Nor was that all that troubled the governor. ‘In a few weeks,’ he added in the same letter, ‘we are liable to be tossed hither and thither by a General Election’; and, as he perhaps suspected, the outcome was the fall of Baldwin’s Conservative ministry and the arrival in June 1929 of a second minority Labour government under Ramsay MacDonald, again with Snowden at No. 11. Neither politician was disposed to nationalise the Bank (notwithstanding a recent Labour policy document advocating it), nor indeed to stray from the path of financial orthodoxy, but Snowden in particular was acutely aware of the political sensitivity of Bank rate decisions. Almost certainly, this sensitivity was becoming greater than ever. Norman in 1927 had told Moreau frankly that he could not raise Bank rate ‘without provoking a riot’, given that a rise would ‘intensify’ industry’s ‘burden’; the following year, Cullen had conceded to the Court that ‘we hear not a few whispers of complaint that our monetary policy is determined too much in the interests of finance and not sufficiently in the interests of Commerce’; and earlier in 1929, in February, Norman had managed to push through a small rise (to 5½ per cent) only because he had correctly guessed that Churchill was unlikely so soon before an election to make a public fuss. That summer saw delicate discussions between chancellor and governor (faced by a continuing drain of gold), culminating in early September in a concordat reached at Snowden’s country cottage in Surrey:
The Chancellor was persistent for a long time [recorded Norman] that a higher rate was no remedy; would harm trade; would be bitterly criticised; and would itself lead to still higher rates elsewhere and eventually here … The Governor said that his was the technical and financial side – the Chancellor’s was the political and fiscal side. On this basis the Chancellor must now leave the Bank rate to the Governor, to which the Chancellor agreed, stipulating that the Governor should see him next week; the Governor promising that he would not this autumn put up the Bank Rate for fun but only when it was essential …
Eventually, with Snowden’s reluctant consent, Norman later that month raised the rate to 6½ per cent – and the result was an intensely hostile reaction, not only from the left. ‘The Governor may be in touch with the volume of banking advances and trade bills,’ declared the Evening Standard, ‘but he is out of touch with the flesh and bones of industry.’
Firmly on the table by this time was the possibility of a major monetary inquiry, a prospect seriously displeasing to Norman and prompting him to try, shortly after the Bank rate hike, to put the frighteners on Snowden via the Treasury’s Sir Richard Hopkins:
I rather fear that the Congress [that is, the Labour Party conference] which is to be held at Brighton this week may be made the occasion for a general attack on the Bank Rate; credit policy: the effect of dear money on unemployment and other kindred subjects; and that in such event the attack might be met by some Minister present by a promise that the cabinet would at once set up a Committee to enquire into these subjects. I wish to impress upon you as definitely as possible that the mere promise of any such Committee under present conditions would of itself endanger our financial position, both at home and abroad. Indeed, the maintenance of the gold standard itself might by such action be suddenly and dangerously threatened.
To no avail: Snowden on 3 October announced to the party faithful that he would shortly be appointing a committee to inquire into the relations between finance and industry. His speech was deliberately low key – prompting Norman to congratulate him on how ‘it seems that you have got the extremists at both ends on your side’ – but at least as much to the point was the question put to the chancellor soon afterwards by his private secretary: ‘Is there not some danger of giving the impression that the Governor is being put in the dock?’
That, however, was probably not Norman’s greatest anxiety at this particular moment. 1929 was the year that the virtuoso, high-profile financier Clarence Hatry hit the rocks – confirmed by Norman’s refusal to help, despite a personal appeal – and then succumbed to the temptation of authorising the forgery of scrip certificates. A very public fall was played out during September (‘this Hatry affair has smirched us all,’ reflected Norman), for a time plunging the stock market into free fall.27 Then in late October came one of the seminal events of the twentieth century: the Wall Street Crash. All bets, whether for Norman or anyone else, were off.
