Till Time's Last Sand

by David Kynaston

  ‘I trust,’ concluded Cherwell, ‘we shall not allow ourselves to be persuaded that there is a painless, magical way – by leaving it all to the Bank of England.’

  Far from everyone in the know in Threadneedle Street had been convinced of Robot’s merits, including perhaps Cobbold by the end; but the episode still left the Bank, in Fforde’s words, ‘severely bruised’, being perceived as having ‘rashly attempted to engineer a change of economic and monetary strategy without proper consideration or consultation in Whitehall’. The debate would continue for many years whether the failure to implement Robot was the great missed opportunity of post-war economic history; but in the here and now of 1952 the focus switched to achieving convertibility more gradually, with a new and coherent Bank/Treasury plan (‘Collective Approach to Multilateral Trade and Payments’, involving American help and European co-operation) in place by the autumn, followed in March 1954 by the reopening of the London gold market and in February 1955 by the de facto (if not yet de jure) convertibility of sterling for non-residents at practically the official fixed rate. ‘A long steeplechase course with fences to be jumped at intervals, some stiffer than others, but with a lot of steady plodding in between,’ was how Cobbold in 1954 described that route to convertibility, and there was still the odd obstacle ahead.14

  By then, the Conservative government had successfully denationalised the steel industry, nationalised by Labour. ‘I found myself,’ recalled Cobbold, ‘in the extraordinary position of having to act as adviser and “pusher” to the sellers (Chancellor and Minister of Supply), the intermediaries and agents (Issuing Houses), and the buyers (mainly Insurance Companies), not to mention negotiation with the banks and the Stock Exchange, as well as many of the individual companies.’ Indeed, it was the governor who in April 1953 assembled an issuing consortium, comprising the major merchant banks and to be headed by Morgan Grenfell. ‘This whole matter is far too political,’ complained one merchant banker, David Colville of Rothschilds, to Cobbold’s face at a meeting at the Bank of the issuing houses:

  What the Bank of England is in fact doing is to use its influence in the City, acting as the nationalised agent of a government controlled by a political party, to obtain the support of private enterprise to help implement the election promises of that party. In effect, private enterprise is being suborned by a nationalised institution for political ends and the Bank is, moreover, seeking to throw the whole political onus and possible loss on the City, without taking either risk or responsibility.

  Colville received little support for this remarkably frank attack, but it was another reminder of that inherently treacherous terrain that the Bank occupied, somewhere between government on the one hand and the City on the other. Undeterred, Cobbold over the next fourteen months continued to play a key role as the sale to the investing public and institutions was undertaken in turn of six of the biggest steel companies: talking to key figures like Carlyle Gifford of the Scottish Investment Trust, or agreeing to ‘have a word with the Chairman of the Pru’; ensuring that the Bank acted as a long-stop in the underwriting process; persuading Butler that, after a poor response to the Lancashire Steel Corporation’s offer, the process ‘be left to simmer for a bit’ and ‘that there was nothing to be gained by rushing any fences’; and generally, through deft deployment of his considerable force of personality, leading from the front.

  The first privatisation virtually coincided with that disturbing phenomenon, the contested takeover bid, previously almost unheard of in the corporate world. In March 1953, in the context of the hard-bitten outsider Charles Clore initiating a much publicised stake-out for J. Sears & Co (parent company of Freeman, Hardy & Willis), the Bank drew up an internal ‘Memorandum on Real and Fictitious Share Bids’, arguing that ‘this kind of manoeuvre may mean the break-up of businesses which are making an important contribution to the country’s needs’. Even so, notwithstanding the concerns of the City establishment at large, there was a limit to how far the Bank felt it could go in preventing such bids, as the senior figure at Morgan Grenfell discovered on a visit to the governor’s room that summer:

