Till Time's Last Sand

by David Kynaston

  Timothy Curtis, meanwhile, was also to the fore, though no longer governor, in an embarrassing but telling episode during the summer of 1839. For a mixture of reasons, including lax control and a drain on sterling in order to pay for wheat imports, the Bank’s bullion by the last week in July stood at barely £3.7 million, just over a fifth of the circulation and manifestly inadequate. It is possible that the Bank turned initially to Rothschilds, no longer under the guidance of Nathan, who had died three years earlier; but, in any case, by 19 July it was looking elsewhere, approaching Barings for assistance in negotiating a £2 million credit from the Bank of France, as formally given the go-ahead by the Court next day. Barings agreed to help, and soon Tom Baring joined Curtis in Paris for the negotiations with a syndicate of Paris bankers acting on behalf of the Bank of France. The agreement was eventually signed on 1 August, providing the Bank of England with £2 million in bills and thus avoiding the danger of having to suspend cash payments. The diary entry of a veteran timber broker, Charles Churchill, nicely caught the City reaction to the turn of events: ‘The Bank of England raise the rate of disC to 5 p Ct & negotiate an arrangement with the Bank of France to draw 2 Millions, by way of a Check to the Exchanges!! The Bank of England & accommodation Bills!! What next.’

  The dismay was unmistakable, but at least it lacked the venom of the Rothschild reaction, after its Paris house had apparently tried to get involved in the negotiations but left it too late. Writing from there on the day the agreement was signed, Nathan’s brother James recalled that in 1825 ‘we arranged for such large quantities of gold to be brought in and thereby saved the Bank’; noted that ‘now it is Baring who is the recipient of everything’; argued that the Bank ‘should at least share out’, so that ‘the business is properly distributed’; and reserved his deepest ire for Curtis, nothing less than ‘a two-faced scoundrel’. Relations between Rothschilds and the Bank would continue to deteriorate, to the point where Nathan’s son Lionel took the decision in 1843 to close their account there. But for Curtis himself, sending a report back to Threadneedle Street at the end of the negotiations, the lesson of the episode was the desirability of establishing ‘a direct intercourse and interchange of good services’ between the Bank of England and its French counterpart. ‘Such an arrangement,’ he went on,

  might be of the highest advantage to the Bank of England in freeing it in the first place from the necessity of applying to individuals on business when it may be desirable to operate on the foreign exchanges in the second, and therefore in giving greater facility to the intended action, from the powerful means it would place at the disposal of the Bank of England, and thereby from the immediate and unobserved influence which such friendly and confidential relations between the two establishments would tend to produce when the situation of either Bank might require the aid and assistance of the other.23

  No one of course yet talked about ‘central banks’, but it was still a significant anticipatory moment in the history of central bank co-operation.

  That was for the relatively distant future. Later in 1839, the Manchester Chamber of Commerce – speaking as the voice of provincial industry rather than metropolitan finance – issued a report (endorsed by the influential Morning Chronicle) specifically blaming the Bank for having caused unnecessary commercial distress through monetary contraction, at a time when the state of trade was essentially sound. The response of one of the Bank’s directors, Norman, was to start preparing a lengthy defence of the Bank’s recent conduct, to be delivered to its proprietors early in 1840. ‘They are bound as faithful Stewards of the interest of the Proprietors, and as beside intrusted with important obligations towards the public at large,’ he asserted of his colleagues and himself, ‘to declare it to be their unequivocal opinion, that the old system of silence and reserve on their part is no longer applicable, and that great injury would arise to the corporation and the community, was it any longer persisted in to the former extent.’ The uncomfortable but unavoidable fact was, he continued, ‘that the Bank of England in all occasions, seems to be the general object of hostility’: ‘These attacks in some few instances are directed against the personal integrity of the Court of Directors, but more commonly charge them with gross ignorance and incompetence, and represent the Bank itself as a pernicious, or at best useless, Institution.’ The Bank appeared to be entering the new decade in a distinctly exposed, vulnerable position; and although nearly a century and a half old, and for all the lucidity of Norman’s ensuing analysis (including the admission that ‘had it been possible to foresee at the commencement of last Year all that has subsequently occurred, The Court of Directors can have no hesitation in saying that their measures would not have been exactly what they have been’, prompting the scribbled note ‘very true’ on Horsley Palmer’s copy), the general outlook was at best murky.24

  The Bank’s travails during the second half of the 1830s had especially serious implications for Palmer and his celebrated Rule, placing both on the defensive. Naturally he took to print, publishing as early as 1837 The Causes and Consequences of the Pressure upon the Money-Market – in which pamphlet he pinned the blame for the ongoing monetary instability almost wholly on the new joint-stock banks, by now numbering around a hundred, with as many as forty-two established during 1836 alone. ‘It is needless,’ declared Palmer, ‘to attempt to describe the competition that grew out of this excessive multiplication of banks: its effects were exhibited in a great and undue, and even rash extension of paper-money and credits … The commonest observer must have seen the gathering clouds, and dreaded the consequences.’ What about the Rule itself, so far honoured as much in the breach as in the observance? ‘The proportion of one-third of bullion with reference to the liabilities of the Bank at the period of a full currency’ was, he insisted, ‘never intended to apply under any extraordinary events that might arise,’ adding that ‘in such times it would become the duty of the Bank to reduce their securities without delay’. Palmer’s protestations failed to convince Samuel Jones Loyd, who within weeks issued a counter-pamphlet, not only accusing the former governor of ‘a mere arbitrary mode of making up an account to exhibit a desired result’, but advancing an attractively clear-cut argument:

  The Bank, it must be observed, acts in two capacities; as a manager of the circulation, and as a body performing the ordinary functions of a banking concern. The duties of these two characters, though very often united in the same party, are in themselves perfectly distinct. In the principle [that is, the Palmer Rule] laid down by the Bank for its own guidance, the separate and distinct nature of these two characters has not been sufficiently attended to.

  Accordingly, proposed Loyd, ‘if the two natures of the Bank of England were completely dissociated, each would proceed to the discharge of its respective functions with more simplicity and efficiency, unencumbered by the conflicting tendencies and opposite action of its former companion’; and under which system, involving a rigid separation of the Bank’s issuing and banking functions, ‘the amount of paper issued shall be represented by an amount of securities which never varies, and an amount of specie which is left to fluctuate with the fluctuations of the amount of notes out’.

  Over the next few years, the late 1830s and into the early 1840s, two clear schools of thought took shape: the pro-Palmer ‘banking’ school that sought to give discretionary powers to bankers over the volume of currency; and the pro-Loyd ‘currency’ school that explicitly warned against such powers. The Bank’s recent track record hardly helped the former school, and by 1842, in his survey of Banks and Bankers, Daniel Hardcastle was bluntly stating that Palmer’s Rule was ‘effective against a Bank of issue, but not effective against a Bank of deposit also’. The decisive factor was political will. Prime minister since 1841 was the stern-minded Sir Robert Peel, arguably the principal driving force behind the 1819 decision over the resumption of cash payments, a move essentially designed to reduce the Bank’s freedom of action; and having witnessed since then a series of
monetary mishaps, usually involving feverish speculation followed by financial crisis, he was determined to force the banking system, including the Bank itself, on to a path as straight and narrow as he could make it. Everything came together in 1844: the Bank’s Charter was liable for renewal; many of the Bank’s directors had long lost confidence in the efficacy of the Palmer Rule, perhaps even in their own discretionary abilities; Peel himself was thoroughly convinced of the merits of Loyd’s ‘currency’ school; and in William Cotton he and his chancellor, Henry Goulburn, had a governor (abetted by Benjamin Heath as deputy governor) with whom they could work. ‘I must say,’ publicly declared Peel with apparent sincerity after a round of positive and broadly harmonious negotiations during the early months of the year, ‘that I never saw men influenced by more disinterested or more public-spirited motives than they have evinced throughout our communications with them.’25

  Peel’s warm words came in the course of a lengthy speech to the Commons on 6 May, setting out and justifying his proposals.26 In essence they were sixfold: separation of the Bank’s note-issuing function from its banking operations; restrictions on other banks of issue; a fixed fiduciary issue of £14 million (that is, the amount of notes that might be issued against securities); above that limit, a fixed ratio between notes and bullion; £180,000 less annually to the Bank for its management of the national debt; and the weekly publication of the Bank’s accounts. The reception was generally positive. ‘There can be little objection raised to the principle of the proposed plan,’ asserted a few days later the recently founded Economist; ‘sound & solid & generally approved of,’ noted the timber broker Churchill; while according to the diarist Charles Greville, ‘Peel has gained immense credit by his measure (and speech) about the Bank.’

  Among the Bank’s proprietors, though, opinion was more divided. At two special meetings of the General Court, on 7 and 13 May, at least four strong dissenting voices were heard. Timperon stated (‘in a low tone of voice’) that ‘if it rested with him he would send the proposal of the Ministers to the winds’; Fielder, recalling bitterly that ‘the Government paid not a farthing of Fauntleroy’s frauds, which have all been paid by the Bank’, declared that once again ‘the Bank had been hardly dealt with, that they had not had fair play’; Cook (speaking ‘amidst much interruption’) claimed that the directors ‘were totally unfit to defend the interests of the proprietors’, being ‘tied down by the Government’; and Younger likewise ‘hoped the proprietors would make a stand, and not suffer themselves to be dictated to, or be made, as they had been, the ’scape-goats’. The key speeches on the other side of the argument came from Hammond and, perhaps inevitably, Samuel Jones Loyd. Praising the separation of departments, the former set out a financially attractive vision of the directors now given ‘an opportunity of directing their attention more to the Banking Department, and making it more profitable’, so that ‘he had no doubt that that branch of the business would extend, unfettered by the trammels of the other branch, with great advantage to the proprietors’; while from a loftier, less mercenary perspective, the latter, speaking in response to ‘many calls’, termed the proposed legislation ‘the measure of a truly statesmanlike mind, characterized as it was by a manly adoption of great principles and enlarged views of the public interest’, adding that ‘there might be some difficulty in working out the measure, but it would be well carried out by those of whom the Bank could justly boast, who would work the measure in a manner to promote the interests of the Bank’. Significantly, these fine uplifting words came after Loyd had waved a big stick. Rejection of the government’s proposals would lead, he warned, to a ‘monetary system of the country’ that ‘would assume a totally new and distinct form, which would terminate in a manner not less beneficial to the interests of the country, but infinitely less beneficial to the interests of this corporation’. In any case, from whatever mixture of motives, the proprietors voted overwhelmingly to accept, with ‘only three hands held up against’.27

