of interest rates. Given this advisory niche, the Bank, not surprisingly, almost always reacted sharply and negatively to suggestions that the Treasury develop its own direct contacts with market participants. From the mid 1970s onwards there was a formal monthly mechanism for reviewing the conjuncture and policy on interest rates, with a Treasury–Bank meeting of officials, followed by a Chancellor–Governor meeting. But such meetings were not publicised and rarely led to a decision to change interest rates immediately. Rather there was a tendency to decide on a bias, with any subsequent move conditional on further information flows. Moreover, interest-rate changes could be, and were, perhaps more often than not, made in response to immediate events, usually then following a quick private discussion between Chancellor and Governor (or Deputy Governor). What followed from this was that the extent of the Bank’s influence over monetary policy, prior to 1993, depended greatly on the particularity of the personal chemistry between Chancellor and Governor. When the relationship was good, and the Chancellor felt that the Governor’s advice added value, then, as with Healey and Richardson, the Bank did play a role. When the Chancellor felt that he would gain little from the Bank’s advice, as in the case of Lawson, the Bank had less influence. This process for changing interest rates had continued, mutatis mutandis, pretty much unchanged between the 1950s and 1993. But then it 28

This argument was reinforced by the Radcliffe Committee Report, esp. ch. 2.

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changed. After the perceived disaster of the ERM exit, Lamont as Chancellor of the Exchequer faced the problem that his claim to vary interest rates so as to control inflation just would not be believed. To restore credibility he took a number of steps. First, he allowed, indeed encouraged, the Bank to publish its own forecast of the likely outcomes for output and inflation, conditional on an assumption of unchanged interest rates. This latter was necessary because the Bank could not be seen to pre-empt what remained the Chancellor’s decision. The Bank was, however, perceived as sufficiently expert, independent from government, and concerned with inflation that its forecasts could be taken as a credible guide whether interest rates needed to change (and of course in what direction) to hit the inflation target. Next, and subsequently, the next Chancellor, Clarke, not only announced the event of the regular Chancellor (plus Treasury officials)– Bank meeting on interest rates, and published the minutes of the meeting, but he also allowed the Governor’s opening statement to be read into these minutes verbatim and without editing. Thus the public was made directly aware of the Governor’s (and the Bank’s) own views, and could identify exactly when the Chancellor decided differently. Third, and least important, when a decision to change interest rates was made, the Bank was given control over the exact timing of its implementation. These innovations, taken together, meant that the Bank’s views and advice on the interest-rate decision, which had previously been kept covert and private, now were made transparent. As such, they were, surely, more influential. Even so, a self-confident Chancellor, such as Clarke, was willing to back his own (and the Treasury’s) judgement, and there were several cases of disagreement, but at least they, and the relevant arguments on either side, were now in the public domain.29 The Conservative government was, therefore, willing to let the Bank’s views, forecasts, etc., be heard in public. Nevertheless it kept the final decision under the political control of the Chancellor himself. While both Lawson and Lamont had considered the idea of giving operational independence to the Bank to set interest rates in a favourable light, their respective Prime Ministers, Thatcher and Major, both balked at the idea of transferring this power out of political hands. Indeed, the fact that these Chancellors had considered this at all was only revealed in their respective resignation speeches, perhaps an indication of the perceived political sensitivity of the matter. 29

D. Cobham, The Making of Monetary Policy in the United Kingdom 1975–2000 (Chichester, 2002).

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When in opposition, the shadow Chancellor, Gordon Brown, had indicated that he would want experience of the quality of the Bank’s advice for some quite long period before any grant of operational independence to the Bank. So it was a surprise when he granted this within the first week of taking office. This major change in the Bank’s role is so well within recent memory that it is not really now necessary to describe further how that has worked (successfully in practice). In any case there will be many such analyses available in coming years. Perhaps the only end-note that should be added is that two obstacles to such operational independence turned out in the event to be nugatory. First, might there be embarrassment from the publication of two separate forecasts? Here the Treasury assumes that the Bank will achieve its inflation objective, and the Bank takes the Treasury’s announced fiscal policy measures as given. There are one, or two, points of minor difficulty (e.g. if a fiscal policy change is confidently expected, but not yet announced), but the two separate forecasts have co-existed with minimal problems, so far at least. Second, the argument that monetary and fiscal policies needed to be coordinated was, at least in these circumstances, found to be invalid, so long as the Chancellor both sets the inflation target and also accepts the Bank’s expertise in setting interest rates to achieve that. Thereby the Treasury knows that any (fiscal) measure that influences forecast inflation will lead to a reaction from the Bank (to stabilise inflation at the target rate). So the Treasury can internalise the Bank’s reaction function (which functional form the politicians in effect decreed in advance), and hence coordinate policies as well as ever before. Indeed, monetary policy has now become much more transparent and accountable, to both Parliament and people, than in the past. The Bank’s domestic market operations (a)

The gilt market

Britain emerged from the Second World War with a hugely inflated stock of outstanding government debt, as it had after the Napoleonic war and the First World War. This amounted to some 186 per cent of GDP in 1945, and even by 1965 still stood at 106 per cent of GDP.30 In the sixteen years from 1964 to 1979 the annual redemptions of marketable government debt averaged £1,370 million, some 6.1 per cent 30

C. A. E. Goodhart, ‘Monetary policy and debt management in the United Kingdom. Some historical viewpoints’, in K. A. Chrystal (ed.), Government Debt Structure and Monetary Conditions (1999), pp. 43–97.

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of the broad money stock M3, and slightly more than 25 per cent of the monetary base on average in these years. One of the nightmares of the Bank was that there would be a ‘buyer’s strike’ in the gilt market, and that there would be a ‘flood’ of cash pouring into the monetary system from these maturities. The term ‘flood’ was, indeed, coined by Chancellor Thorneycroft, and then by Tew,31 to describe just this situation. So the primary task of debt management was to limit monetary expansion (and excessive ‘liquidity’); an important secondary objective was to minimise the cost of the debt. Moreover, the gilts market was perceived by the Bank as being skittish and dependent on expectations, which were often, locally at least, extrapolative. Thus if prices in the gilts market were falling, say as a result of worsening inflationary expectations, it was thought to be difficult and dangerous to press gilt sales on such a market, in case investors became dismayed and dispirited. Instead the market should be allowed to find a bottom, perhaps aided by policy measures elsewhere, for example a rise in short-term rates (i.e. Bank rate) or a fiscal tightening. Then, once the market began to rise again under its own steam, the government broker could resume unloading large volumes of debt sales on such a rising market. The view that expectations were, locally, often extrapolative, and that sales were a positive function of the rate of change of prices (not just a negative function of the level of prices), did not go unchallenged. Somewhat naturally both economists and Treasury officials tended towards some scepticism. A detailed study of the Bank’s (and Treasury’s) views on the working of the gilts market was a major element of the Radcliffe Committee Report.32 Nevertheless the Bank stuck to its guns, and, given the sheer scale of the national debt, its management of that debt was, perhaps, the most sensitive and important aspect of monetary and fiscal policies which, at the start of our history, was primarily under the control of the Bank (though this had not been so earlier in the Dalton era in the late 1940s). The perceived failings of that experiment perhaps reinforced the Bank’s influence later on. Both the tactics and strategy of debt management were devised by the Bank’s official(s) at the gilt-edged desk, in conjunction with the government broker, who operated in the market on behalf of the Bank, but was the senior partner of a private firm, Mullens and Company. These two, together with the chief cashier and the executive director in charge 31

32

P. Thorneycroft, ‘Policy in practice’, in Not Unanimous (1960), pp. 1–14, and B. Tew, ‘Monetary policy’, in F. Blackaby (ed.), British Economic Policy 1960–1974 (Cambridge, 1978), p. 229. See also Goodhart, ‘Monetary policy and debt management’.

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of domestic finance, effectively decided on policy initiatives in this field. They needed to consult, and had to get agreement from, both the Governors in the Bank and senior Treasury officials and the Chancellor (and the Financial Secretary). Such, however, was the extent of mystique, and/or market awareness, that was seen as requisite for success in this field that it was extremely rare for the Bank to fail to have its proposals adopted. Indeed, the extent of influence achieved by the Bank through its specialised abilities in debt management spread over into other areas of macro-policy operations as well. The question of how the gilt market might, or might not, react was often a focal part of the Bank’s repertoire when advising on questions of whether (and by how much) to adjust short-term interest rates (Bank rate) and on the scale of the budget deficit. So, at the start of this period, debt management was a key feature of the Bank’s overall role and importance. Over time, however, a combination of responsible fiscal policies (on occasions under pressure from the IMF) and unforeseen inflation, especially in the 1970s, eroded the relative scale of the debt (relative to GDP, history, and increasingly to other countries as well). Moreover innovations in the range of debt instruments, for example convertibles, zero coupons, indexed bonds, and techniques of issue, notably auctions (which had for many years been resisted by the Bank, though, to be fair, these were technically impossible prior to the change in market structure in 1986 as part of ‘Big Bang’ reform of UK capital markets33 ), enhanced the ability of the authorities (Bank plus Treasury) to sell debt even under supposedly adverse conditions. There was a further flourish of debt management in the mid 1980s when the Chancellor and the Bank relied on the technique of over-funding the fiscal deficit (and the accruing maturities), to try to hold down monetary growth in the face of a sharp expansion in bank lending to the private sector. This is not the place to go into an assessment of the merits, or otherwise, of that policy, a contentious issue already briefly discussed. Be that as it may, while it lasted it put a premium on the marketing skills of the Bank. The policy of overfunding was brought to an abrupt end by the Chancellor, Lawson, in 1985.34 With the monetary regime between 1987 and 1992 increasingly being based on an external anchor, debt management policy ceased to be used aggressively to lessen monetary growth; instead the stated objective was to achieve a ‘full fund’, so that any monetary effects of a deficit would be sterilised by net debt sales. By 1990 the debt 33 34

C. A. E. Goodhart, ‘The economics of “Big Bang” ’, Midland Bank Review (1987), pp. 6–15. Lawson, View from No. 11, ch. 36, esp. appendix pp. 458–60.

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ratio had fallen further to 47 per cent of GDP, and, despite a resurgence in the size of the fiscal deficit in the years 1992–5, the exercise of debt management was becoming less of a key pressure point, and somewhat more of a routine exercise. Increasingly debt was being sold at auctions where the date and volume to be sold were announced well in advance, in order to allow the market full prior preparation. Then in 1997, as part of the sweeping reorganisation of the Bank, and of monetary policy operations more widely, Brown, the new Labour Chancellor, removed debt-management operations from the Bank altogether, and placed them in the hands of a separate, Treasury-controlled, debt-management institution, which was legally part of the Treasury – an ‘executive agency’ of the Treasury. Against the background of the original context at the start of my period, this would have represented a truly revolutionary step. But the steady reduction in the scale of the national debt, relative to GDP, and the changing nature of the market (with an increasing semi-captive demand for long-term debt from pension funds, etc.) had meant that its management had slowly evolved from a crucial, but arcane, art into a more routine process. (b)

The money market

The Bank has always made its desired short-term interest rate effective by setting the rate at which it would make cash, high-powered money, available to the banking system. It could, under any plausible circumstance, make the banking system, on average, short of cash by selling a larger amount of short-term debt, usually through an auction tender of Treasury bills, than was forecast to be necessary to mop up the predicted amount of cash becoming available to the banks, for example from the fiscal deficit, cash flows to/from the public, gilt sales/maturities, etc., over the next week. Even if the Bank got its forecast occasionally wrong, so that there was excess cash for a day or so, with overnight rates falling close to zero, everyone knew that within a day, or two, the Bank could easily re-establish control. So period rates, e.g. longer than one week, depended on predictions of the authorities’ future policy decisions, not on the wayward, and sometimes sizeable, fluctuations in overnight rates. Such money-market control is really quite simple, and has remained essentially unaltered over many decades. Nevertheless several of the technical market details have seen considerable change. For example, at the start of the period short-term cash flows ran largely through a small group of highly levered intermediaries, the discount houses. For historical reasons going back to the nineteenth century, the Bank did not want to lend directly to commercial banks (except in crisis lender-of-last-resort

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operations). So it encouraged a regime where the commercial banks lent to the discount houses, and the Bank then dealt with those houses. The houses were required to make markets in overnight funds. So if the clearing banks were short of cash, they would withdraw funds from the discount market, forcing the houses to borrow from the Bank. The houses kept a large book of bills (both commercial and Treasury bills) and short bonds, financed largely by very short-term, e.g. overnight, funds from the commercial banks. So the discount market was subject to considerable interest rate risk (though it had, at least in the later years, some hedging opportunities, e.g. using futures), and, if they failed to foresee the advent of shocks to Bank rate, could teeter towards insolvency. Placing such small, and quite risky, intermediaries at the heart of the money market had its disadvantages. Moreover the arrival of large foreign banks in London slightly widened the degree of competition (as did the transformation of the larger building societies into banks). For this, and no doubt other reasons, the Bank slowly overcame its phobia about dealing directly with commercial banks, and the discount houses were dispensed with; they either folded, merged or turned to other niche activities. There have been a number of developments in the form of the Bank’s domestic money-market operations in recent years. These include the inauguration of the repo market, the shift shortly thereafter of the Bank’s operations on to repo, and the widening of the range of counterparties. It has also had to manage a much wider range of collateral, notably in the context of providing liquidity to the Real Time Gross (Payment) System (RTGS) and for British banks participating in the European payment system (TARGET). An important by-product of its market operations is the ability to generate market intelligence which assists its financial stability objective. As the monopoly supplier of cash (high-powered money for the banking system), a central bank, in a closed economy or a floating-exchange-rate regime, cannot really avoid specifying the rate at which it will supply, or withdraw, cash to (from) the system. Otherwise, if there is a surplus, overnight rates will fall to zero; and, if a deficit, rise to whatever level is necessary to allow banks to cope with that deficit, e.g. by ignoring cash-ratio requirements. Yet there were two extraordinary occasions during these decades when Conservative governments tried to suggest that short-term interest rates instead were market-determined, and not set by the monetary authorities. The first occurred towards the end of 1972 in the context of government negotiations on pay and price controls, and the imposition of a Standstill on prices, incomes and dividends in November. The government wanted

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to avoid the accusation that, when other costs were fixed, it had increased the interest-cost burden on borrowers. Hence it introduced a formula, in October 1972, whereby minimum lending rate would be related to the outcome of the previous weekly Treasury bill tender.35 So for a time the senior officials in the Bank played out an elaborate charade, in which they decided what minimum lending rate they wanted and then adjusted tender, and market, conditions to achieve that (aided on occasions by calls for (repayments of ) Special Deposits). In fact this artificial set-up had to be overridden quite soon, in November 1973, in the context of worsening inflation and monetary expansion. It limped on, however, until overridden again in the course of the balance-of-payments crisis in October 1976. Shortly thereafter, in the context of a Treasury bill tender that would have led to an unwanted decrease in interest rates, the Bank announced that ‘the rate will remain at 12 per cent until the Treasury bill tender rate moves into the range which would result in a minimum lending rate of 12 per cent under the usual formula (i.e. 111/4 – 111/2 per cent), or until the Bank administer a further change’.36 That effectively made it clear, once again, that the monetary authorities were the effective arbiter of the level of short-term interest rates. At least the purpose of the 1972 exercise was patent, i.e. to obfuscate the fact that short-term interest rates were set by the monetary authorities. The next episode, in 1980, was even more confused. It arose in the aftermath of the decision not to proceed further with (immediate) moves to Monetary Base Control (MBC), after the publication and debate on the Green Paper on Monetary Control.37 One of the hopes of advocates of MBC was that the central bank would set the growth rate of the base, and that (short-term) interest rates would then become ‘market-determined’. In order to allow that to happen, a central bank’s discount-window lending would have to be severely curtailed, and/or kept at a penalty rate above market rates. As a kind of consolation prize for MBC monetarists (for not getting MBC), the authorities agreed that operations could become somewhat more market-oriented with less reliance on discount-window lending; a note on ‘Methods of monetary control’ was issued on 24 November 1980.38 The authorities would still set interest rates (with a view to hitting their monetary target), but would, it was suggested, disguise what their interest-rate objective was (the unpublished band), and pretend that it was all the market’s doing. Frankly this was confused and silly. In practice, 35 37 38

36 BEQB 17 (1977), p. 21. See BEQB 12 (1972), p. 442. Treasury and Bank of England, Monetary Control (Cmd. 7858, PP 1979–80). Ibid., p. 429.

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it had little effect, apart from being a pretext for the Bank to introduce some reform and widening of British bill markets, which it wanted to do anyhow for its own purposes.39 The unpublished bands, etc., never transpired; the authorities went on announcing administered changes in minimum lending rate, and the monetarist overtones in the supposed ‘new methods’ of 1980 rapidly became a dead letter and forgotten. (c)

Other domestic financial markets and market mechanisms

The gilt and bill markets are the only domestic ones in which the Bank operates directly. Nevertheless it has always seen one of its core functions as looking after the general health and successful functioning of financial markets in this country, usually known under the general title of ‘the City of London’. In particular, as part of its remit for maintaining financial stability, it has direct, and immediate, responsibility for the continued smooth operation of the payments system, which ultimately depends on the transfer of ‘good funds’ through the books of the Bank itself. This has meant that one niche speciality within the Bank has been professional understanding of the working mechanisms, inherent risks and methods of controlling such risks in clearing and settlement systems covering a wide range of financial markets in Britain, equity as well as bond, foreign exchange as well as domestic, future/forward as well as spot, derivative as well as underlying. This is a notably technical area and is not widely remarked in press commentaries. Yet Bank involvement and guidance in such market mechanisms have been pervasive and continuous, albeit discreet. Even after the transfer of the supervision of financial intermediaries to the FSA, oversight of the structural operation of financial markets has remained an important, but usually unsung, part of the Bank’s responsibilities. If anything, with the growing complexity of financial markets, and the continuing dominance of the City as the main international financial market, this task has increased in importance. Besides its influential role in sculpting the structure of the organisational ‘plumbing’ of financial markets, e.g. clearing and settlement mechanisms, the Bank also has played a major advisory role in guiding the structure, strategy and (occasionally) top appointments in the City. In this respect it is, perhaps, more often reactive, in the sense of responding to proposals and names put to it, rather than taking the initiative for change; the latter might be perceived as overstepping its appropriate role. 39

See ‘Monetary control: next steps’, 12 March 1981, and reproduced in BEQB 21 (1981), pp. 38–9.