Away from market ups and downs, the Bank by the late 1920s was in fact starting to get significantly involved in the problems of British industry.28 ‘In general I believe that the great industries can only be satisfactorily re-established by means of rationalisation, and this is slowly coming to be recognized in textiles, in iron and steel, and to some extent in coal and shipbuilding,’ Norman wrote in November 1928 to a Foreign Office mandarin. ‘In particular I am interested in the reorganisation of Armstrong, Whitworth & Co and its allied undertakings.’ That indeed was true – with Norman, Peacock and a ‘company doctor’ called Frater Taylor, an unsentimental Aberdonian, having already spent much time on the financial reconstruction of the troubled Tyneside armaments firm, eventually leading to the creation of Vickers-Armstrong, a pooling with the naval-shipbuilding business – but increasingly what concerned the governor by the end of the decade was the wretched state of the Lancashire textile industry. The conventional wisdom of the day was that the route to economic salvation lay in large-scale mergers in order to increase efficiencies and reduce over-capacity; and though both the Midland and Barclays banks declined to back the proposed Lancashire Cotton Corporation, intended instrument of rationalisation, the Bank stood firmly behind the LCC and made a series of temporary advances. Norman undeniably had misgivings, admitting to bankers and others in December 1928 that he ‘was not anxious for this business, which was entirely outside the normal sphere of the Bank of England’; but at the same time, he explained, ‘the Cotton Industry was not the only one in need of rationalisation, and he looked to any scheme for the rationalisation of the Textile Industry to lead the way and set the type for schemes of rationalisation in other industries’. The details of the LCC were announced soon afterwards, prompting rare public praise from Keynes about how ‘this incursion of the Bank of England – somewhat late in the day but wholeheartedly in the end – into the field of Rationalisation is in itself a matter of much interest and, in my opinion, of congratulation’.
What were Norman’s broader motives in his industrial initiative more generally? It is hard to imagine that he was unaware of the possibility that it might play well in the wider world, at a time of mounting criticism of the City’s neglect of industry and of the Bank’s industry-insensitive monetary policy; there is also evidence that through the 1920s he had been under increasing Treasury pressure for the Bank to become more constructively engaged in this whole area; yet equally, rather as with his commitment to international financial reconstruction, he did believe for its own sake in what he was trying to do, in the context of the deep problems faced by British industry, especially in the traditional exporting sector. What he did not want was for the Bank either to exercise managerial control or to be permanently involved, candidly telling Peacock in August 1929 that his ultimate goal was to get all the various industrial questions out of his room ‘and on a self-supporting and conducting basis’.29
The stakes were undeniably high. When in November 1929 the Bank established Securities Management Trust (SMT) – essentially a group of outside experts to advise the governor and see through rationalisation schemes – Norman explained to the Court ‘at considerable length the present position in regard to industry generally and his views as to the necessary steps to restore it to a healthy condition by private enterprise and without government intervention’. Two more Norman initiatives followed in quick succession: in January 1930 he sought to strengthen the national credit machinery, and simultaneously to keep government out of the money market, by sanctioning a major injection of capital into the City-based United Dominions Trust (UDT), offering hire-purchase finance along American lines
; and three months later he established the Bankers’ Industrial Development Company (BIDC) – ‘a new private Company to finance rationalised industry’ (as he informed the Treasury), mainly comprising merchant bankers but with Norman as chairman, and with its £6 million capital coming partly from the Bank itself (£1½ million) but mainly from the suitably cajoled clearing and merchant banks. As all this unfolded, not every industrialist was convinced that Norman and his colleagues were the solution. ‘In their own affairs they have never given more employment than that vouchsafed to gardener, chauffeur, and valet,’ reflected after a visit early that year to Threadneedle Street a disgruntled twenty-seventh Earl of Crawford, with his family firm, the Wigan Iron and Coal Co, about to be ‘rationalised’ and become part of the Lancashire Steel Corporation. ‘They are,’ he went on, ‘too much detached from the realities of production with its tremendous problems; they are usurers and nothing else … The banks sail serenely above the tempests of industrial trouble.’