  Lord Bicester came in to say that he was very agitated about further manoeuvres by Mr Clore and wondered whether I could not suggest to the Insurance Companies that they should not lend him money. I said that I thought this would be extremely difficult. I started by being reluctant to interfere with other people’s business. Although I had no love for Mr Clore’s activities I found it very difficult to draw a line between what was moral and what was immoral in this field and I certainly had no evidence of any misbehaviour by Mr Clore. Finally I thought that if I talked to people, the nice people would play and lose the business which would be taken by the nasty people …

  The winter after that tellingly Manichean observation saw the battle for the Savoy group of hotels, including Claridge’s and the Berkeley as well as the Savoy itself. The aggressor was the property developer Harold Samuel, acting in informal liaison with Clore; and for a moment the government was minded to step in on the Savoy’s behalf, until Cobbold pointed out to the minister concerned, Reginald Maudling, that ‘any remedy would cause more trouble than the disease’. Accordingly, the Savoy was left to save itself, which it managed to do with significant help from Anthony Tuke, chairman of Barclays. ‘Mr Tuke told me privately that they had fixed up the Savoy business,’ noted Cobbold in early 1954. ‘The Savoy people had managed to collect some quite good guarantees but it had still meant Barclays taking the shares at 40/- instead of the 30/- they had originally contemplated.’ The governor’s note at the foot of his memo was Normanesque: ‘I am telling HMT [the Treasury] 1st sentence only.’15

  The previous autumn had seen Bank rate reduced from 4 to 3½ per cent – the first Bank rate change since the war to be announced in the traditional way, with a notice being posted in the front hall of the Bank at precisely the same time that the government broker (Derrick Mullens) arrived on the floor of the Stock Exchange, climbed on to the customary bench, took off his top hat and bawled out the new rate to the assembled gilt-edged market. The question increasingly, though, was whether monetary policy, having been neglected for so long, could carry the load. ‘I stressed the danger of thinking that monetary policy could do more than it can,’ noted Cobbold as early as July 1953 after one of his quarterly briefings for the clearing bankers. ‘The main problems remain those of Government expenditure, taxation and the tendency for wage increases.’ Moreover, he was uncomfortably aware that if the Bank was to continue to retain a significant degree of control over monetary policy – squeezing out the Treasury, certainly below the very top level – then that policy had to be seen to be working, the chances of which hinged on a whole range of factors, mostly beyond the Bank’s control. By the start of 1955, he found himself in a particularly unenviable position. A summer election was in the offing, the stock market was booming and it would have been little comfort to read the Financial Times on New Year’s Day assuring its readers that, ‘with the monetary weapon available to check inflation’, Butler would be free in his budget in the spring to concentrate on tax cuts.16

  A fateful year played out with an implacable inevitability. Eden was prime minister from early April, not long after Churchill had paid his one and only visit to the Bank, for a farewell dinner. There was some anxiety beforehand – Churchill wanting champagne, as well as worried that Niemeyer might be present – but, recalled Cobbold, ‘in any event he came and we made polite little speeches, there was a lot of champagne and a good time was had by all!’ On 19 April, Butler delivered his much awaited budget and duly cut the standard rate of income tax by sixpence, while publicly pinning his faith on ‘the resources of a flexible monetary policy’ in order to counterbalance this fiscal generosity. Already, behind the scenes, the signs were visible of serious trouble ahead. On the Bank’s part, Cobbold the day before the budget was trying to nudge the clearing bankers to apply the brakes, telling them that he had ‘heard a good deal of gossip round the place
that there was little or no change in the attitude of the banks towards lending’ and that he ‘thought this ought to be put right’; on the Treasury side, Robert Hall was even more critical of the Bank than usual. ‘They have never been too keen on being tough with the Banks,’ he observed in his diary on budget day. ‘Now the Governor tells the Chancellor that he is being tough with them, but Oliver Franks (now Chairman of Lloyds) tells me that this is not so …’ And he added ominously that ‘altogether we are working up to some sort of éclaircissement with the Governor, but whether the Chancellor will support us I don’t know – he has always felt that the Governor is in the saddle and that it is a very serious thing to disagree with him’.