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All the same the views of the Bank in strategic issues, such as ‘Big Bang’ for stock market deregulation in the mid 1980s, represented a key input into the strategic decision-making process. How far the Bank goes in formulating and pressing its views of the appropriate strategic design of other financial markets does, however, depend somewhat on the accidents of personality among senior Bank officials; some were more forward than others in this field. At various stages during these decades, the Bank did play a very substantial role in facilitating and promoting restructuring of trading mechanisms and governance in key parts of the City (e.g. the Stock Exchange and Lloyds), and proffering ‘good offices’ advice in a large number of non-financial corporate situations. International monetary issues (a)

The foreign exchange market

During those monetary regimes in which policy is constrained by an external anchor, for example under a pegged exchange rate, the foreignexchange market becomes the chief cockpit for monetary policy. Even when the country is supposedly on a floating exchange rate there can be crises, often crises of confidence threatening a collapse in the exchange rate, as in 1976, that put operations in the foreign-exchange market at the centre of attention. The Bank of England is the government’s operator in this foreignexchange market, and suggestions on day-to-day tactics have largely emanated from the Bank. Unlike the gilt-edged market, where the Bank usually took the lead on strategy as well as tactics, in the foreign-exchange market strategy was usually decided on equal terms between the Bank and the Treasury, while the overarching policy regime to be followed was always firmly in the hands of government. The Bank consistently saw itself as an agent in this area acting on behalf of its principal, the government. This was because the foreign-exchange reserves which it paid out, when it supported sterling, or accumulated when it sold sterling, came from or went to the Exchange Equalisation Account (EEA), which was in the name of the government, not of the Bank. Again, however, the day-to-day portfolio management of this stock of reserves fell to the Bank, but still very much in the role of fund manager acting as agent to the Treasury and government as principal. Any significant portfolio investment idea had to be explained to, and cleared by, the principal. Any major change in policy, e.g. to shift between gold and foreign currencies, is taken and announced by government, not by the Bank.

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This structure of relative responsibility has remained largely unchanged over the last four decades. However, the importance of this role has varied widely, depending mainly on the policy regime adopted. It was, of course, very much in the front line during the shaky years surrounding the 1967 devaluation, the problems with gold in 1968, and the collapse of Bretton Woods 1971–3. But foreign exchange management remained of critical importance during the crisis years, 1973–6, that followed. The prospective development of North Sea oil coincided with the return of the Conservatives in 1979; the Conservatives wanted to avoid having their monetary control distorted by pegging the exchange rate. A combination of North Sea oil, high interest rates and confidence in Thatcher provoked a massive, but temporary, blip in sterling in 1981 (to be followed by a huge upsurge in the US dollar in 1983–5, which drove sterling back down to more reasonable levels). Then, at the end of the 1980s, the policy of shadowing the deutschmark was shortly thereafter followed by entry into the ERM. This, once again, put the spotlight on foreign-exchange operations. After Britain’s exit in September 1992 there was much less inflationary turmoil than in the 1970s. Although there was another sharp appreciation of sterling in 1996–7, which has remained largely unexplained, the currency has been allowed to float freely. The foreign-exchange dealing room in the Bank, once the centre of policy interest with telephone discussions every five minutes with senior officials at the Bank and Treasury, has by comparison become something of a backwater. That said, the Bank has been much more actively involved in management of the foreignexchange reserves of the EEA in the last decade than previously. In the last couple of years it has also managed the gold auctions which the Chancellor mandated. Here, as elsewhere, the range of market operations has been increasing. When Brown made the Bank independent in 1997, he did make one additional change in this area. He gave permission for the Bank to intervene in foreign-exchange markets on its own initiative using some of its own comparatively small reserves, which arose, for example, from sales of Bank of England euro-denominated bills, or from swaps. This would allow the Bank to intervene in the foreign-exchange market by itself, without prior agreement with the Treasury and the politicians, but it could only do so for purposes relating to monetary policy. The small size of such Bank-owned reserves made any support of sterling problematical, but a central bank can intervene to sell its own currency, to check an unwanted appreciation, without limit in theory. For a variety of reasons, including concerns about the risks of such a policy and doubts about its efficacy, the Monetary Policy Committee felt that it should not make use of any

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such intervention opportunities to aim to check the appreciation of the pound in 1997 and afterwards.40 Whether historians will count this as an opportunity missed has yet to be seen. (b)

International policies and diplomacy

In the 1960s a rump of the Sterling Area remained and these, and other, countries maintained sizeable balances invested in sterling assets which could be switched into other currencies and hence represented an overhanging threat to the British balance of payment. Considerable attention was paid to maintaining good information with these countries. The devaluation of the pound in 1967 further eroded both the Sterling Area, and the willingness of foreigners to hold sterling investments in London. After the oil shock in 1973, many of the oil-exporting countries suddenly faced huge increases in reserves, and several of these, particularly those with British links, such as Nigeria and Kuwait, continued for a time their earlier practice of holding much of these reserves in sterling in London. Before long, they revised their ideas about how to spend and to invest them worldwide, despite strenuous efforts to keep OPEC balances in sterling in London. One aspect of the story of the 1976 crisis reflects the withdrawal of part of such oil funds. After that crisis the reputation of sterling fixed-interest investments in London, as a safe haven, declined yet further; and the saga of the Sterling Area and of its members’ sterling balances came to a sorry end, just as Britain was itself joining the ranks of oil producers. Just as London was losing one role, as a destination for foreign holdings of sterling, so it was gaining another during the 1960s and 1970s, as the pre-eminent international intermediary centre for trading foreign currencies and debt, mostly in US-dollar form. The Eurodollar market grew and thrived in London from the 1960s onwards; the Eurobond market developed here; the international gold market was headquartered in London; and so on. London became a truly international financial centre, with more international banks establishing a presence here than anywhere else. The Bank was keen to foster these developments, which in turn placed it at the centre of the international financial system. That, and the historical accident of Britain’s close alliance with the USA, the world’s preeminent power, gave the Bank an international influence and status well above its purely domestic strength, although its reputation and position 40

See Monetary Policy Committee minutes, Aug. 1997, para. 64, published with the Bank of England’s Inflation Report, no. 1997, pp. 57–62.

