Till Time's Last Sand

by David Kynaston

  I think you will also find that working relations between the Bank of England and the Banking System are pretty good. The Banks dislike ‘directives’ and are getting tired of the credit squeeze – but, even so, relations are close and harmonious. The only place I expect you to hear contrary views is among some banking economists who feel that they are inadequately consulted …

  Many people (and some members of your Committee) will press for more information from the ‘Authorities’ … We ought not to go too fast or too far. And Heaven protect us from a monthly ‘Federal Reserve Bulletin’, a duplication of Government Economic services, and a continuous spate of unreliable statistics and prophecies …

  Notwithstanding the Treasury’s intense frustration over the previous couple of years with the Bank’s unwillingness to instruct the clearing banks to cut their advances by a specific amount, Cobbold was also in productive, pre-emptive correspondence with its permanent secretary. ‘Each of us will keep in touch with the other’s thinking while we prepare our positions,’ Sir Roger Makins assured the governor, who for his part replied, ‘We are, I think, in full agreement and I foresee no difficulty in practice.’

  Two early sessions in July saw Cobbold giving evidence. Asked about his institution’s openness or lack of it, he insisted that the Bank needed to be able to offer its advice to government ‘on terms of strictest banking secrecy’, adding that ‘there is very much to be said for the policy we generally adopt of hammering out any differences of policy or view and by and large leaving it to the Government to explain the decisions finally taken’; even so, he went on, ‘on balance the Bank’s policy is in fact to be rather more forthcoming than it was, I would judge, in the old days’, and he noted that ‘it has been my practice to make speeches from time to time – not a great many, perhaps two a year – saying a good deal about the Bank’s view on current policy developments’. In short: ‘Our view is that it is very much better that we should be able to choose our own time when it would be useful and helpful to the public to say something rather than be forced by some regular monthly or weekly arrangement to say something, or indeed perhaps to say very little, in frequent, regular statements.’ Cobbold gave a controlled, measured performance almost throughout, but did allow himself the occasional show of emotion. Given that the Bank was now nationalised, would he equate his position, Radcliffe boldly asked, with that of ‘a leading Civil Servant’? To which the governor indignantly replied: ‘Not at all. I am a servant of the Bank Court.’20

  Within weeks of these appearances, sterling was yet again under intense pressure, with reserves tumbling fast. ‘We have a difficult time ahead,’ Cobbold warned Thorneycroft on 22 August before going on holiday to Sardinia, adding darkly that ‘the Germans are going to behave like Germans’. The focus turned to his deputy, Humphrey Mynors. ