Till Time's Last Sand

by David Kynaston

  He had already while at the Bank published The Golden Age (a childhood memoir, reportedly a favourite book of the Kaiser’s), and during the mid-1900s there was seldom any respite from the gold reserves question. In February 1904 the Institute of Bankers heard Alfred Cole, a plain-speaking merchant who had been a Bank director since 1895, tell the assembled company that, in order to increase the country’s gold reserves, the banks ‘must agree that, instead of calling in their loans temporarily, they must all keep permanently larger balances at the Bank of England’; some two years later, the new Liberal chancellor, H. Asquith, briefly considered setting up a broad-based royal commission to examine the whole issue. ‘It is quite true I have spoken to 2 or 3 City men about the gold inquiry,’ he told Hamilton. ‘In what other way one is to get any independent opinion of any value, I fail to see. The truth is all these people, & not least the Bank directors, are as jealous of one another as a set of old maids in a Cathedral town.’ Later in 1906, at a big City dinner that July at the Ritz, the major speech was made by Viscount Goschen, almost half a century after he had joined the Court before becoming a politician. In a classic piece of elder statesmanship, he cogently outlined the options:

  The bankers ought to hold more reserves themselves. The Bank of England ought to hold more gold. (Hear, hear.) I see the majority are in favour of making the shareholders of the Bank of England responsible for the increased cost. Well, that is the question. I am not controversial; after dinner I will never be controversial; but I am putting the various alternatives. There is the Bank of England or there are the bankers. Then there is the Government. Perhaps there will be greater unanimity there, because now the representatives of the Bank can join with the representatives of the bankers in saying it is the Government who ought to bear the increased cost. Well, gentlemen, those are difficult questions, but I do think it would be worthy of the City of London – that it would be worthy of this great community who are responsible for the finance of the country – if they could agree to go upon some plan by which, perhaps by mutual sacrifice, by mutual compromise, by wise counsels, they might discover some method by which the present position might be remedied.

  ‘It was significant,’ noted the Financial News in its report, ‘that there was dead silence, in an audience largely composed of bankers, when he spoke of the possible duty of the joint-stock banks in this connection, loud applause when he suggested the Bank of England as an alternative sufferer, and vehement cheers when the Government was mentioned as a last resort.’

  As it happened, the events of the next year and a half, including a mini-crisis and a more testing crisis, brought the issue even more to the fore. The mini-crisis was in the autumn of 1906, against a background of feverish speculation in New York and an increasingly worrying drain of gold from London across the herring pond. ‘Threadneedle Street has, of course, arrived at the season when the demands upon it from abroad are usually keenest, and naturally a Reserve of under 19 millions makes the market sensitive to every rumour of possible further withdrawals,’ observed the Financial Times on Friday, 19 October, after Bank rate had been increased from 4 to 5 per cent; later that day, it was put up to 6 per cent, precipitated by a heavy demand for gold from Egypt, following a bumper cotton crop there. Eventually the danger passed, but in January 1907 Schuster’s emerging rival as the great joint-stock banker of the day, the combative Edward Holden of London City and Midland Bank, put forward a complicated scheme by which the joint-stock banks would have a gold reserve created for themselves – a scheme that the Economist roundly condemned, declaring that the joint-stock banks ‘do not scruple to ask that the Bank of England and the public should be fleeced for their benefit, but their profits are to be held sacred’. The bankers themselves were far from united, and soon afterwards the London Joint Stock Bank’s Charles Gow expressed himself satisfied with the existing constitutional arrangements: ‘The Bank of England is by our system the holder of the only gold reserve in the Country which is of practical use, that is to say, which can be drawn upon in need, and which can be replenished by the action of the exchanges influenced by the Bank rate.’24

