Till Time's Last Sand

by David Kynaston

  Productive of great advantages and has fully answered the main purposes for which it was devised. (Sheffield Neave, deputy governor)

  Has worked admirably and been productive of vast benefit to the Public. (John Hanson)

  Highly beneficial in its operation, by maintaining the convertibility of the Bank Note, and in preventing any discredit of the paper circulation of the Country. (Thomas Smith)

  I should strongly advocate its renewal for a term of years as it now stands. (James Currie)

  Crises and Panics will arise under any system, whether Metallic or any other; and in my humble opinion founded on long and extensive connection with Commercial affairs, I am satisfied the Act has greatly mitigated those that have occurred during its existence, and to which they were in no degree owing. (James Malcolmson)

  Weguelin himself, forwarding the replies to the chancellor (by now the generally more accommodating Sir George Cornewall Lewis), contrasted the safety of the Bank’s reserve with that of the very rapidly growing joint-stock banks. Citing the Joint Stock Bank of London – £30 million of deposits, £3 million capital, £31 million ‘invested in one Kind of Security or another’, thereby ‘leaving only £2,000,000 of Reserve against all this mass of liabilities!’ – he asserted that ‘it is impossible to foresee the consequences of the failure of one of these large establishments’; and that, he claimed not altogether implausibly, was a subject that ‘more pressingly requires the attention of Parliament’ than ‘any alteration’ in the 1844 Act.

  The governor’s tactic failed, and from March to July 1857 a select committee of the Commons took evidence on how the Bank Charter Act had played out in practice. Weguelin and Neave (the new governor from April) were the Bank’s two main witnesses, with the former the more articulate, not least as he conceded, contrary to the literal interpretation of the Act, that the Bank’s banking department was the ‘pivot of the whole banking system of the country’ and thus should eschew active competition with other financial institutions, let alone any form of speculation. Gladstone pressed him at one point:

  Will you describe to the Committee what you consider to be the difference between the Bank of England and a private banker with regard to the management of their deposits? – The chief difference, perhaps the only difference, is that the Bank of England makes a much larger reserve than a private bank finds it necessary to do.

  So that the Bank of England has to apply prudential considerations of a public order to cross and qualify to a certain extent the simple pursuit of profit? – That is so.

  It must therefore be a matter of great difficulty at times for the Court of Directors, having the interest of the Bank proprietors to attend to on the one hand, and these public considerations on the other, to balance the one against the other? – No; I have been a Director of the Bank of England for 20 years, and I can never yet remember a discussion in the Bank Court in which the interests of the proprietors were considered irrespective of the public interests.

  Still if I understand you rightly, it is the fact, that to a certain extent under certain circumstances, the interests of the proprietors have to give way to what you deem prudential considerations immediately connected either with the welfare of the State or with the welfare of commerce at large? – I think that the interests are identical; I do not think that the Bank Court could manage its affairs well for the interests of its proprietors, and at the same time manage them badly for the interests of the public. The interests of the public are the same as the interests of the proprietors, namely, that the Bank should be in an effective position of the highest possible credit.

  Is the Committee then to understand that there is a real, or that there is only an apparent conflict of interest between the two? – I think that there is only an apparent conflict of interest between the two; and that has been the invariable opinion of the Bank Court.

  What, asked another questioner, about the bullion aspect? ‘I think the result has been satisfactory,’ answered Weguelin. ‘In no case has our reserve declined below 3 millions; and on the whole, I think, there has been no anxiety in the public mind with regard to the state of our reserve.’ It was not a reply that satisfied the up-and-coming journalist and commentator Walter Bagehot, though at this point, writing in June, he blamed the legislation rather than the Bank itself:

  The bullion which the Act of 1844 compels the Bank to keep is, to speak absurdly, bullion in a straight waistcoat. It appears to be tied up for something, and there is no confidence that it can be made available for the actual liabilities of the concern … We have seen that even while the notes are in good credit, the bullion might be reduced to less than one seventh of the liabilities. In general the Bank ought not, I imagine, to hold less than one third of its liabilities in bullion; it ought never, perhaps, to have less than one fourth. Occasions might arise in which they should have more than either.

