Till Time's Last Sand

by David Kynaston

  The late-Victorian Bank could also seem a formidable presence when it came to politicians. An invaluable witness was the Treasury’s Edward Hamilton, a marvellously watchful diarist who accompanied successive chancellors on visits to the parlour. In September 1886 it was the turn of Lord Randolph Churchill. A year earlier, while at the India Office, he had declared to the viceroy that the ‘financial knowledge’ of Rothschilds was ‘as great as that of the Bank of England is small’; but now his mood was rather different. ‘Tenders for Treasury Bills [a recent innovation that was becoming increasingly important to the short-term funding of the government] afforded a good opportunity of introducing him to the Governor & Deputy Governor with whom the Chanc of the Exchequer ought to be on good terms,’ recorded Hamilton. ‘He seemed quite nervous about presenting himself …’ Almost certainly this was the episode when Lord Randolph was reduced, in his son’s words, to ‘hovering for half an hour outside in a panic of nervousness’. Once inside, however, things went smoothly enough:

  We sit [noted Hamilton] round the Governor’s table. The Cashier & two others bring in the Tenders, open & sort them. The Governor then proceeds to read them out. The cashiers then give roughly the average price at which our requirements can be met by three months Bills & six months Bills … Today we wanted about 2 millions, & as nearly a million falls due in 6 months Bills next December we took one million in three months Bills at about 2¼% per annum, & the other million in 6 months Bills at about 2¾% p.a. One of course defers to the judgement of the Governor & Deputy Governor; but it is generally a simple & straightforward business … Randolph Churchill said he was interested in the ceremony. The Bank of England is certainly a grand institution. After we had done our business we had luncheon. The working of the Bank Act very appropriately formed a subject of discussion.

  ‘One of course defers’ – four words conveying a wealth of meaning. Or as Hamilton had reflected of a similar occasion a year earlier, ‘one must practically follow the advice of the Governor & Deputy Governor’, even though ‘I am not satisfied with the bargain I made.’ Politicians came and went, and the Bank was intensely careful not to be drawn into party controversy, but there was one eminent politician towards whom its private view was now consistently negative, reflecting a larger shift in the City’s political mood as well as specific institutional memory. ‘At luncheon in the Bank parlour one generally hears grumbles, if not expletives, about Mr G,’ recorded Hamilton in January 1888 after a visit. ‘Mr G’ was of course Gladstone, still the Liberal leader in his late seventies. ‘One Director,’ added Hamilton, ‘said he intended to send Mr G a naive advertisement of an enterprising undertaker, who expressed surprise that people should go on living a life of trouble to themselves and others when they could be comfortably interred for £3 …’13

  There were warmer feelings towards George Joachim Goschen, Churchill’s successor and the only former Bank director ever to have become chancellor (1887–92). His first great moment of reliance on the Bank was in the spring of 1888, as he sought to convert almost £600 million of British government 3 per cent stock to 2½ per cent. The circumstances were propitious – cheap money, dear securities, Goschen’s own high reputation in the City – but only four years earlier a debt-conversion scheme had failed unexpectedly. ‘The Chanc of the Exchequer is fortunate in having a very sensible Governor of the Bank (Collet) and a shrewd hard headed Deputy Governor (Lidderdale) with whom to consult,’ noted Hamilton in early March, and not long afterwards Goschen publicly announced his scheme. This time it came off triumphantly, with Lidderdale in due course expressing to Goschen the Bank’s pride in having contributed to ‘the complete success of a financial operation of such unprecedented magnitude’, an operation that earned Collet a knighthood. For those at the Bank never in line for honours, though, the work involved was huge and continuous for weeks if not months – ‘beyond all precedent’ in the words of Collet himself, while the principal of the Transfer Offices broke down under the round-the-clock strain. ‘I had no love for it,’ admitted Allan Fea many years later:

  The great thing, I remember, was to knock off as many addressed envelopes as possible, and the speed records were easily carried off by Scotsmen, for I believe it was ‘piece-work’ – pay on the hop-picking system – the greater the bulk the taller the pile of solid cash. I must confess I didn’t make much myself over the job. The novelty of nocturnal scribbling soon palled … I, therefore, escaped into the open-air whenever I could alight upon a plausible, though obviously shiftless excuse, and like the moral story of Hogarth’s ‘Good and Bad Apprentice’, left the diligent to earn his own reward.