  The real crisis came that autumn, again in the context of American irrational exuberance, with the failure on 22 October of the important Knickerbocker Trust Co the catalyst for near-panic in London, compounded from the 28th by the severe drain of gold from London to the States. Bank rate went up on the 31st from 4½ to 5½ per cent, but the drain still continued. Then, on Monday, 4 November, the governor, William Campbell, walked into the Bank, inspected the figures, and did two things. First, wholly off his own bat, he raised the rate to 6 per cent, a ‘Governor’s rise’ that much impressed the newest director, Mark Collet’s grandson Montagu Norman. And second, he sent for Lord (‘Natty’) Rothschild, head of the London house, and asked him to secure via Rothschilds in Paris a major tranche of gold from the Bank of France. With the reserve dipping dangerously below £20 million, this was duly done by Tuesday. Yet, as large withdrawals of gold by New York continued, Campbell and his colleagues saw no alternative on Thursday the 7th but to raise Bank rate to 7 per cent, its highest level since 1873. Soon afterwards, the American authorities at last got a grip on the situation, through the issuing of Treasury securities; and over the rest of the year, with the worst of the crisis over, gold flowed into London. ‘Does the raising of the Bank Rate ever fail to attract gold and change the course of exchanges?’ the US Senate’s National Monetary Commission would subsequently ask the Bank. ‘Experience seems to prove,’ it reassuringly answered, ‘that the raising of the Bank Rate to a sufficient level never fails to attract Gold, provided the higher rate is kept effective.’ Or as the tag now went in the money market, ‘7 per cent brings gold from the moon.’25

  On the eternal question, and despite the recent alarms, nothing much happened over the next few years, which included the cautious governorship of the coffee merchant Reginald Johnston, grandfather not of a future governor but of a famous cricket commentator. His successor, from the spring of 1911, was Cole, an altogether larger figure and determined to resolve the gold-reserve impasse. So it seemed were the bankers also, and that summer it was as if peace was suddenly breaking out. ‘I am one of those who have always refused to believe that the interests of the bankers are opposed to those of the Bank of England,’ Cole on 21 July, one of the hottest days of a ferociously hot spell, told the lord mayor’s banquet:

  There is no conflict of interests between the banks and the central institution, and I have hailed with the utmost satisfaction a proposal that has been made unanimously by the representatives of the London Clearing Bankers that will bring the Governor of the Bank into more direct personal relations with the Clearing Banks. The resolution is that there should be quarterly meetings of the representatives of the London Clearing Banks at the Bank of England …

  The timing was propitious, given the fast-moving events just about to happen – events that Cole would subsequently relate to the Court:

  On Saturday, the 22nd July, I received a telegram in the country [Cole’s out-of-town home being West Woodhay House near Newbury] from the Chief Cashier stating that Sir Edward Holden had sent over to the Bank as he wished to see me on important business. When he heard I was absent he proposed to motor down to call on me. I replied by telegram that I could see him at any time on the following day, Sunday, the 23rd, but my telegram was not in time to reach him on the Saturday. I arranged to see him at the Bank on Monday morning. He then informed me that, in his opinion, the condition of the affairs of the Yorkshire Penny Bank was serious … Sir Edward Holden informed me that he had communicated with the Chairman of the Union of London and Smiths Bank and the National Provincial Bank; also that he had prepared a scheme by which the business of the Yorkshire Penny Bank should be taken over by a group of Bankers, if those Bankers would agree to raise a capital of £2,000,000 sterling so as to ensure the safety of the Yorkshire Penny Bank on a reconstituted basis. He asked me as Governor of the Bank to assist him in ra
ising the Capital.

  On the Monday, at a meeting at the Bank attended by Cole, Holden and Schuster among others, ‘it was decided to proceed on the lines of Sir Edward Holden’s scheme’; and over the rest of the week, Cole and Holden worked ‘day and night’ to prevent a ‘debacle’ that would ‘lay in ashes the whole of Yorkshire and a great deal of Lancashire’, to quote Holden’s reports to the chancellor, David Lloyd George. Between them, Cole and Holden succeeded in rescuing the Penny Bank, with the leading joint-stock banks injecting £2 million of working capital and the Bank heading a guarantee fund of £1 million.26 All in all, it seemed that Holden, Schuster and the others had at last arrived on the stage as acknowledged – not least by the Bank – members of the City elite.