  After all, as Bagehot concluded, ‘the great wish on the part of the English people as to currency and banking is to be safe’.14

  Within months, the Bank was facing the first major crisis for all of ten years – a crisis occasioned largely by the collapse of American banks and railroads. It was, as so often, an autumnal affair. ‘We clearly are going to have a heavy Squall & we must take in every reef we can,’ governor Neave, laid up at home in Hampstead, wrote on 9 October 1857 to his deputy, Dobree, shortly after Bank rate had gone up from 5½ to 6 per cent and shortly before it jumped to 7. From the start, the Bank’s primary focus was on the discount houses. ‘My almost only fear is whether the great Bill Brokers are in such a position to bear a considerable drain on their resources,’ one senior director, Thomson Hankey, confided to Dobree on the 20th, the day after Bank rate had been raised again, this time to 8 per cent, the rate imposed during the 1847 crisis; and Hankey was right to be fearful, especially after the failure a week later of the Borough Bank of Liverpool, prompting the joint-stock banks to recall their call money from the money market, which in turn left the discount houses struggling to finance their bill portfolios and having to look to the Bank for help. King of the discount houses was Overend Gurney, whose David Barclay Chapman, senior partner since the recent death of Samuel Gurney, dropped in to Threadneedle Street on the 29th in order, noted Dobree in his diary, ‘to know whether they could rely on the Bank for unlimited assistance if pressed’. As usual, Norman (in his fourth decade as a director) kept Loyd (now Lord Overstone) in the picture. ‘The bill brokers’, he reported in late October, ‘now find themselves up to the ears in their Bills’ and ‘expect the old Lady to cash every thing’; while by Guy Fawkes Day, with Bank rate hoisted to 9 per cent, ‘things in the City’ were ‘very sick, and more likely to be worse than better’, so that ‘we may again see Lombard St knocking at the door in Downing St’. Saturday, 7 November brought the news that Dennistoun, Cross & Co, an important firm of American bankers and exchange brokers based in Liverpool, London, Glasgow, New York and New Orleans, had stopped payment – news that Neave and Dobree presumably took with them late that afternoon when they went to the Foreign Office at the request of the foreign secretary, Lord Clarendon, who was under pressure from Emperor Napoleon III to be told what was going on in London and likely to transpire. ‘The Governor replied [recorded Dobree] that as regarded the Bank of England’s Position it was one of considerable anxiety: that the Figures of the Bank as nearly as possible corresponded with those existing at the memorable period in October 1847 when the celebrated Letter authorised an unlimited issue of Notes on Securities: that the difficulties of the Moment were gravely aggravated by the total Suspension of all Credit in the U States …’15

  Then came the week of third time pays for all. On the late afternoon of Monday, 9 November, with Bank rate up to 10 per cent, Neave and Dobree were summoned to see Lewis in Downing Street. ‘Chancellor stated that a Deputation from Glasgow was to have an interview with him Tomorrow. Asked in general Terms whether or no the Bank of England have any thing to suggest in regard to the Action of the Bill o
f 1844. The Govor replied that they had none.’ Such was the first of the week’s three key meetings, with neither side blinking. Next day the significant event was recorded in Dobree’s terse diary entry – ‘Gurney’s asked for a dis: of 30 day Bills 400m [that is, mille, the old-fashioned term for thousand]. Granted’ – before the crisis was further ratcheted up on Wednesday the 11th by two dramatic developments: the stoppage of the City of Glasgow Bank (causing huge consternation in that city) and the failure of the discount house Sandersons, with liabilities of at least £3½ million. By late afternoon governor and deputy governor, accompanied by Weguelin, were again in Downing Street. Lewis asked ‘if the time had arrived to adopt the measure resorted to in 1847’, mentioning that earlier in the day Chapman had urged him to do so; to which Neave and his colleagues replied that ‘the period had not arrived for such a Step’ and that ‘a strong opinion was entertained by the Court of Directors to maintain the Bill of 1844 at any sacrifice’. As they left the room, Neave remarked to his deputy that his impression was that the government ‘were prepared to issue 50 Letters and all they wished was that the Governors should make such a request’. The decisive third meeting was not long coming. Thursday the 12th saw discounting virtually non-existent, the joint-stock banks unwilling or unable to make any advances, two major discount houses (Gurneys and Alexanders) under severe pressure, the Bank’s own banking reserve down to under £1 million: unsurprisingly, Neave and Dobree were in Downing Street by 2 o’clock. After some discussion – during which Neave admitted that certain directors were starting to waver, but refused either to reveal names or to make a formal request – it was Lewis of his own accord who produced the Treasury letter once again in effect temporarily suspending the 1844 Act.16

