Till Time's Last Sand

by David Kynaston

  The City’s worst two days were now at hand. On Friday, 31 July – with Austria mobilising against Russia, the Stock Exchange closed until further notice and the Bank rapidly losing gold to a drain that was both internal and external – Bank rate was doubled from 4 to 8 per cent. ‘A most untimely shock to the public’s nerves,’ would be the verdict of the financial journalist Hartley Withers in his 1915 book War and Lombard Street. ‘Many, who had never heard of Bank Rate before, became aware that something unprecedented and dire had happened in the world of finance.’ Meanwhile, that Friday, ‘the courtyard and the Issue Department of the Bank of England presented a remarkable spectacle’, in the words of The Times reporter, confirmed by the man from the Financial Times, who found ‘a queue of people, some 200 to 250 strong, resignedly awaiting their turn to obtain access to the magical counter where cash [that is, gold sovereigns] was being poured forth in a steady stream’:

  There was no visible sign of alarm among the besiegers; rather the matter was treated in the light of a humorous episode … This cheerful demeanour even spread to the usually ultra-sober officials, who were stirred to unprecedented activity, and a quantity of good-natured chaff and banter passed between them and many unsuspecting clients, who, all unconscious of the position, strolled into the Bank with a nonchalant and proprietary air, only to be unceremoniously placed in their legal positions in the queue.

  ‘Gold, gold, gold, gold,

  Bright and yellow; hard and cold.’

  This was undoubtedly what was wanted, and when a red-cloaked official shouted ironically, ‘Silver! Anybody want silver? Plenty of silver going cheap,’ a dead silence followed, and on many faces was to be observed a sardonic smile. No, cheap silver was not wanted, and the outflow of the precious yellow metal continued …

  ‘We were so hard pressed,’ recalled one Bank clerk, ‘that none of us on the Issue Office Counter got out to lunch; instead we had to be content with sandwiches and whiskies and sodas sent down from the Club.’

  That afternoon, unbeknown to most, Cunliffe went to the Treasury to see Lloyd George and his senior officials. ‘Very angry,’ noted Blackett, ‘with the Joint Stock Banks for acting against & not with the Bank of England’; and, accusing the bankers of having ‘caused the panic’, he called on the chancellor not just to suspend the Bank Charter Act, but if necessary to suspend cash payments and to introduce a moratorium. The Treasury demurred about the double suspension, and it was agreed to see how much gold the Bank – its reserve down to £17 million – lost next day, with £5 million as the tipping point for at least suspending the Act. As to larger questions of British foreign policy, Cunliffe made it very clear where the Bank and the City stood. ‘The Governor of the Bank of England,’ noted Lloyd George’s confidant Lord Riddell in his diary that day, ‘said to me with tears in his eyes, “Keep us out of it. We shall all be ruined if we are dragged in!”’33

  Saturday, 1 August featured, amid much else, the money market more than ever on the rack; the clearing banks still more or less refusing to pay out sovereigns; an even longer queue than the previous day’s straggling from inside the Bank into its courtyard; Cunliffe returning to the Treasury, warning that the Bank’s reserve was likely to be down by the end of the day to £11 million, and taking away with him a ‘chancellor’s letter’ permitting suspension, if need be, of the Act; Bank rate being hiked by a further two points up to the traditional ‘crisis rate’ of 10 per cent; and the governor at last managing to get the joint-stock banks to agree to stop calling in loans from the discount houses. Cunliffe – what one might call good Cunliffe – was in his element, nicely caught in Blackett’s description of an informal moment at the Treasury as they waited for the letter to be finalised:

  The Governor, who was as cool as ever, was chatting about Bank matters & mentioned the Officer commanding the Guard. I asked if that was the Bank Guard & he said yes. Bradbury [the Treasury’s Sir John Bradbury] remarked that he would not need a Guard in a few days [a reference to the Bank’s rapidly vanishing gold reserve] & the Governor’s smile was a delight in tune with the funniness of the joke. While talking with me, he remarked, with a twinkle, that he had had the misfortune to run out of £5 notes this morning. His manner was a rare contrast to the frantic excitement of two members of the Cabinet whom I met just after.

  The letter secured, the Governor returned to the Bank, leaving me to telephone to Nairn[e] that ‘the Governor has just started back with all he wanted’. This was the nearest he came all day to telling a soul (except the Deputy Govr) [R. L. Newman, known in the Bank as ‘the port-wine man’ because of his firm’s merchanting speciality] that he had got the fateful letter.

  It was left to a youngish director, though, to record the great cardinal fact of the day. ‘Germany v. Russia,’ noted Montagu Norman flatly but meaningfully in his sparsely filled diary.