The first year or so of the new institutional dispensation tended to confirm the sceptics rather than the believers. As the LCC struggled – gaining for itself the reputation of being (in Norman’s regretful words) an ‘association of lame ducks’ – so the BIDC came under public fire in August 1930 from a local Conservative MP, who accused it of ‘a wilful lack of knowledge of the existing situation in Lancashire and of the practical difficulties that have to be overcome’; at the BIDC itself, the day-to-day leadership of the merchant banker Sir Guy Granet proved ineffectual, so that it soon became known in the City as the ‘Brought in Dead Company’; and in spring 1931 the LCC’s long-awaited debenture issue, made under the Bank’s auspices, flopped. Ultimately the problem was that the Bank found itself uncomfortably exposed, in the middle of a vicious circle. ‘Very large sums of money must be forthcoming if we are to make the slightest impression on the re-organisation of our basic industries,’ noted SMT’s managing director, the experienced iron and steel manufacturer Charles Bruce Gardner, on the occasion of BIDC’s first anniversary; but, as he added, ‘experience has shown that in most cases it will be impossible to help those industries to formulate schemes that can guarantee to the investor their interest and sinking funds and the money provided …’30
A few weeks before the Wall Street Crash, in September 1929, Norman had his initial sitting for what would become a controversial portrait by Augustus John. The painter was struck by the governor’s preoccupied air, ‘as though he was troubled by graver problems than beset other men’; and over the next year and a half there was ever more to be preoccupied by, as much of the world slipped into what would become the great depression of the early 1930s. A rare source of solace for Norman was the establishment in April 1930 of the Bank for International Settlements (BIS), enabling central bankers to mix on what he commended to Snowden the previous autumn as ‘neutral soil’ (in the event, Basle) and thus provide ‘the only way for Europe out of financial chaos’. It was not an easy birth – tangled up as it was with the whole reparations question – but Norman was hopeful at the outset, telling the BIS’s first general manager, Pierre Quesnay, that the new institution should aim ‘to direct short-term capital towards long-term markets by coordinating the policies of central banks, their discount rates, and by increasing the control each of them has over its own market’: in other words, an essentially supra-political approach. Elsewhere, difficulties continued to mount, including in Australia, with its economy in particularly dire straits because of the gathering world slump. The Bank’s answer (on a request from Canberra) was to despatch Niemeyer, who arrived in July in full deflationary mode, ready to recommend to the Labor government there the unappetising steps, especially in the form of wage cuts, that it needed to take so that its increasingly onerous financial obligations in London might be met with the Bank’s assistance. ‘I hope our good Niemeyer will succeed in converting these remote Australians to economic sanity and indeed to reason,’ observed Norman some weeks later to a London stockbroker, ‘but they have a long way to go’; and indeed the unbending, somewhat high-handed Niemeyer proved an intensely divisive figure down under, so that it was not until several months after the end of his mission that a compromise settlement was reached. As for Norman himself by this time, a certain understandable weariness was perhaps setting in. ‘As regards the Serbian negotiations, both the Serbs and the French have been very troublesome,’ he grumbled in November 1930 to Peter Bark, the last finance minister in Tsarist Russia and by now, as a Central European expert, one of the handful of people on whom the governor most relied. ‘The longer I go on,’ he added, ‘the harder do I find the path of an internationalist!’31
Casting a further shadow for Norman over this year and a half was the Committee on Finance and Industry that Snowden had set up. Its chairman was the Scottish lawyer Lord Macmillan, while members included Keynes, McKenna, the strong-minded trade unionist Ernest Bevin, and Lubbock for the Bank. ‘Whatever the outcome of the Committee may be, we at any rate have nothing to fear,’ the deputy governor, Sir Ernest Harvey, assured his chief in December 1929 after giving five days of very capable evidence, concentrating mainly on explaining the mechanics of the Bank rather than attempting to elucidate or justify questions of high policy; but for Norman himself, giving evidence one morning in March 1930 after an earlier postponement because of a physical-cum-nervous breakdown followed by a convalescent cruise in the Mediterranean (‘I have been away for a month to get my fire-box patched because the fire burnt it through’), the whole thing was a considerable ordeal.