  The new spirit of amity lasted only until 1913. That February, shortly before the end of his governorship, Cole for the final time took the chair of the by now well-established quarterly meeting between the Bank and the leading joint-stock bankers; and he proceeded, with supporting statistical evidence, to argue that although the Bank had done its bit in maintaining a respectable proportion of cash to liabilities, the bankers had not followed its example. The upshot was the formation of a new Clearing Bankers’ Gold Reserves Committee (CBGRC), to be chaired by Lord Aldwyn, the former Hicks Beach. It had made little progress by January 1914, at which point Holden in his annual address to shareholders dropped his bombshell: in essence, that his bank would henceforth increase the holdings of gold in its own vaults, independently of the Bank – a move instantly and widely viewed as an assertion of a larger independence. Schuster meanwhile continued to plug away at his idea of strengthening the central reserve through establishing a secondary gold reserve – comprising an agreed proportion of each bank’s liabilities – that was in the Bank’s physical custody. For if, he contended, ‘we each of us say we will maintain sufficient gold reserves of our own, then we assume a responsibility to the community which is not properly ours, and we relieve the Bank of England from the responsibility which is theirs’. At this point, critically, Cole’s successor, Cunliffe, failed to persuade a waiting-on-events Court to allow him to attend the CBGRC – no doubt with the directors well aware of his potentially damaging tactlessness. In any case, the slighted bankers now came together, and that summer Schuster, Holden and Herbert Tritton of Barclays laid before the CBGRC their joint scheme by which the banks would secure Parliament’s assent to their holding 5 per cent of their liabilities in gold. ‘He had had a strong aversion to any legislative requirements being mooted,’ explained Tritton in a short speech that said much. ‘But after the action of the Bank of England in refusing to participate in the discussion and formulation of a scheme, he had concluded that the line of least resistance was to … leave nothing to the discretion or goodwill of the Bank of England …’27

  That was on 22 July 1914, while a largely unconcerned Bank pursued – like a largely unconcerned City – the daily round. The overwhelming majority of the Bank’s 700 or so officials and clerks in Threadneedle Street continued to work under either the chief cashier or the chief accountant: those in the former category including the ninety in the Private Drawing Office, the fifty in the Bill Office, the twenty-seven in the Public Drawing Office, the twenty-seven in the Dividend Pay Office, the eighteen in the Securities Office, the fifteen in the Issue Office, the ten in-tellers; those in the latter category including the fifty-seven in the Dividends Office, the forty-five in the Consols Office, the thirty-two in the Bank Note Office, the thirty-one and twenty-eight in the Colonial and Corporation Stock and Bank Stock Offices … Sometimes the work was heavy, often it was not. A final glimpse of the pre-war Bank comes from the Financier’s profile in 1910 of the Stock Transfer Office:

  In each ‘pulpit’ sit two stern-looking gentlemen, looking uncommonly like schoolmasters watching over a large class. And, in point of fact, that is exactly what they are, for their only business seems to be that the staff are not playing cards, or ‘noughts and crosses’, or ‘blind man’s buff’, instead of checking and entering the transfers in the books. Time must hang very heavily on their hands during the long hours between 10 and 4! But at 3.55 principals and clerks are alike very busy, for then begin hasty preparations for departure. Here is the program: 3.55, coat-brushing; 3.57, hat-brushing; 3.59, putting on gloves; 4, hats on, and – exeunt omnes.28

  Two Bank directors and the current governor were among those who in the winter of 1911–12 gave evidence to the Committee of Imperial Defence, conducting an inquiry into the financial and commercial consequences if war broke out between England and Germany. The first director was the energetic Frederick Huth Jackson of the merchant bank Frederick Huth & Co. ‘To suspend the export of gold even for twenty-four hours might be to jeopardise our position as the principal bankers of the world,’ he insisted; and generally he argued that provided London got through the first few days of war then all would be well, because by raising Bank rate it would be able to call in gold from all quarters of the globe. The other director was Lord Revelstoke, son of the main culprit of 1890 and now head of the resuscitated Barings. Predicting that a declaration of war ‘would create such chaos as would result in the ruin of most, if not of all, accepting houses’, he declared that ‘the only way to remedy such a state of affairs would be a moratorium’. Whereupon this exchange followed:

  And a moratorium not in the realm of the Bank of England, but between private individuals and banks in this country; that is the sort of moratorium you mean, is it not? – No moratorium could affect the Bank of England, of course. The Bank of England really is the source of the whole credit of the British Empire.