  The relief produced by its publication was not quite so instant as in 1847, but even so it broadly turned the tide, notwithstanding the American house George Peabody & Co (forerunner of the merchant bank Morgan Grenfell) having a week later to borrow at least £250,000 from the Bank in order to keep going. A trio of immediate codas to the crisis was telling. One was Norman’s reluctant pragmatism, for almost certainly he was the anonymous director – ‘a consistent and heretofore staunch supporter of the Bill and well capable of judging the actual condition of affairs,’ as Neave explained to Lewis at their final meeting – who on the crucial Thursday morning ‘declared to his great regret that he saw no safety to the Bank or to the Mercantile Interest but in a relaxation of the restrictive Clause’. Second was the revelation, by an Overstone informant, that very soon after the letter’s publication Chapman had ‘avowed to his friends that he had threatened to compel the Bank to stop unless the Directors should obtain from Government a suspension of the Act’. And the third came from Overstone himself, who on the 24th, two days after Lewis had rather ingenuously told him that prior to suspension ‘no pressure was applied to the government which they could not have resisted as easily as an application for a postponement of the hop duty’, and that ‘the pressure which was applied to them was the pressure of facts’, sent a reply amply suggestive of unfinished business on the Bank’s part:

  The Bill brokers have been in the habit of holding probably from 15 to 20 Millions of Money at call!! The whole of this sum they invest in the discount of Bills and in advances upon Goods and Produce. – When general pressure arises, and calls for Money are made upon them by all their depositors – they have no source from which to meet these calls, except that of rediscounting at the Bk of England. Hence the enormous demands upon the Bank – The Bill-brokers cease to discount – they send overwhelming masses of Bills to the Bank – and if this process sustains the slightest check – they at once exclaim, the world must stop payment, because there is an inadequate supply of money. In one, the last day before the Letter, Gurneys obtain 800 from the Bank!! and then they go to the Govt to urge the suspension of the Law, because the Bank is exhausted and can do nothing for trade. Either this system must be broken down, or it will in its turn break down any and every Monetary system which can be established …17

  Crises notwithstanding, the Court’s doors were always open – if the timing was right and the face fitted. ‘Mr W. Goschen called to ask if there would be any objection to his son being considered a candidate for the Bank direction,’ recorded Dobree on New Year’s Day 1858 following a visit from the elderly co-founder of the successful merchant bank Frühling & Goschen. His son was George Joachim Goschen, just twenty-seven but already a partner in the family firm, and he duly became a Bank director that spring. Quickly tagged ‘the fortunate youth’ by the City at large, he published three years later The Theory of the Foreign Exchanges, an instant classic owing at least something to his assurance to its readers that ‘the object proposed is by no means to propound any dogmatic theories’; in 1863 he was returned unopposed as a Liberal member for the City, having been nominated by two fellow Bank directors; and two years later he became vice-president of the Board of Trade, compelling him to retire from business and relinquish his position at the Bank.

  Back in January 1858, a week after Goschen senior had put out his feeler, it was the turn of Horsley Palmer, who the previous spring had stepped down from the Court after a combative and often successful, but in the end somewhat marginalised, forty-six years. He explained to Dobree the new set-up of Dent, Palmer & Co (somewhere on the border between merchants and merchant bankers) following his own retirement – essentially, that the senior partner would be the sixty-year-old Thomas Dent, but with a major role for his own forty-five-year-old son Edward Howley Palmer, whose capital in the house would be at least £60,000. Accordingly, Palmer senior (who would die only a few weeks later) had two requests to make of the deputy governor. First, in relation to Dent, that ‘it would be very desirable he should be chosen as Director of the Bk of England & for which Mr D has declared himself a Candidate, and if his Age should not be deemed a disqualification & he should be recommended by the Comme of Treasury’; second, in relation to his son, that ‘should Mr Dent not be accepted a Candidate (on a/c of his Age), then in such Case Mr Edw H. Palmer would be a Candidate’. Horsley Palmer’s suspicion was correct: Dent was indeed considered too old – and accordingly Edward Howley Palmer joined Goschen that spring as one of the new directors.18

  By then, Neave and Dobree had appeared thrice before the Select Committee on the workings of the 1844 Act, reconvened in the wake of the previous autumn’s crisis. Inevitably, Neave was pressed hard about the exact circumstances during the critical week:

  What would have been the effect upon the Bank, if the Act of 1844 had not been suspended by the Treasury letter? – The Bank had evidently gone beyond what a mere ordinary joint-stock banker would have done. The Bank would not have risked what she did, if she had been certain that by no possibility would Government give any relief; but feeling that she was bound, as a public institution, to make common cause with commerce, she certainly gave greater assistance. If she had only had to think of herself, and selfishly to protect herself, she would have refused discounts at an earlier period altogether …

  Then, as I understand you, the Bank acted upon the conviction that the Treasury would suspend the Act, in case of difficulty? – I think it must have weighed with them within the last few days, that the Government would probably interfere, if the action of the Bank was unsuccessful.

  And again, later in the same February 1858 session of evidence, with Sir Francis Baring (a former chancellor) continuing to put the questions:

  A few days before it was issued, did you, on the part of the Bank, represent to the Chancellor of the Exchequer the necessity of issuing such a letter? – No; we did not take upon ourselves to urge upon him a measure for which we considered the Government entirely responsible; but we gave him every information from which he could make a correct judgement.

  You went as near the wind as you could, I suppose? – No; I do not use that expression ‘near the wind’; but we gave him every information which we possessed ourselves.

  You did not
give him your advice or opinion, but you gave him the facts? – We gave him all the facts.

  It fell to the Committee’s chairman, Edward Cardwell, to ask Neave whether, in terms of the suspension of the Act, ‘it might not be as well to leave the power with you as to throw it upon the Executive Government’. To which Neave carefully replied, ‘I would place it chiefly in the hands of the Government.’ A final exchange followed: ‘That the responsibility would, in your opinion, be too great if it were cast upon you? – I think the Bank would rather be without it.’ Given that in day-to-day practice the Bank had been able since 1844 to exercise a significant degree of discretionary monetary control, almost certainly more than Peel would have wished or intended, Neave’s was a sensible – and politically realistic – reply.

  The Committee itself reported in July, with only two members dissenting from its recommendation (tacitly accepted by the Commons, which failed to debate the report) to retain the Act as it stood. ‘A new generation were taking charge who saw no practical difficulty in operating under the Act, particularly since they realized that it would be suspended if necessary,’ would be the helpful gloss of Elmer Wood in as the 1930s, adding that anyway ‘the problem of monetary control was becoming less pressing as the supply of gold increased’. Even so, the 1858 report had its tantalising might-have-been – namely, an appendix considering the merits of implementing Ricardo’s proposal (in a posthumously published pamphlet) for a National Bank of Issue, distinct from the Bank of England. The decisive voice against came from Lord Monteagle, the former chancellor Thomas Spring Rice. Such a bank, ‘charged also with banking functions on Government account’, would, he insisted, ‘rest on no defensible principle whatsoever’; and he resoundingly declared that ‘the honour and independence of the Bank of England, and the sense of duty invariably manifested by that great Corporation in fulfilling the trust confided to it by Parliament, furnishes a security which may not always be found in a mere executive department of the State, bound to obey the commands of a superior authority’.19