  A further recollection came from another former Bank clerk, Arthur Rowlett. This was of the ‘courtly, white-haired old gentleman with Gladstonian collar and white choker’ who ‘refused to recognise’ Goschen’s conversion. ‘He always appeared on the same day and at the same hour, and asked for his Dividends on 3 per cent Consols. When told they were now 2½ per cent he shook his head, walked to the middle of the Office, looked at the clock, compared the time with his gold hunter, and then walked slowly out. This proceeding he repeated regularly each quarter for about fifteen years until he died …’14

  Yet if the Bank remained indispensable, perhaps increasingly so during the 1870s and 1880s, it was hardly omnipotent. This was especially so in the money market, where the big commercial joint-stock banks, their deposits continuing to rise at a far greater pace than the Bank’s, enjoyed considerable clout. ‘It is felt on all sides that the old system of paternal government is passing away,’ one informed City practitioner wrote to the Economist in December 1874, adding that ‘the Bank of England, which once distanced every competitor, is now only primus inter pares’. The key problem was that of making Bank rate effective in the market, an especially pressing concern with the development in the mid-1870s of the so-called Greene–Gibbs policy (named after the two successive governors of those years), involving the systematic use of Bank rate to protect the reserve. ‘The Bank of England,’ explained Gibbs to his Oxford correspondent in 1877, ‘has but one weapon, the rate, wherewith they defend their own position, and make those who want to borrow money pay a little more for it, inducing, by the rise of interest, the foreigners to minister to the provisions of the Act of ’44, and send more note-producing gold into our coffers.’ Gibbs was honest enough to concede that the Bank no longer had the power ‘to command and control the market’, but even so, he went on:

  Our rate is a real power; and as to export of gold, it is so also. So long as the bankers have with us more in balance than what is necessary for them to work with, they can of course buy gold and export it, whatever the rate of discount in the Bank; but we, of course, know by practice how far they can go; and, when they can go no farther, our rate is an all-controlling engine. Nor are we powerless while they have a surplus balance with us, for of course a timely disposal of some of our Consols or other securities takes the spare money off the market, and makes the Banker of Bankers (‘Shah-in-Shah’) the real arbiter.

  Over the next decade or so the question of making the rate effective continued to exercise the Bank’s best minds. Three distinct approaches gradually evolved: first, as intimated by Gibbs, an increasingly frequent resort to open-market operations, selling securities (usually Consols) ‘spot’ for immediate delivery and repurchasing them forward, thereby impacting as desired on the reserve base of the commercial banks; second, gradually withdrawing the controversial 1858 rule and fostering closer relations with the discount houses, by now instinctively more co-operative than the commercial banks; and third, in relation to those banks, seeking to subdue antagonism by slowly retreating from the Bank’s own commercial business, a policy not always easy to sell to the Bank’s own shareholders. All three approaches helped, but the problem was far from solved by the end of the 1880s.15

  There were signs of relative weakness in other areas too, most visibly the famous 1875 episode in which Benjamin Disraeli at 10 Downing Street, eager t
hat the British government buy a major stake in the Suez Canal Company, cold-shouldered the Bank and instead turned to Rothschilds to put up the £4 million.16 Possibly there was a legitimate constitutional doubt whether the government could raise that sum from the Bank without the authority of Parliament (not sitting), but almost certainly Disraeli saw Rothschilds as the more dynamic outfit in an urgent situation. Ten years later, in July 1885, the Bank again found itself outflanked by that merchant bank, this time at the behest of Lord Salisbury’s government, choosing the issuer of the London portion of a £9 million loan to Egypt guaranteed by the British, French and German governments.17 ‘We were prepared,’ insisted a pained governor, Currie, in his reply to Salisbury’s letter giving the disappointing news, ‘to carry out the issue in the centres of the guaranteeing powers with, we believe, the greatest advantage to the Egyptian Government.’ Within weeks, moreover, Currie was writing again, this time to the chancellor, Sir Michael Hicks Beach, after a recent meeting at which Hicks Beach had, in Currie’s words, ‘informed us [the governor and his deputy] that it had been hinted that the government might have offers for the supply of their “Ways and Means” advances from some other source than The Bank of England’. A lengthy cri de coeur ensued:

  The expediency of the Government entertaining offers of loans from other Banks than The Bank of England cannot be decided by a consideration of the present or any exceptional condition of the Money Market.