  Some five weeks later Eden and Butler won their election, which was followed even more predictably during the rest of the summer by serious inflationary and balance of payments pressures. The first crunch came in July. While Butler on the 26th announced a round of credit-tightening measures, Cobbold and the Treasury engaged both before and after (going into August) in a fierce tussle over the governor’s exclusive authority to deal with the clearing banks, with the Bank’s man successfully counter-attacking through his usual line that a ‘credit squeeze’ would work properly only if more was done ‘to cut back public spending’. The second crunch came in the autumn as severe pressure on sterling led by late October to an emergency budget and significant cuts in government expenditure – though not significant enough for Cobbold, who told Butler soon afterwards that he ‘continued to feel doubts whether it was possible to run a defence programme and a social programme of the present size at the same time, without keeping the economy overloaded’. As for monetary matters, the mood in the Treasury remained deeply resentful of what it saw as a tacit conspiracy between the Bank and the banks not to implement credit policy with sufficient stringency – a charge that Cobbold strongly denied, claiming in November that ‘in the last few months’ the banks ‘had done much more than anybody else to fight inflation’.17 Increasingly, West End was telling East End how to run its affairs, and vice versa: not a happy situation.

  Butler, his reputation badly tarnished, was replaced in January by Harold Macmillan. Believing that the debacle of the previous year had been caused less by his predecessor succumbing to the electoral cycle than by ‘ignorance, lack of proper statistical information, bad Treasury advice, a weak Governor of the Bank, & resistance of the Clearing Bankers’, the new chancellor was soon enjoying personally cordial but professionally difficult relations with the governor, amid a circle increasingly hard to square: the Bank and the banking system wanting to stick as far as possible to a voluntary system of credit control; such a system appearing at best only semi-effective; and naturally the Bank and the bankers looking to shift the blame elsewhere. February, with sterling once again in trouble, saw a temporary accord – Bank rate raised to 5½ per cent, Macmillan acceding to Cobbold’s demand for a package of expenditure and investment cuts – but in late March there was an explicit stand-off:

  I am wondering [Macmillan wrote to Cobbold] whether you could not help me, not merely by what you are doing but by getting the full benefit of everyone knowing what you are doing. For it is not only what we are, but what we seem to be, that matters …

  The question of liquidity ratio [the ratio of cash held by banks relative to their deposits] seems to be worth considering again from this point of view. I know at present you rely on the banks carrying out your general wishes. But is there not a lot to be said for this system being more regularised? For instance, could I announce in the Budget that the liquidity ratio was now to be imposed by the Bank of England on the banks?

  The governor in his reply gave no ground. After arguing as usual that the banks were already being squeezed as severely as possible, and that it was the expenditure side of things that really needed the chancellor’s attention, he upped the stakes:

  There has been no major banking failure or moratorium in living memory, no Government has had in this country to rescue the banks from unliquid commitments, the banks have survived two great wars and immense economic changes without loss to anybody and they have provided enormous help to the Government of the day in war and peace.

  Our banking system is incomparably better co-ordinated, more responsible and more willing (some critics would say too willing) to listen to official advice and requests than any other banking system in the world …

  Macmillan backed off for the moment, but by early May, after further discussion on the vexed subject of liquidity ratios, was noting that ‘the Governor is putting a fast one over me, I fear’. Eventually he did accept that a prescribed liquidity ratio was unrealistic (except in an emergency), but at the same time exacted a price for that acceptance. ‘I want to see & talk to the Clearing Bankers myself,’ he recorded in his diary in early July. ‘Mr Governor does not like this, as he regards himself as the right person to deal with the Clearing Banks. We compromised. He will see them, & tell them my wishes this week. I will see them later on in the month …’ That meeting duly took place on the 24th – the day after an entry in the governor’s diary that would not have surprised the Trollope-reading chancellor: ‘I had a talk with Mr Robarts [chairman of the Committee of London Clearing Bankers] and Sir Oliver Franks about tactics at the Bankers’ Meeting with the Chancellor.’18 At which point, late July 1956, Egypt’s President Nasser nationalised the Suez Canal Company, and suddenly all that tactical manoeuvring seemed rather unimportant.