  The governor was Cole, who like Huth Jackson strongly deprecated any idea of a wartime embargo on the export of gold, given that it was the ‘free market for gold’ that more than anything had made London ‘the international banking centre of the world’; and, after optimistically asserting that ‘the City as a whole would escape any great financial disaster’ if the worst did happen, he concluded with some reassuring rhetoric about how, in terms of defending the gold standard, ‘the adjustment of the discount rate to meet the ever-varying circumstances of each moment’ was a mechanism that had ‘never failed us in the past’ and ‘might be relied on in almost any conceivable eventuality, so long as we retained command of the sea’.29

  In the summer of 1914, it all played out for real. ‘The general feeling seems to be that there will not be war on the Continent, but it is by no means certain,’ Brien Cokayne, another Bank director and a partner in the merchant bank Antony Gibbs, informed a correspondent on Monday, 27 July, with Serbia having just rejected Austria’s ultimatum. But the City as a whole was now starting to get distinctly nervous, compounded by the joint-stock banks – in a way that they would find difficult to defend afterwards – not only in a panicky way calling in loans from discount houses and Stock Exchange firms, but starting to withdraw gold from the Bank in significant quantities. As for the Bank itself during the first half of the week (which included the news on Tuesday afternoon that Austria had formally declared war), it did its best to provide liquidity to the money market, with Natty Rothschild somewhat grudgingly noting on Wednesday the 29th that it had been ‘advancing money against gold shipments from New York which is the wisest thing they have done for a long time’. That same day, a Treasury party went to the Bank to meet Cunliffe, Cole and a trio of senior merchant bankers. ‘The opinion of the Governor, confirmed by the other Directors present,’ noted the Treasury’s permanent secretary, Sir John Bradbury, ‘was that the Bank of England was in a very strong position, and that any special steps would be unnecessary, and indeed harmful as tending to excite apprehensions.’ ‘The Bank,’ he added, ‘had the situation in hand.’ And ‘opinion was also expressed that it were better that the Governor should not go to visit the Chancellor of the Exchequer lest alarming inferences be drawn’. In short, steady as she goes – or, as another Treasury official, Basil Blackett, put it in his diary, the message from the Bank was that �
��all was quite comfortable, though Bank Rate would be put up to 4 p.c. tomorrow by way of precaution’.30

  And so it was put up, on Thursday, 30 July, the day that in the City’s inner parlours serious unease turned into an awareness that there was now an outright financial crisis. That awareness was also starting to spread more widely. ‘A very bad day,’ recorded the bill brokers Smith St Aubyn. ‘People are getting really alarmed and are flocking to the Bank of England to change notes for gold.’ They were indeed, with again the joint-stock banks playing a less than helpful (if perhaps understandable) role. ‘There is a general run on all the banks,’ the general manager of Lloyds, Henry Bell, told the eminent financial journalist Sir George Paish, adding that ‘customers are asking for gold, but we are paying out in notes and telling them to go to the Bank of England to change them’. On which news, recorded Paish, ‘I hurried round to the Bank of England and there found an immense queue waiting to cash their notes’: ‘They filled the Issue Department of the Bank and spilled out, four deep, through the courtyard, down Threadneedle Street and half way up Princes Street. Hundreds and hundreds of people waiting as patiently as possible to see if their money was still safe!’31

  Inside the Bank, it was now largely down to Walter Cunliffe, governor since the previous year, a director since 1895 and founder with his two brothers of the firm of Cunliffe Bros, concentrating mainly on accepting. A large man with a walrus moustache, he was asked once how he knew which bills to approve, to which he replied as a true City man, ‘I smell them.’ Rude, arrogant and a bully, he was hardly the most popular of men – ‘a little of Mr Cunliffe’s society fills me up for the year,’ a Bank director, E. C. (‘Teddy’) Grenfell of Morgan Grenfell, remarked in 1908. A small flavour comes through in the curt letter he sent in October 1912 from the Bank, while deputy governor, to someone at Kensington Palace. It reads in toto: ‘I shall be much obliged if you will kindly return at your convenience, the catalogue of my silver which I sent you in April last.’ There was, though, a more positive side, as Grenfell, for all his innate distaste, acknowledged some years after the 1914 crisis. Cunliffe had, he wrote, ‘an intimate knowledge of banking, bill broking, Stock Ex, accepting & though not the greatest expert in all, yet he combined the knowledge of these spheres of finance to an unique degree’. Moreover, he also had a ‘wonderful physique enabling him to work as few younger men could do’. Against that, ‘he had no gift of public speaking, was always at a loss for words, had very bad manners & suspected everyone who differed with him, of having ulterior motives’. And of course, seemingly unable to help himself, ‘he was rude & abrupt with his colleagues, the bankers & the ministers’.32 All in all, the governor may or may not have been the man for the hour, but he was certainly not burdened with self-doubt about being the man of the hour.