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were tarnished by the devaluation of 1967, and then the difficulties of the disastrous years, 1973–6. Nevertheless the Bank still played a major role in the various crises faced by the international financial system, notably the, eventually failing, attempts to salvage the Bretton Woods system (1968–73) and handling the less-developed-countries crisis in 1982. Governor Richardson enjoyed the role that he could play on the world’s stage, and did it well. To support the Governor in these tasks, the Bank had an International Department, about as large as the Economic Intelligence Department, and an executive director focusing on such international issues. Furthermore Britain’s endemic balance-of-payments problems meant that Britain retained its tight exchange controls over capital movements (until October 1979). Although clients wishing to make transfers potentially subject to such controls would normally deal with their own commercial banks, rulings on difficult issues, case law and minor adjustments to the regulations were all undertaken by the Bank, which also generally monitored the decentralised conduct and observance of the controls. This was done in a separate, and sizeable, department. So a significant proportion of the Bank’s professional staff and efforts were directly taken up with handling overseas affairs in the 1960s and 1970s. With the establishment of the European Monetary System in 1979, the 1980s saw a growing shift of emphasis towards Europe, with perhaps somewhat less attention on global financial issues. Moreover, the European scene was somewhat different, requiring experts from domestic departments in the Bank discussing issues of common concern with their counterparts from other countries. All too often delegations from the Bank to these various European fora would involve two, or more, officials, one from the relevant domestic department and one from the International Department. There was a subtle difference from occasions of global crisis when establishing the Bank’s views, for meetings at the IMF and/or World Bank would be the main responsibility of the International Department, though after Bank-wide consultation. In any case, the growing weight of European coordination meant that international dealings were largely, if not mainly, carried out by the relevant domestic experts. The logic of this was carried to its ultimate extreme, in the mid 1990s, with the abolition of the International Department altogether. At the same time the policy issues were now divided up between those relating to macroeconomic issues, which lie in the monetary analysis area, and those relating to financial stability, including most IMF related work; moreover both areas, monetary analysis and financial stability, have divisions which concentrate on international issues.

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The abolition of the International Department, and of its associated executive director, was a major wrench to the structure of the Bank. The advantages and disadvantages of this step remain arguable; whether a central bank’s external affairs should be centralised under one departmental roof, or decentralised to the relevant domestic experts remains unclear. Again historians of central banking may find this an interesting question to discuss. The future? Of course, the most important question affecting the Bank’s future is whether Britain will adopt the euro and join the euro-system. If it should do so, then what would be the roles for the participating national central banks? Would London become the dominant euro-wide monetary centre, so that the Bank of England became the equivalent in the euro-system to the Federal Reserve Bank of New York within the Federal Reserve System? The next set of questions relates to the role of the national central banks, and also of the European Central Bank, in financial regulation and supervision within the euro-system. At the moment there are several key arguments for keeping oversight of financial stability and of supervision at the national level (besides the general principle of subsidiarity). These are: 1 The fiscal authorities who would have to provide support in a really serious financial crisis should be national. 2 Retail (though not wholesale) financial intermediaries should remain predominantly national in ownership and control. 3 National central banks should have their ear closer to the local ground. But point two may over time disappear. If the financial intermediaries in the euro-system become eventually euro-wide in form, then the logic of supporting a single monetary system with a single, centralised, regulatory and supervisory system would become more pressing, though even then the problems of combining a centralised monetary system with decentralised, nationally based fiscal systems would remain difficult and complex. My own view is that this latter disjunction cannot persist. But what might happen to the Bank of England (and to other separate central banks), if Britain did not join the euro? One recent concern, that the growth of electronic sales and transfer mechanisms might erode both the demand for cash and the central bank’s ability to control the system’s short-term interest rate, seems on closer inspection to be invalid. Another concern is that recent experience suggests that stability in goods and services prices may be consistent with extreme volatility in asset prices, and

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that these latter can have serious distortionary effects on the real economy. Central banks, however, normally deploy only one instrument, the short-term interest rate, and that is properly predicated to the achievement of inflation targets. I have been amongst those who would advocate a cautious attempt to find other instruments, e.g. direct intervention in asset markets (outside the domestic money market41 ), or the greater use of margin requirements, but so far this has been a largely solitary cry in the wilderness (except in the case of Japan where the fact that the shortterm interest rate cannot go below zero means that those who believe that more should be done have to advocate unconventional measures). Over the last thirty-five years during which I have watched, and occasionally participated in the evolution of the Bank of England, there have been a whole series of far-reaching changes. What can be said with some confidence is that change will not only continue, but, as always, be extremely hard to predict in advance. 41

This might include the purposeful use of debt management operations for monetary objectives. A few economists, notably T. Congdon, e.g. ‘On the basic principles of debt management’, Lombard Street Research Monthly Economic Review (Feb. 2000), pp. 3–20 and ‘Another awkward corner in monetary management’ (Dec. 2000), pp. 1–16, regard the failure to appreciate the potential monetary role of debt management as one of the great intellectual and practical failings of our profession. Others, like me, are more ambivalent, but do see some force in the argument, especially when the nominal shortterm interest rate is constrained, as is the case now in Japan. Most US economists are dismissive, except perhaps in extreme circumstances.

Select bibliography

The purpose of this bibliography is to identify the literature most closely concerned with Government–City relations, rather than to provide a list of all items cited in the chapters. Unless otherwise stated, the place of publication is London. Atkin, J. M., British Overseas Investment 1918–1931 (New York, 1977) Augar, P., The Death of Gentlemanly Capitalism. The Rise and Fall of London’s Investment Banks (2000) Booth, A., ‘Britain in the 1950s: a “Keynesian” managed economy?’, History of Political Economy 33 (2001), 283–313 Bowden, S. and M. Collins, ‘The Bank of England, industrial regeneration and hire purchase between the wars’, Economic History Review 45 (1992), 120–36 Boyce, R. W. D., British Capitalism at the Crossroads 1919–1932. A Study in Politics, Economics and International Relations (Cambridge, 1987) ‘Creating the myth of consensus: public opinion and Britain’s return to the gold standard in 1925’, in P. L. Cottrell and D. E. Moggridge (eds.), Money and Power. Essays in Honour of L. S. Pressnell (1988), pp. 173–97 Bulpitt, J. and P. Burnham, ‘Operation Robot and British political economy in the early 1950s: the politics of market strategies’, Contemporary British History 13/1 (1999), 1–31 Burk, K., ‘The Treasury: from impotence to power’, in K. Burk (ed.), War and the State.TheTransformationofBritishGovernment1914–1919 (1982), pp. 84–107 The First Privatisation. The Politicians, the City and the Denationalisation of Steel (1988) Morgan Grenfell, 1838–1988. The Biography of a Merchant Bank (Oxford, 1989) Burk, K. and A. Cairncross, ‘Goodbye Great Britain’. The 1976 IMF Crisis (New Haven and London, 1992) Burn, G., ‘The state, the City and the Euromarkets’, Review of International Political Economy 6 (1999), 225–61 Cain, P. J. and A. G. Hopkins, British Imperialism, 2 vols., I: Innovation and Expansion 1688–1914, and II: Crisis and Deconstruction 1914–1990 (1993; one-volume edn 2001) Cairncross, A., Years of Recovery. British Economic Policy 1945–51 (1985) ‘The Bank of England: relationships with the government, the civil service and Parliament’, in G. Toniolo (ed.), Central Banks’ Independence in Historical Perspective (Berlin, 1988), pp. 39–72 372