  The Bank of England, as the Banker of the State, is by statute empowered to make loans to the Government under provisions which apply to it exclusively. The Advances under different Statutes, which The Bank is enabled to make in preparation of the dividends, or to meet deficits in the Revenue at other periods, are always made at exceptionally low rates of interest – lower considerably upon the average than could possibly be charged by any other Banks guided by the rate they could obtain in the open Market, or upon discount of bills spontaneously offered to them.

  The Bank of England supplies the Government on exceptionally favourable terms because it regards the Government as its largest and, under every point of view, its most important customer, and believing hitherto that (with the exception of Treasury and Exchequer Bills) the Government invariably resorted to The Bank for the pecuniary advances indispensable to the punctual fulfilment of the engagements of the State, The Bank has always held itself bound to the extent of its power to render the assistance required by the Treasury in any exigency and under any condition of the Money Market.

  Acting upon this sense of obligation, The Bank have at times encountered serious inconvenience and loss in order to enable them to comply with the requirements of the Government; selling, for instance, at a large sacrifice, portions of their public securities.

  That there is at times a large amount of unemployed capital in the Money Market is certain, and there is no reason why the Treasury should not reap the benefit to be derived from its use. Treasury Bills were devised for the very purpose of enabling the Government to avail itself of these occasional redundancies of cash, and the experience of the present year demonstrates how successfully the instrument has worked in supplying the Exchequer with considerable sums at unprecedentedly low rates of interest.

  The Bank at times holds large amounts of these Treasury Bills; and when the state of the Money Market has been at any time such as to cause fewer tenders to be made than would cover the requirements of the Government, The Bank has invariably come forward to supply the deficiency, although it may not have considered it advisable to tender at the time.

  A statement could easily be framed exhibiting over a series of years the very moderate rates charged by The Bank upon advances to the State compared with the Market rate of discount or with The Bank’s charge to its ordinary Customers.

  ‘In conclusion,’ wrote Currie, ‘I would observe that the practice which has hitherto prevailed enables the State to depend upon The Bank of England for any Advances it may require, at all times, upon the most favourable terms; whereas offers from any other Bank would probably only be made under exceptional circumstances when it suits the interests of that Bank to make them.’ And he finished with what he clearly trusted was his killer point: ‘It must be borne in mind that any transactions between the Treasury and a Joint Stock Bank would certainly be known, whereas those subsisting between the Treasury and The Bank are accompanied with a secrecy greatly to the advantage of the State.’ To the extent that the Bank did indeed retain its monopoly of Ways and Means advances (short-term loans by the Bank to government to enable the latter to balance its immediate books), the governor’s missive worked; but the very fact of the letter was troubling enough.

  ‘The Declining Power of The Bank of England’ was the title of a leading article in the Bullionist in early 1890. Noting that the official rate of discount had been 6 per cent for several weeks, ‘yet this high rate has failed to attract gold, as it would have done in years gone by, when the power of The Bank of England had not been diminished substantially’, the paper argued that the Bank had not only lost control over ‘the Home Discount Market’ – ‘partly by its own antiquated methods of procedure and practice, and partly because of the active operation and greater liberality of its powerful competitors, the large joint-stock banks’ – but was also by this time significantly less influential in relation to ‘foreign money markets’, with London ‘not the monopolist of gold which it once was’, as increasing quantities of gold went instead to Germany and the United States. In consequence of all of which, declared the Bullionist, the Bank ‘finds itself in tight places’.18