Much of the session turned on the increasingly debated question of whether the Bank’s traditional threefold prioritisation – defence of sterling, adherence to the gold standard, maintenance of London’s position as an international financial centre – was to the detriment of the domestic economy. ‘I think that the disadvantages to the internal position are relatively small compared with the advantages to the external position,’ insisted the governor, before Macmillan courteously pushed a little further:
What is the benefit to industry of the maintenance of the international position? – This is a very technical question which I am ill equipped to explain, but the whole international position has preserved for us in this country the wonderful position which we have inherited, which was for a while thought perhaps to be in jeopardy, which to a large extent, though not to the same extent, has been re-established. We are still to a large extent international bankers. We have great international trade and commerce out of which I believe considerable profit is made; we do maintain huge international markets, a free gold market, a free exchange market – perhaps the freest almost in the world – and all of those things, and the confidence and credit which go with them, are greatly to the interest of industry as well as to the interest of finance and commerce in the long run.
One of the criticisms which has been made is that while the policy pursued may have been excellent from the point of view of the financiers of the City of London, it has not benefited the industries of this country, that the considerations which have moved that policy have been directed rather to the financial side than to the plain man’s industry? – Yes. Of course, industry has had ill luck, shall I say, and has been in a very unfortunate position and from one reason and another has suffered particularly. I agree; I am sure that is true.
There has been no doubt a conspiracy of causes at work? – Almost; yes.
At which point, a clearly frustrated Bevin pressed Norman to concede that the decision to return to gold at the pre-war parity had played a major part in industry’s misfortunes; to which the governor responded, ‘I do not attribute the ills of industry in the main to that change.’ Unconvinced, the trade unionist made a suggestion:
Having regard to the fact that the workpeople at home have to suffer the biggest blow of unemployment and the depression of their standard of life, can you see any way to separate the national and the international policies, so that the effect of restoring the gold position internationally c
an be in some way modified in its effect upon British industry? – I believe it is absolutely impossible to have two separate policies …
Supposing, for instance, you have to stop your gold flowing out, and therefore restrict credit, is it not possible to have a conscious direction of credit under those circumstances to the home market? – And to maintain, as it were, two separate supplies of credit at different rates?
Yes? – I do not think so.
Overall, the session left Norman in a depressed state, having held his ground but failed to articulate satisfactorily what in the end was instinctive behaviour and assumptions. At one moment during the session, the Committee’s secretary would recall, he had been asked how he knew something – to which he had simply replied by tapping his nose three times.
In any case, that proved to be Norman’s main appearance, though in February 1931 he did give two final and less challenging days of evidence, accompanied respectively by Granet and O. M. W. Sprague, his new American economic adviser. The Committee itself, meanwhile, spent part of the interim in private sessions, with Keynes inevitably to the fore and, equally inevitably, expressing the hope that the Bank would at last engage in ‘a more open discussion’ about matters of policy. ‘If at every stage in the last ten years,’ he went on, ‘the Governor of the Bank of England had stated publicly what his object was and what he thought the things he was doing were likely to result in and how he assessed the advantages and disadvantages of his policy, if he told us what he was aiming at and what his method was and what he thought his method would cost in order to gain the advantages he was seeking, then it would be possible for public opinion of an informed kind to be crystallised on the point whether his policy was wise and successful.’ McKenna for his part put it more crisply: the governor was guilty of ‘a mute and irresponsible despotism’. A further private session, in December 1930, included this piquant exchange:
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