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Thain, C., ‘The Treasury and Britain’s decline’, Political Studies 32 (1984), 581–95 Thane, P., ‘Financiers and the British state. The case of Sir Ernest Cassel’, Business History 28 (1986), 80–99 Tolliday, S., Business, Banking and Politics. The Case of British Steel 1918–1939 (Cambridge, Mass., 1987) Tomlinson, J., Public Policy and the Economy Since 1900 (Oxford, 1991) ‘Attlee’s inheritance and the financial system: whatever happened to the National Investment Board?’, Financial History Review 1 (1994), 139–55 Democratic Socialism and Economic Policy. The Attlee Years, 1945–1951 (Cambridge, 1997) Williamson, P., ‘Financiers, the gold standard, and British politics 1925–1931’, in John Turner (ed.), Businessmen and Politics. Studies of Business Activity in British Politics, 1900–1945 (1984), 105–29 ‘A “bankers’ ramp”? Financiers and the British political crisis of August 1931’, English Historical Review 99 (1984), 770–806 National Crisis and National Government. British Politics, the Economy and Empire 1926–1932 (Cambridge, 1992) Wormell, J., The Management of the National Debt of the United Kingdom, 1900– 1932 (2000)

Index

Accepting Houses Association/Committee, 13, 35, 73 Addis, Sir Charles, 147, 148, 150, 218 Amery, L. S., 204, 207, 209, 212, 225 Arnold, Percy, 77–9 Asquith, H. H. (Prime Minister 1908–16), 120, 122, 138, 139 Australasia, borrowing by, 197, 198, 201, 205, 206–8, 210–11 Baldwin, Stanley (Prime Minister 1923–4, 1924–9, 1935–7), 24, 228, 229 Balogh, Thomas, 110, 176, 184, 336 Bank for International Settlements, 232, 346 Bank of England, character and policies of, 14–17, 38, 88, 177, 221, 261–2, 266, 268, 269, 301, 302–6, 316, 320, 327–8, 330–3, ch. 17 passim independence of, 14–17, 24, 26–8, 30, 52, 70–1, 130, 134, 169, 179, 180, 181, 221, 338–9, 359, 367 and industry, 15, 158–60, 232 nationalisation of, 15, 28, 40, 71, 176, 191 see also Treasury, and individual Governors of the Bank: Catto, Cobbold, Cromer, Cunliffe, Leigh-Pemberton, Norman, O’Brien, Richardson bank regulation, 47, 49, 51, 72–4, 341–51 Bankers’ Industrial Development Corporation, 158–60 Banking Act (1979), 47, 51, 345 Barber, Anthony (Chancellor of the Exchequer 1970–4), 131, 287 Barclays Bank, 84, 87 Barings Bros. & Co., 86, 89, 244, 247, 249–50 Beaverbrook, Lord, 220, 222, 224, 228, 233, 261, 263

Bell, Henry, 149 ‘Big Bang’ (1986), 10, 50–2, 84, 172, 276, 294, 297, 361 bimetallism, 9, 138 Blackett, Sir Basil, 120, 124 Board of Trade, 18, 103, 131, 237, 341 Boer war: see wars Bolton, Sir George, 267, 270, 331 Bradbury, Sir John (1925 1st Lord), 25, 26, 120, 157 Brand, Robert, 120, 148, 149, 150, 218, 247 Bretton Woods agreements, 71, 260, 353 Bridges, Sir Edward, 119, 271 British Bankers’ Association, 35, 44 British Overseas Bank, 239 Brown, Gordon (Chancellor of the Exchequer 1997– ), 359, 362 budgets 1909, 9, 13, 19, 121, 136, 140–1 1914, 122 1939, 1940, 128 Butler, R. A. (Chancellor of the Exchequer 1951–5), 130, 269–70, 271, 273, 304, 305 Callaghan, James (Chancellor of the Exchequer 1964–7), 336 capital issues, control of, 123, 129, ch. 10 passim, 218, 226, 227, 284, 288, 304, 305, 322, 334, 338 capital levy, 124, 147–8 Catto, Lord (Governor, Bank of England 1944–9), 303 Chamberlain, Joseph, 154 Chamberlain, Neville (Chancellor of the Exchequer 1931–7), 127–8 Chamberlain-Bradbury Committee, 125, 219 Cherwell, Lord, 272

377

378

Index

Churchill, Winston (Chancellor of the Exchequer 1924–9; Prime Minister 1940–45, 1951–5), 27, 125, 158, 204, 222–7, 272 ‘City–Bank–Treasury nexus’, 7–8, 17, 20, 117, 118, 121, 125, 134, 145 City of London, character of, 11–13, 16, 25, 31–2, 41, 42, 45–6, 86–90, 137, 171, 173, 174, 182, 215, 220–1, 236–7, 238, 262, 322–3, 324–6, 337, 368 Clarke, Kenneth (Chancellor of the Exchequer 1993–7), 358 Clarke, William, 189 clearing banks, 84, 87, 88, 90, ch. 15 passim, 322 Cobbold, Cameron (1st Baron, 1960; Governor, Bank of England 1949–61), 130–1, 168–9, 251, 262, 303, 305, 306, 335, 340 Committee of Clearing Bankers, 73, 168 competition and credit control, 47, 131, 287, 298, 319, 321, 325, 344, 351 Conservative governments 1924–9, 157, 216, 228–9 1951–64, 41–4, 110, 130–1, 166–71, 257, 269, 304 1970–4, 47, 132, 363 1979–97, 49–52, 172, 354, 358, 364, 367 Conservative party, 99–101, 112, ch. 8 passim, 339, 353 consols, 138 credit controls, 10, 14, 15, 42, 129, 130–1, 167–71, 259, ch. 15 passim, 352 Cripps, Sir Stafford (Chancellor of the Exchequer 1947–50), 129, 267, 303 Cromer, 3rd Earl of (Governor, Bank of England 1961–6), 178–9, 180, 181, 323, 330, 332 Crosland, Anthony, 183 Cunliffe, Lord (Governor, Bank of England 1913–18), 123, 146 Cunliffe Committee (1918–19), 125, 219 Dalton, Hugh (Chancellor of the Exchequer 1945–7), 129, 295, 301 Department of Trade and Industry, 18, 134 devaluations: for 1919 and 1931 see gold standard; for 1949 and 1967 see sterling discount houses, discount market, 13, 16, 23, 42, 73, 341, 363 Du Cann, Edward, 99, 103–4, 111