  By now the buck stopped with Currie’s successor but one, William Lidderdale, who in his mid-sixties had become governor the previous year. His own background was part Scottish, part Merseyside, and since the 1860s he had been the London partner of the Liverpool-based merchants Rathbone Brothers, developing in the process a distinct scepticism about the much trumpeted virtues of the City. He also had a clear-sighted view of the Bank’s weaknesses, and during the first seven months or so of 1890 took significant action on a handful of fronts, all designed to strengthen Bank control. These included raising its price for gold from Paris and no longer making importers of large bars bear the charge for melting; securing deposits from the new county councils; managing more closely the India Council’s considerable balances; seeking to co-ordinate the market actions of the Bank and the Treasury; pushing for greater business with the provincial banks; and jettisoning the last remnants of the 1858 rule, thereby readmitting the discount houses to regular borrowing and rediscount facilities at the Bank. This vigorous approach won praise. ‘It is said,’ noted Hamilton in August 1890, ‘that Lidderdale is considered in the City to be the best Governor the Bank has ever had (not excepting Collet). He always knows his mind, & his judgement is very good.’ But Lidderdale himself was far from satisfied with the larger situation, writing a few weeks later to the Treasury’s Sir Reginald Welby:

  I don’t think any one who has not sat for 2 years in the Governor’s chair during the last decade can realise fully – the dependence of the English Banking system upon the Bank – the difficulty that this dependence creates in our management. Banking liabilities have enormously increased, not so Bankers’ reserves, & this makes our burden much heavier than before & leads to fluctuations in rates quite out of proportion to actual movement of currency.

  Lidderdale’s particular grievance concerned the joint-stock bankers and their tendency to remove without warning their already inadequate balances from the Bank; as for bankers as a whole, he frankly told Welby that ‘a less public-spirited class … I do not know’.19 In the event, however, it was to be the hubris of a merchant banker that would put him to the ultimate test.

  ‘Went to the Bank, things queer!’ noted Goschen in his diary on about 10 October 1890. ‘Some of the first houses talked about. Argentine, etc, have created immense complications. Uncomfortable feeling generally.’ Over the next few weeks it emerged – though not to public knowledge �
�� that the City house in most serious trouble was Barings, second in prestige only to Rothschilds but guilty of having rashly over-committed itself in the Argentine (site of a lethal blend of political chaos and financial mismanagement), and whose head was Edward (‘Ned’) Baring, elevated to the peerage as Lord Revelstoke five years earlier. A man of considerable ability but also high self-importance and poor judgement, he had been a director of the Bank since 1879; and it is possible that in 1887 he had had a moment with the governor of the day, James Currie, with the latter writing to him, ‘I am sorry that you express a feeling that the Junior Members of the Court [that is, including Revelstoke himself] have practically nothing whatever to do with the management of the affairs of the Bank.’20

  What became known as the Baring Crisis – in time as the first Baring Crisis – began for real on Saturday, 8 November.21 Early that morning, the merchant banker Everard Hambro, one of Revelstoke’s two closest friends in the City and likewise a Bank director, called first on Nathaniel (‘Natty’) Rothschild (who in 1885 had been elevated to the peerage at the same time as Baring), in order to put him fully in the picture, and then on Revelstoke himself, who bleakly informed him that he would be able to say on Monday whether or not Barings could go on. In response, Hambro told Revelstoke that the only person who could help him now was the governor; and, befitting a crisis that would be played out almost entirely behind closed doors, he arranged that Lidderdale should come to Hambros in the afternoon so that he could discreetly see Revelstoke. At that meeting – before which Lidderdale scribbled a note to Goschen asking him to come to the Bank first thing on Monday – Revelstoke and a fellow-partner presented to the governor and Hambro ‘a preliminary statement of their affairs’, in Lidderdale’s retrospective words, ‘which rendered it uncertain whether the Firm would have any surplus after payment of their liabilities’. In an unsurprisingly strained atmosphere, the governor, who had probably only discovered that day that Barings was in such dire, life-or-death straits, contented himself with observing that he needed further particulars and would wait until Monday to see whether Barings could continue. Already, though, he must have begun to see that the consequences of Barings going down were almost unthinkable: not only would the collapse of the City’s leading accepting house (that is, merchant bank), the world leader in trade finance, inevitably bring down an array of other firms, including all the discount houses, but the very status of the bill on London would be endangered and thus the pre-eminence of the City as an international financial centre.