Till Time's Last Sand

by David Kynaston

  Although his book was not officially published until the new year, the Economist responded in early December. Citing the most recent figures, showing the Bank’s reserve standing at £10.5 million (relative to deposits of £25.1 million), Bagehot asked: ‘Can any one fancy the sudden and to shareholders inexplicable reduction in the dividend of the joint stock banks, and the equal catastrophe to the income of private bankers, if they began to hoard bars or cash on a scale approaching this or resembling it?’ Accordingly, he went on, the Bank ‘alone has the means to meet a sudden emergency, and it must use those means, or it will fail in the universal ruin’. Norman entered the lists just before Christmas. ‘That the Bank of England should keep the whole unused reserve of the country seems to me an arrangement at once impracticable, and unsound in principle,’ he wrote to the Economist in defence of Hankey. ‘How is it possible that the directors should know, at any given time, the aggregate demand that may be made upon their resources, and provide accordingly?’ The old man’s letter could hardly have been gloomier. ‘With each oscillation of the financial pendulum,’ he noted with reference to the two most recent crises (1857 as well as 1866), ‘the pressure appears to become more sudden and intense’; and he blamed everyone but the Bank – above all, though he did not need to name them, the joint-stock banks that had become so large during his time – for the dark prospect that lay ahead: ‘If the present system of holding immense amounts at call in London without corresponding reserves be persisted in, no banking arrangements can meet the difficulty in times of extreme pressure. The result is obvious and inevitable, and I fully expect that younger men than myself will witness such a financial catastrophe as we have never yet seen nor can now imagine.’1

  The question of the Bank’s responsibilities was once again firmly on the table. Inasmuch as the Bank had a collective opinion, it seems over the next few years to have settled somewhere between the Bagehot and Hankey poles – to judge, anyway, by a parliamentary intervention in 1869. The catalyst was that most parsimonious of all Victorian chancellors, Robert Lowe, who not long before a Commons debate in May publicly asked, ‘What have I to do with the money-market?’, and equally publicly answered, ‘It must take care of itself.’ In the chamber he explicitly tackled the Economist’s demand that it was his duty ‘to keep a large balance in the Bank of England in order that it may be able to exercise control over the market’, a demand that he repudiated:

  It is the duty of the Chancellor of the Exchequer to take care of the taxpayer and the revenues intrusted to his charge, and it is not his duty to put money into the Bank merely for the benefit of the shareholders of the Bank of England – which, after all, is really a private banking institution – or to enable the Bank to assist traders, or to set up storm signals announcing the coming of panics …

  There is no monarch set up by any other department of business to warn those engaged in it of dangers to come; they must look out for themselves, and I don’t see that Government should go out of its way merely to strengthen a great institution like the Bank of England.

  An immediate response came from Robert Crawford, not only a Liberal MP but also the recently elected governor. Observing that Lowe’s recent remark about the money market taking care of itself had caused ‘a considerable amount of consternation’ in the City, and adding that the City was ‘the centre of the commercial interests of the country, and as the Government acted upon that centre so would the public interests throughout the country be more or less affected’, he then turned to the Bank itself:

  It was not the business of the Bank of England to find funds for the commercial community, nor had it been at any time. The business of the Bank of England was to take care of the funds intrusted to it, and to employ the money for the benefit of the proprietors. As to the ‘storm signals’ to which his right hon. friend had referred, the Bank of England did hoist storm signals, and, more than that, having the power, it used it in rectifying what otherwise might at the time be an unfortunate state of things.

  Crawford finished with a peroration that almost certainly lacked nothing in sincerity. ‘He held that the Bank of England in past times had exercised the vast power which it held with great benefit to the public (hear, hear), and as long as he was in the position which he happened to fill he would do all in his power not to disparage but to make effective the services which the Bank of England have always rendered. (Hear, hear)’2

  Neither Hankey nor Bagehot was done. In November 1872 the veteran director (and former governor) wrote to The Times, referring darkly to how ‘a recent writer on the subject considers it an error for the Bank of England not to keep a larger available reserve of bullion to meet the wants of the country whenever any unusual demand for gold occurs’, and went on: ‘Now, in reply to such an opinion, I venture to say that the Directors of the Bank of England neither have nor ought to have any more control over the reserve of bullion in this country than have any other bankers or any money dealer in England.’ Indeed, Hankey saw ‘no reason’ why the Bank ‘should increase the amount of money left unemployed in order to allow other banking establishments and other large traders in London to use up their own ready money more closely, believing that in case of need they may always avail themselves of the resources of the Bank of England, which resources are not kept for any such purpose’. Bagehot’s riposte, in the next issue of the Economist, appeared below a wholly predictable headline: ‘THE DANGEROUS OPINIONS OF A BANK DIRECTOR’. And in the article itself, after noting that a) ‘for the purpose of gold exportation it is of no use to look to the resources of other London bankers’, that b) ‘the only real source at which gold on a large scale can be obtained if wanted is the reserve of the Banking department of the Bank of England’, and that c) the consequence of the Franco-Prussian War of 1870 had been to knock out Paris as a rival ‘great European exchange centre’, leaving London as ‘the sole such centre’, he reiterated his argument: ‘The Bank of England is the bankers’ bank. Its reserve is the ultimate; our means of meeting a foreign payment depend on the magnitude of that final fund. The country must not go without a reserve while the London bankers and the Bank of England are squabbling who shall keep it.’ Moreover, he insisted, the apparent rule or custom by which the Bank kept about one-third of its deposits in cash was now anachronistic: ‘The nature of the demands upon the Bank of England has changed. The amount of foreign money now in London, the amount of the foreign liabilities of England, the amount of money which may be drawn out of the Banking department at any moment, is excessively increased.’

  By this time, Bagehot had almost finished writing one of the great City books: Lombard Street. Subtitled A Description of the Money Market, and published in the summer of 1873 (almost simultaneously with a new edition of Hankey’s Principles, with the author conceding no ground in his latest preface), it fleshed out in wonderfully vivid and persuasive style the two key arguments in relation to the Bank’s policy that he had been expounding for at least seven years. One, of course, was that the Bank should do everything in its power to protect its reserve. For, as he explained:

  A panic is sure to be caused if that reserve is, from whatever cause, exceedingly low. At every moment there is a certain minimum, which I will call the ‘apprehension minimum’, below which the reserve cannot fall without great risk of diffused fear; and by this I do not mean absolute panic, but only a vague fright and timorousness which spreads itself instantly, and as if by magic, over the public mind. Such seasons of incipient alarm are exceedingly dangerous, because they beget the calamities they dread. What is most feared at such moments of susceptibility is the destruction of credit; and if any grave failure or bad event happens at such moments, the public fancy seizes on it, there is a general run, and credit is suspended.

  So what, then, was that ‘apprehension minimum’? In present-day conditions, he reckoned, there was no alternative but to plump for the historically high figure of £10 million – below which ‘the important and intelligent part of the public which
watches the Bank reserve becomes anxious and dissatisfied’. But ideally, he went on, the reserve should be significantly higher, no less than £11½ million and preferably of the order of £14–15 million. Bagehot’s other key theme concerned what the Bank should do if, despite its best efforts, there was a recurrence in the future of financial panic. His answer was straightforward – that ‘in time of panic it must advance freely and vigorously to the public out of the reserve’ – and he set out his twin rules: that ‘these loans should only be made at a very high rate of interest’; and that ‘at this rate these advances should be made on all good banking securities, and as largely as the public ask for them’. As for those who maintained that the Bank’s reserve might not be enough for all such loans, Bagehot’s reply was bracingly clear: ‘The only safe plan for the Bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent. This policy may not save the Bank; but if it do not, nothing will save it.’3

  How much did Lombard Street shift the dial? During the middle years of the twentieth century, as historians and occasionally practitioners reflected on the evolution of modern central banking, the consensus formed that to a significant degree it had done so. ‘After Bagehot,’ reckoned R. S. Sayers, ‘no one could again put forward the doctrine of 1844 in all its nakedness,’ and instead the Bank’s ‘special position’ was ‘taken for granted’, in other words as ‘the holder of the single reserve, the ultimate source of support for the country’s financial structure in times of difficulty’; to another economic historian, E. Victor Morgan, Bagehot’s vanquishing of Hankey in the court of public opinion ‘may be said to mark another and final stage in the assumption by the Bank of the responsibilities of lender of last resort’. Yet the reality was perhaps somewhat more complicated. For one thing, it was a striking fact (highlighted by Hugh Rockoff in the 1980s) that the Bank’s reserve signally failed to increase during the decade and a half after Lombard Street, in half of those years averaging less than during the early 1870s and presumably, at least in part, reflecting a reluctance to damage the Bank’s profitability; for another thing, the Bank in practice showed itself wholly unwilling to take Bagehot’s advice and commit publicly to being the lender of last resort in times of panic or crisis, perhaps because of an understandable reluctance to surrender the dimension of moral hazard.

  Indeed, it is even possible that the widely held assumption that most of the Bank’s newer directors were instinctively if tacitly on Bagehot’s side of the argument, broadly speaking, may be mistaken – in the sense, anyway, of sharing Bagehot’s almost febrile urgency about the larger financial situation. Suggestive evidence comes from William Lidderdale, a director since 1870, writing to a partner in Liverpool a few months after the book’s publication:

  That our Banking and Monetary system in this Country is of an overcomplicated & interdependent nature which makes difficulties in any important quarter a serious matter for every one, is a fact upon which none of us are likely to differ. The system of taking enormous sums on deposit at call or short notice, on which interest has to be paid & which there is almost a necessity to employ if serious losses are to be avoided, is one which carries risk on its face. Mr Bagehot says things are so & that it is useless trying to change the system, & then throws upon the Bank of England the onus of providing a reserve adequate to the needs of all its competitors as well as regular customers.

  Crucially, however, Lidderdale insisted that the system could take the strain; and he asserted that ‘so far as concerns the big Joint Stock Banks, they most undoubtedly have remembered their lesson & materially improved their practice in the last 6 years’. Such an attitude is doubly instructive, given that Lidderdale was appreciably less complacent and more independent-minded than many of his colleagues. Not that Bagehot himself would have been surprised. Memories of the 1866 crisis may have been all too vivid in his own mind, Paris in the early 1870s may have vanished as a helpful counterweight to London, the sheer volume of the City’s liabilities as well as assets may have been daily growing – and yet:

  It is not easy to rouse men of business to the task. They let the tide of business float before them; they make money or strive to do so while it passes, and they are unwilling to think where it is going. Even the great collapse of Overends, though it caused a panic, is beginning to be forgotten. Most men of business think – ‘Anyhow this system will probably last my time. It has gone on a long time, and is likely to go on still.’ But the exact point is, that it has not gone on a long time. The collection of these immense sums in one place and in few hands is perfectly new.

  In short, ‘money will not manage itself’.4

  In addition to questions of policy, Bagehot offered one other major reform thrust: the improved governance of the Bank. ‘The Bank directors,’ he argued, ‘are not trained bankers; they were not bred to the trade, and do not in general give the main power of their minds to it. They are merchants, most of whose time and most of whose real mind are occupied in making money in their own business and for themselves.’ Thus, he went on:

  We have placed the exclusive custody of our entire banking reserve in the hands of a single board of directors not particularly trained for the duty, – who might be called ‘amateurs,’ – who have no particular interest above other people in keeping it undiminished – who acknowledge no obligation to keep it undiminished – who have never been told by any great statesman or public authority that they are so to keep it or that they have anything to do with it – who are named by and are agents for a proprietary which would have a greater income if it was diminished, – who do not fear, and who need not fear, ruin, even if it were all gone and wasted.

  Accordingly, argued Bagehot, ‘we should diminish the “amateur” element; we should augment the trained banking element; and we should ensure more constancy in the administration’. Specifically, he recommended two things: a permanent deputy governor, who would be ‘a trained banker’ having ‘no business save that of the Bank’; and, in terms of the Court as a whole, that ‘the London bankers’ should no longer be ‘altogether excluded’:

  The old idea was that the London bankers were the competitors of the Bank of England, and would hurt it if they could. But now the London bankers have another relation to the Bank which did not then exist, and was not then imagined. Among private people they are the principal depositors in the Bank; they are therefore particularly interested in its stability; they are especially interested in the maintenance of a good banking reserve, for their own credit and the safety of their large deposits depend on it. And they can bring to the court of directors an experience of banking itself, got outside the Bank of England, which none of the present directors possess, for they have learned all they know of banking at the Bank itself. There was also an old notion that the secrets of the Bank would be divulged if they were imparted to bankers. But probably bankers are better trained to silence and secrecy than most people. And there is only a thin partition now between the bankers and the secrets of the Bank. Only lately a firm failed of which one partner was a director of the London and Westminster Bank, and another a director of the Bank of England. Who can define or class the confidential communications of such persons under such circumstances?

  Neither suggestion seems to have been discussed, let alone countenanced, by the Bank itself; and although the Court had seen a certain broadening since the late 1840s with the election of various merchant bankers, these were far from the ‘trained’ commercial bankers that Bagehot had in mind. Again, it was Lidderdale who offered a private commentary:

  You have [he wrote in October 1873 to his Liverpool correspondent, who had dared to raise a moral eyebrow in the context of the Bank lifting its rate to 7 per cent against the background of bad news from both America and Europe] a very curious notion about the action of the Merchants who occupy seats at the Bank Court – the effect of alterations of rate is generally much less felt in their business than in Banking arrangemen
ts, & people who do the latter on a large scale are much more constantly face to face with questions of self interest … Then many Directors, men like Morris, Latham, Hankey, Hubbard, Huth, Campbell, the present Governor Greene, & Gibbs are personally in a position so little touched by anything which goes on in the Bank that it cannot be a matter of material interest what the rate is. Certainly no body of men have a right to claim superiority to even unconscious promptings of self interest, but I am bound to say that I have never seen more honest endeavours to decide in the true interest of the Bank, even when I have differed with the majority.5

  In politics, in cricket, in Threadneedle Street, the cult of the disinterested amateur was only just approaching its apogee.

  Even so, one can overdo the Bagehotian exasperation, shading into scorn. The men who ran the Bank during the final third of the century were for the most part serious, conscientious and intelligent, usually with a highly developed sense of the practical. Take a handful of examples. Robert Crawford in 1869, a few months after becoming governor, declined the offer of a baronetcy, on the grounds (he informed Rothschilds) that ‘a man in business ought not to be Sir Robert’; Benjamin Buck Greene (governor, 1873–5), of a firm trading largely in Mauritian sugar, was a thoroughly sound operator, a member of the Bank’s inner councils for many years, and renowned for his private collection of statistics relating to its accounts; J. W. Birch (governor, 1879–81), senior partner of a Hispano-English merchanting firm (Mildred, Goyenesche & Co), was described in a contemporary profile as ‘a shrewd man of business, impatient of the refinements of theorists, careful of facts, and, therefore, as a necessary consequence, judicious in a crisis’; while Sir Mark Collet (governor, 1887–9) was, as senior partner of the steadily rising merchant bank Brown, Shipley & Co, a capable, hugely experienced figure, as well as being brother-in-law of George Warde Norman and a benevolent, closely involved grandfather to young Montagu Norman.