  Thereafter, it was not quite all plain sailing. Horsley Palmer was the last man to concede defeat readily, and at the end of May he wrote to Peel, asking him to increase the fiduciary limit to £16 million. Then a week later, on 7 June, the senior partners of the City’s private banks met to consider a memorial to Peel that expressed themselves ‘apprehensive that the absolute limitation of the issue to £14,000,000, without any power of expansion being reserved, whether that amount be in itself a proper amount or not, will create a general feeling of uneasiness throughout the country’, in due course ‘leading to a general withdrawal of legitimate accommodation’ – in short, causing yet another financial and/or commercial crisis. ‘I strongly suspect that Mr Palmer is very much at the bottom of this movement,’ a disconcerted Cotton wrote on the 10th to Goulburn. ‘He has been trying to influence members of the Court and I shall not be surprised if he brings forward some resolution which may probably place me in a Minority, but I will make the best fight I can and I shall be supported by the intelligence if not by the members of the Court.’ In the event, though next day the majority of City bankers signed and presented their memorial to Peel, the former governor did not seek to mobilise fellow malcontent Bank directors – perhaps because, despite Cotton’s anxiety, he did not quite have the numbers.

  Peel, anyway, was unmoved, and very soon afterwards, on the 13th, the Bill had its decisive second reading in the Commons, amid a fair degree of apathy. During the debate, the Whig politician Benjamin Hawes warned that having what was increasingly tantamount to ‘a single bank of issue’ would lead to the Bank being ‘ruled by the Government of the day’ and getting ‘mixed up with party politics’, producing ‘all the evils which resulted from such a course in America’; Goulburn, after referring to 1825 (when ‘the country had nearly been reduced to a state of barter’) and to ‘the misfortunes’ of 1839, and explaining that ‘the principle of this measure was, to make the currency, consisting of a certain proportion of paper and gold, fluctuate precisely as if the currency were entirely metallic’, insisted that ‘if there was one thing more than another guarded against in this measure, it was, that the Government should have no control over the Bank’; John Masterman, private banker and Conservative MP for the City, ‘thought it was a difficult point to settle that fourteen millions was to be the exact amount of money required at any particular period, or under any circumstances’; and the loudest cheer was reserved for Colonel Sibthorp, the famously reactionary member for Lincoln, when he declared that ‘if he had £100,000 in money he would rather entrust it to country bankers than to the monopolising Bank of England’. None of which stopped a 185–30 vote in the Bill’s favour, so that within weeks the Bank Charter Act was duly in existence, almost at the very moment of the Bank’s 150th anniversary.

  The creators of the new dispensation undoubtedly knew their history, going back to the 1790s. ‘The main object which Sir R. Peel and myself had in the arrangement made in 1844,’ Goulburn would recall, ‘was to ensure the convertibility of the Bank note and to prevent as far as was in our power a return of the calamitous circumstances which had resulted from the suspension of cash payments of which we were both old enough to have witnessed the commencement and the close.’ At the heart of that analysis lay an unshakeable belief in the superior virtues of gold – virtues that, if consistently adhered to, would dampen down speculation and ensure financial and commercial stability; while in ministerial eyes the prospect that the Bank would henceforth be kept in check, administering the gold standard along strictly non-discretionary lines, merely completed the virtuous circle. Yet of course the underlying reality was more complex. Not only did the narrowness of the Bank’s remit give it the opportunity to achieve a technical mastery over monetary matters that few outsiders would be able to challenge, but the very inflexibility of the fiduciary limit (somewhat against Cotton’s wishes) would make future crises more likely – as predicted by Horsley Palmer, and inevitably compelling politicians to look to Threadneedle Street for guidance.


  Even so, the godfather of the Act was relaxed enough. ‘H. Palmer has sent me his letter, if it proves anything it proves only that 14 million on Securities is too much,’ Samuel Jones Loyd wrote in August 1844 to George Warde Norman, still on the Court and perhaps secretly not unsympathetic to somewhat more flexible notions than either Loyd’s or Peel’s. ‘For a just decision on this point,’ went on the wealthiest banker of the day, ‘you Gentlemen of the Bank are exclusively responsible; and if you go wrong a la lanterne with you all.’28