  That Saturday marked the end of what Richard Roberts in his authoritative account of the 1914 financial crisis calls the ‘breakdown’ phase. How had the Bank performed? Arguably its Bank rate policy was, by the end of the week anyway, counter-productive, with the youthful John Maynard Keynes arguing in his retrospective a month or so later that in the ‘special circumstances’ a 10 per cent rate was the worst of both worlds, not only failing to attract gold from abroad but also severely undermining confidence. Where the Bank did well, earning praise from both contemporary commentators and subsequent historians, was in its provision of liquidity to the discount houses and thus in turn to the banks: over the fortnight from 20 July, computes Roberts, its combined discounts and advances rose almost fourfold, from £12 million to £44.8 million. ‘Following the splendidly cool policy it has adopted throughout the crisis,’ noted the Financial Times’s money market report for 31 July, ‘the Bank of England was a free lender.’ Or in Roberts’s summarising words, ‘despite deteriorating relations with the major banks, the Bank of England went on liberally providing liquidity to the market and relieving the situation’.34

  Sunday, 2 August was, from the Bank’s point of view, an uneventful day – albeit with no sighting of the governor relaxing at London Zoo – before early on Monday the 3rd, fortuitously enough a bank holiday, about 150 of the City’s leading bankers and merchants gathered in the Court Room, with Cunliffe presiding. The meeting had its moments of drama – Bell of Lloyds at one point shaking his fist at the governor – but there was general agreement (though with Cunliffe himself dubious) that the banks needed to be closed for a further three days in order to enable adequate measures to be taken. The request was passed on to Lloyd George, who agreed, while arrangements were also made to implement a moratorium on bills of exchange, thereby providing immediate relief to the merchant banks. Those things settled, the major financial debate of the day was about the Bank’s wish (backed by the banks) to be able to suspend cash payments – that is to say, the convertibility of notes into gold – as well as the 1844 Act. This was the cue for a decisive intervention by the thirty-one-year-old Keynes, by now ensconced at the Treasury. ‘It is difficult to see how such an extreme and disastrous measure,’ he wrote to Lloyd George, ‘can be justified,’ given how much it would ‘damage our prestige as a free gold market’. All this, however, was overshadowed by the diplomatic situation. That afternoon, against a background of the German ultimatum to Belgium and its rejection, the foreign secretary, Lord Grey, made his historic statement in the Commons that in effect committed Britain to military action. Writing to a former Morgans partner, Grenfell commented that ‘war seems to be an absolute certainty’.35

  Keynes apparently swayed Lloyd George, who during the late afternoon and early evening of Tuesday, 4 August attended the first session of the Treasury’s protracted ‘War Conference’ while the banks were shut. Also present were other key politicians and what the minutes described as ‘representative bankers and traders’, including Cunliffe, Newman and Cole from the Bank. The governor was involved in two characteristic exchanges, the first concerning Bank rate. It was due to be lowered
on Friday to 6 per cent, but on Holden’s insistence it was agreed to reduce it to 5. Might ‘one or two banks attempt to exploit this?’ wondered the chancellor (with the joint-stock bankers out of the room). ‘Lame ducks, in other words,’ observed the unforgiving Revelstoke. To which Cunliffe roundly responded: ‘If there are lame ducks it does not matter to us. We have to help them over the stile. We cannot afford to let one bank go – not the smallest in the country.’ The other exchange, perhaps involving the governor in a degree of economy with the actualité, was with an unnamed colleague of Holden’s:

  A Banker: I understand one of the difficulties today is that the Bank of England cannot help us because they are afraid of a run on the gold supply. It is really a question for the Governor of the Bank of England whether he wants people to come and ask for specie and not get it.

  The Governor: It is not true that if the Bank is open today I could not pay my way in gold.

  A Banker: I am very glad to hear it.

  The Governor: And if you could see the accounts of the Bank which the Chancellor of the Exchequer has seen, you would be surprised that there is so much fuss.

  The Bank, in other words, had suddenly changed tack; and of course Cunliffe’s desire not to suspend cash payments, if it could possibly be helped, was sincere and deep rooted. But at the same time, the question of abandoning the gold standard had become the new symbol of a long-running power struggle between the Bank and the bankers. Fortified by the support of Lloyd George and the Treasury, the governor was not someone – at this of all times – to underplay his hand.

  Later that evening, the British ultimatum to Germany expired. For the Bank as for the City, the guns of August meant that life would never be quite the same again. Back in January 1912, soon after Norman Angell’s highly influential treatise The Great Illusion had gone into its sixth edition, a crowded Institute of Bankers had heard a paper from its author on ‘The Influence of Banking on International Relations’. At its core was the thesis that finance and commerce were now so inextricably entwined, crossing all national boundaries, that the price of war between nation states must be so high as to make the prospect inconceivable. ‘It is very evident that Mr Norman Angell has carried this meeting almost entirely with him,’ observed one speaker during the discussion. But at the very end Huth Jackson, president of the Institute as well as a director of the Bank, sounded a note of caution: ‘It is all very well to get the bankers on your side, but that is not sufficient. What you have to do is to get the whole body of all the peoples in the world on your side.’ And he concluded: ‘But, gentlemen, bear in mind one thing, and that is that until you get that thing done, there is, I am afraid, little prospect of any change in the international position – that is to say, war will still remain a possibility.’36 Two and a half years later, events proved him horribly right: surrounded by frightened monarchies and restless masses, by the unreason of nationalism, not even the safest, most secure institution in the world was invulnerable.

  PART THREE

  1914–1946

  10

  The Kipling Man

  ‘As I was passing the Bank of England, I met Hendy and a friend of his and they were just going to be shown over the Bank, so asked me to go with them,’ recorded a young Australian on the last Friday of August 1914:

  We went into the weighing room, where every sovereign that has been in circulation is put through a machine & weighed, – the light coins dropping one side and the right weights on the other. These machines each weigh 60 coins per minute and all day there are over 100 machines working. Sovereigns & ½ sovs are scattered all over the floor and the men walk over them just as if they were dirt. We were shown a small scuttle-full of sovs and were told that we could have them if we could take them away, but one can hardly lift them, – they’re so heavy.

  Next we visited the store-room where all the notes & gold are stored, the gold all being in canvas bags, each bag containing £1,000 sovs, & they are all stacked so that the money can be counted at a glance. The notes are all tied in small bundles of about 500 to 1000 notes in each. We saw the richest spot on the earth viz a little safe about 2 ft 6 in square where the £1,000 notes are kept, and were given two bundles of these, each bundle containing 500 notes, so that for ½ a minute of my life, I have been a millionaire.

  After this novel experience we were very lucky and got special permission to go to the bullion room. Here, all the gold bars each weighing about 80 lbs odd & worth £1700 are stored when they arrive. They are pure gold (24 carat) and although very small are exceedingly heavy. It is only a very small room with thick walls and the bars are packed on trollies. The amount of gold bar at present there was worth over £4,000,000. I never expect to see so much money in such a small space again.

  It all seemed timeless and reassuring, but of course in the world outside the war was almost a month old. And indeed, ten days before the diarist’s visit, the secretary had posted on 18 August a telling notice with regard to the Bank Picquet: ‘The Military Authorities think it necessary that, in place of the countersign now prevailing in the Bank, namely, two stamps with the foot, in future there should be a different password each night.’1

  In that outside world, the great financial crisis of 1914 continued to be played out during the days and weeks after the declaration on war on 4 August. The key immediate development was Lloyd George’s decision to issue Treasury currency notes for £1 and 10 shillings – a decision that, in the words of Richard Roberts, not only ‘rendered redundant the need for the suspension of the Bank Act’, but ‘by staunching a possible internal gold drain, clinched the case for the retention of specie convertibility’. Why Treasury as opposed to Bank notes? Ultimately there was no alternative, given that the Bank’s Printing Department was already working flat out producing enough £5 notes for the reopening of the banks on Friday the 7th; but inevitably the Bank regretted the development, with the Court soon afterwards expressing its view that the Treasury’s note issue should in the fullness of time be issued by the Bank. The other significant initiative during those febrile early days of war, as the summit conference at the Treasury continued on Wednesday the 5th and Thursday the 6th, was the decision to broaden Sunday’s moratorium on bills of exchange into a more general one-month moratorium (eventually extended to three months), in effect offering protection to the commercial world against banks calling in loans. For their part, the concern of the banks was that major account holders might transfer deposits to the Bank; but Cunliffe reassured them, saying that he had rejected a £100,000 account because ‘I thought it was not cricket.’2

  In due course the ‘Containment’ phase of the financial crisis moved into the ‘Revival’ phase, culminating in the reopening of the Stock Exchange in January 1915. Perhaps nothing was more important than the measures – in which the Bank was intimately involved in the planning stages, especially through the person of the former governor Alfred Cole – to restore to life the discount market and to save the accepting houses (that is, the merchant banks). The details were complicated, but the crux in relation to the former was the Bank’s willingness, under government guarantee against loss, to abandon its traditional practice of buying only the ‘finest’ commercial bills. Instead, as the veteran financial commentator W. R. Lawson put it soon afterwards, ‘practically the Bank lowered its standard from first-class to second, and even third-class bills’. As for the latter aspect, rescuing those accepting houses not in a position to pay once bills matured, the Bank was prepared to lend at 2 per cent above Bank rate, with the helpful promise that it would not seek repayment until a year after the war ended. The Bank during these early months also advanced substantial sums to government – some £83 million by the end of the year – as well as naturally playing a significant role in the first War Loan, issued in mid-November for £350 million at 3½ per cent. Cunliffe, overridden by the Treasury, would have preferred a more generous coupon; and he was proved right, as the issue flopped, despite fulsome political and journalistic propa
ganda about its high take-up. The reasons for the fiasco, amounting to a £113 million shortfall, have been closely analysed by Jeremy Wormell, who among other factors identifies errors in timing and structuring as well as pricing. In any case, Cunliffe at this point took the big view and acted decisively: with the Bank having already at the outset subscribed for £40 million, he now covertly came in for the remaining £113 million – typically without troubling to consult his colleagues.3