  Three months later, at the end of October, military action began. A Fed memo on the 31st recorded the gist of Bolton’s telephonic commentary on the Suez crisis as seen from Threadneedle Street:

  Just don’t know how things are going to turn out. If Suez settles down quickly, maybe alarm in the market may also disappear. We now have an open breach between London and Washington and that may have consequences one can’t foresee very accurately … I was quite convinced that something was going to happen – only thing that surprised me was the speed … I regard that sort of thing as being quite inevitable. Sorry it happened so quickly and also before the [US presidential] election …

  ‘The pressure on Sterling was considerable,’ Cobbold next day told the discount market, adding that he didn’t ‘wish it to continue in this way for 365 days in the year’. On 6 November, faced by Britain’s reserves draining away and the Americans unwilling to come to the rescue by offering dollar loans, Eden announced a ceasefire. That, though, did not halt the run on sterling (not helped by the recent Russian invasion of Hungary), and on the 15th the Fed’s John Exter recorded a far-from-buoyant Bolton:

  Sir George seemed tired and harried. He said there was a real war psychology in Europe and that there was strong pressure away from Continental currencies and toward North American dollars. He said that as far as they were concerned in Britain they were very discouraged about the situation and were at loose ends as to what to do. He emphasized twice in the conversation that the deterioration had gone beyond the point where it could be handled by any available techniques. I inquired about direct controls and he indicated that he did not think tighter controls would do any good.

  By the time things stabilised, during the second week of December, Britain had lost $450 million of reserves since 30 October – ultimately, the cost of an episode that had marked, with brutal clarity, the end of Britain as a world power.

  That episode also now prompted a Cobbold special:

  Whatever longer-term effects Suez may prove to have on the economy [he wrote to Macmillan five days before Christmas], it has certainly had the immediate effect of laying bare to the public eye, both at home and abroad, some of the weaknesses of which we have long been conscious …

  The fundamental trouble is that the economy and the public purse have been over-extended for many years, partly as a result of the war and partly because of the many commitments, social, military and political, which we have since undertaken (most of them doubtless justifiable on their own merits but adding up to a total bigger than
we could afford).

  On top of our domestic commitments, we are overstretched by our banking liabilities to overseas holders of sterling …

  Accordingly, he called for ‘dramatic, far-reaching and convincing measures in 1957’; and he ended by asserting that ‘we are, I believe, at a cross-road, where the whole future of sterling, and everything which that implies, depends on the decisions of the next few months’. Just over a fortnight later, Macmillan replaced Eden. ‘Mr Hallett called to say that they were pleased with the way sterling was behaving and that they had been able to acquire some dollars,’ noted the Fed’s Thomas Roche next day after a phone conversation with Richard Hallett, deputising for Roy Bridge. ‘Hallett said that they, in the Bank of England, were of the opinion that the resignation of Eden had cleared the air and they look forward to more settled conditions for the rest of the year.’19

  The recent Suez drama did not obliterate memories of the monetary system’s embarrassing failure in 1955 to deliver the credit squeeze on which Butler’s tax-cutting pre-election budget had been predicated; and in April 1957 the new chancellor, Peter Thorneycroft, announced that the eminent lawyer Lord Radcliffe would be chairing a formal inquiry into the working of that system. In mid-May, after a fairly staid, eminently respectable array of Bank-vetted names had been assembled, Cobbold sent Radcliffe ‘Some Thoughts at Random’:

  I hope that the Committee will not feel it necessary to go deeply into relations between Government and Bank. They have worked out happily, much along the lines which you will remember we were hoping for at the time of the [1946] Bank Act; though there is a mild blow up from time to time, the relationship is pretty smooth and pretty well defined in practice. This does not seem to me a matter of much public controversy, and I hope it may be ‘taken as read’.