economic policy, character of, 13, 21–3, 24–30, 34–8, 39–43, ch. 6 passim, 136, 138, 139, 143, 146, 166, 172, 257–60, 266, 273, 299–301, see also incomes policy, monetary policy, tariff reform Einzig, Paul, 245 Eurodollar, Eurobond market, 45, 46, 52, 323, 326, 330–4, 345 European currency (euro), 54, 370 European Economic Community, 46, 50, 185, 188, 274, 328–9 exchange controls, 15, 42, 49, 166, 172, 325, 334, 345 Exchange Rate Mechanism, 355, 367 Falk, Oswald, 120 Federation of British Industries, 109, 125, 219, 224, 227 financial elites, debate on, 79–82 Financial Services Authority, 52, 71, 350 First World War: see wars foreign banks in London, 35, 44, 48, 51, 88, 323, 324–6, 330 foreign exchange market, 36, 37, 366–8 Foreign Office, 18, 233, 237, 241, 245, 246, 248, 249, 253 free trade, 12, 25, 26, 36–7, 122, 137, 141–3, 146, 147, 148, 223, 231 Friends of Economy (1930–1), 151 fringe banks: see secondary bank crisis Gaitskell, Hugh (Chancellor of the Exchequer 1950–1), 269 ‘gentlemanly capitalism’, 7, 33, 35, 95, 117, 135, 156, 172, 177, 236 Glendyne, Lord, 207, 208 gold standard to 1919, 25, 26, 122, 125, 138, 356 1925–31, 6, 9, 17, 18, 26, 27–8, 36–7, 118, 125–7, 150, 157–8, 195, 202, 205, ch. 11 passim 1931 crisis, 9, 20, 23, 37, 126, 152, 234–5, 239 Goodenough, Frederick, 87, 218 government, character of British, 20–2, 24–30, 237 Government and City relations, historians’ views on: Perry Anderson, 7; Robert Boyce, 8, 117; Peter Cain and Anthony Hopkins, 7, 83, 117, 135, 141, 236; Youssef Cassis, 7; Ewen Green, 8, 117, 236, 275; Geoffrey Ingham, 7, 17, 117, 118, 300; Frank

Index Longstreth, 7, 300; Scott Newton and Dilywn Porter, 8; George Peden, 18; John Peters, 123; Sidney Pollard, 6; William Rubinstein, 7; Rob Stones, 23; Martin, 7 government finance, 18–20, 22, 25, 26, 39, 42, 47, 118, 139–41, 147, 178, 234; see also budgets, national debt, taxation Gwynne, H. A., 156 Hall, Robert, 168, 272, 273 Hamilton, Sir Edward, 119, 121 Heath, Edward (Prime Minister 1970–4), 111, 352 Heathcoat Amory, Derick (Chancellor of the Exchequer 1958–60), 169, 305, 336 Hewins, W. A. S., 155 Hills, J. W., 161, 163–5 Hilton Young, Sir Edward, 124 Hirst, Francis, 142, 146, 148 Holden, Edward, 87, 138, 146 Hoover moratorium (1931), 238 Hopkins, Sir Richard, 127 Horne, Sir Robert (Chancellor of the Exchequer 1921–2), 22, 24, 127 Howell, David, 108 incomes policy, 108 Industrial and Commercial Finance Corporation, 129, 190 Industrial Reorganisation Corporation, 190 industry, the City of London and, 5, 6, 8, 15, 38, 45, 81, 84, 99, 129, 135, 136, 141, 145, 147, 150, 158–60, 190, 216, 227, 232, ch. 14 passim International Monetary Fund, 133, 260 investment, domestic, 38, 190, ch. 14 passim foreign, 33, 37, 178, 284 imperial, ch. 10 passim, 322 see also capital issues Jay, Douglas, 101, 102, 184, 302, 303 Jenkins, Roy, 184, 185 Johnson Matthey Bankers, 349 joint-stock banks: see clearing banks Kaldor, Nicholas, 109, 110 Keynes, J. M., 27, 40, 120, 122, 125, 147, 149–51, 152, 157, 161–3, 222–3, 224, 258–64, 278

379 Kleinwort, Alexander; Kleinwort, Sons Co., 136, 139, 240 Labour governments 1924, 216, 217–18 1929–31, 23, 216, 230–4 1945–51, 28, 40–1, 129–30, 176, 183, 191, 261, 263, 301, 303 1964–70, 22, 23, 44, 46, 111, 133, 177–83, 185–9, 191, 324, 336, 339 1974–9, 47–9, 133, 295, 353 1997– , 52, 71, 350 Labour party, 27, 28, 40, 64, 65, 100, 104, 109–11, ch. 9 passim, 237, 350 Lamont, Norman (Chancellor of the Exchequer 1990–3), 358 Lancashire Cotton Corporation, 158 Lawson, Nigel (Chancellor of the Exchequer 1983–9), 96, 349, 355, 357, 361 ‘Lawson boom’, 280, 282, 284, 287 Leaf, Sir Walter, 149 League of Nations, 149 Leigh-Pemberton, Robin (Governor, Bank of England 1983–93), 355 Lever, Harold, 101, 110, 111 Liberal party, ch. 7 passim Lidbury, Sir Charles, 242, 252 Lloyd George, David (Chancellor of the Exchequer 1908–1915; Prime Minister 1916–22), 121, 122, 124–5, 136, 137, 140–1, 145, 151–2, 224, 228 MacDonald, James Ramsay (Prime Minister 1924, 1929–35), 126, 228, 230, 231, 234 MacDougall, Sir Donald, 272, 273 McKenna, Reginald (Chancellor of the Exchequer 1915–16; Chairman, Midland Bank 1919–43), 94, 146, 149, 150, 151, 218, 222–3, 227, 252 Maclean, Sir Donald, 147 Macleod, Iain, 99, 111 Macmillan, Harold (Chancellor of the Exchequer 1955–7, Prime Minister 1957–63), 42, 158, 161–3, 165, 167, 169, 170 Macmillan Committee (1929–31), 15, 27, 161, 231 ‘Macmillan gap’, 126, 129, 175 Maudling, Reginald (Chancellor of the Exchequer 1962–4), 324, 327, 336, 339 May Committee (1931), 126, 234

380

Index

merchant banks, 84, 86, 88, 259 Midland Bank, 40, 45, 84, 87, 242, 302, 326, 330; see also Holden, McKenna Monetary Base Control, 171, 364 monetary policy (and bank/interest rates), 15, 19, 26, 27, 28, 29, 32, 34, 36, 42, 126, 130, 133, 176, 180, ch. 13 passim, ch. 15 passim, 351–9, see also gold standard, ‘Robot’, sterling Monetary Policy Committee, 119, 134, 367 Monopolies Commission, 47, 49, 306, 316 Morgans & Co., Morgan Grenfell & Co., 121 Myners Committee (2001), 294 National Board for Prices and Incomes, 47, 182, 306, 313 national debt, 11, 18, 31, 32, 34, 35, 40–3, 48, 121, 124, 139, 342, 359–62 National government 1931–40, 16, 23, 28, 38, 126, 129, 217, 234–5 National Investment Board, 28, 150, 162, 176 National Investment Council, 129 National Westminster Bank, 84 Next Five Years Group (1935), 162 Niemeyer, Sir Otto, 120, 125, 157, 201, 203, 222, 223, 224, 225, 245 Norman, Montagu (Governor, Bank of England 1920–44), 16, 39, 119, 125, 158–60, 200–14, 221, 223, 224, 226, 232, 234, 235, 237, 242, 251 O’Brien, Sir Leslie (Governor, Bank of England 1966–73), 17, 131, 179, 320, 324, 331, 336 Office of Fair Trading, 49 Paish, Sir George, 142, 147, 148 Peacock, Sir Edward, 159–60, 247 Phillips, Sir Frederick, 126 planned economy, 31, 40–3, 60–1 Plowden, Sir Edwin, 272 protection: see tariff reform Radcliffe Committee (1957–9), 131, 157–8, 167, 170, 180, 277, 287, 288, 291, 307, 317, 341, 360 Railtrack, 53

Reid, Sir Edward, 242, 244, 246, 248, 249–50, 253 Restrictive Practices Court, 49, 50, 51 Richardson, Gordon (Governor, Bank of England 1973–83), 17, 353, 355, 357, 369 ‘Robot’ plan (1952), 10, 29, 132, 269–72 Rothschild, Nathan (1st Lord); Rothschilds & Sons, 86, 94, 120, 121, 122, 138, 140, 244, 247 Rowan, Sir Leslie, 132, 270 Schroders & Co., 88, 240, 244, 248; see also Tiarks Schuster, Sir Felix, 138, 140, 142, 151, 155 Second World War: see wars secondary bank crisis (1973), 132, 344 Securities and Investment Board, 52, 350 Select Committee on National Industries, 182 Shonfield, Andrew, 184, 189 Simon, Sir John (Chancellor of the Exchequer 1937–40), 127 Snowden, Philip (Chancellor of the Exchequer 1924, 1929–31), 27, 126, 230–2, 234 Stamp, Sir Josiah, 122, 220–1, 224 Standstill Agreements, 239–54 Steel-Maitland, Sir Arthur, 159–60 sterling, after 1945, 43–4, 46, 132–4, 166, 183–9, ch. 13 passim, 299, 322, 326–30, 337 convertibility crisis 1947, 261, 264–5 devaluations: 1949, 182; 1967, 45, 188, 265–7, 329 see also gold standard (for pre-1931); Sterling Area Sterling Area, 19, 40, 45, 166, 178, 183–8, 191, ch. 13 passim, 368 Stock Exchange, London, 12, 16, 31, 33, 35, 42, 48, 49, 50–2, 100, 102, 123, 128, 276, 284, 291, 295 tariff reform, protection to 1913, 9, 12, 26, 135, 141–2, 144, 146, 154–6 interwar, 157, 225, 228–9, 231, 233 taxation to 1914, 12, 32, 34, 122, 139–41 1920s, 13, 19, 223 1930s, 244 1950s to 1960s, 109, 179

Index capital gains tax, 109–10, 179, 295–6; excess profits tax, 128; national defence contribution, 127; selective employment tax, 111, 179; stamp duty, 294–5, 297 Thatcher, Margaret (Prime Minister 1979–90), 171–2, 354 Thorneycroft, Peter (Chancellor of the Exchequer 1957–8), 131, 166–9, 170, 360 Tiarks, Frank, 242, 247, 251, 252, 253 Treasury, character and policies 6, 17–20, ch. 6 passim 218, 237, 259, 262, 271, 337, 338, 356 relations with Bank of England, 6, 9, 14, 15, 17, 26, 28, 29, 119, 130–1, 168–70, 177, 181, 221, 232, 270, 302, 336, 338, 357–9, 366 see also individual Chancellors of the Exchequer (Barber, Brown, Butler, Callaghan, N. Chamberlain, Churchill, Clarke, Cripps, Dalton, Gaitskell, Heathcoat Amory, Lamont, Lawson, Lloyd George, Macmillan, Maudling, Simon, Snowden, Thorneycroft), and senior Treasury

381 officials (Blackett, Bradbury, Bridges, Hamilton, Hopkins, MacDougall, Niemeyer, Phillips, Plowden, Rowan) ‘Treasury view’ (1920s), 25, 26 Tuesday Club, 120 unit trusts, 102–8 USA, loan (1945), 260, 264 Walker, Peter, 103–4 wars, impact of, 22, 24 Boer War, 121 First World War, 26, 33, 34–5, 122–4, 136, 145–7 Second World War, 39, 127–9, 166, 259–60 Webb, Sidney and Beatrice, 23, 60, 135 Wider Share Ownership Society, 101, 113 Williams Deacon’s Bank, 239, 244 Wilson Committee (1977–9), 277–8, 287, 292, 293, 296 Wilson, Harold (Prime Minister 1964–70, 1974–6), 49, 109, 177, 178, 184, 185, 187 Wood, Sir Kingsley (Chancellors of the Exchequer 1940–5), 128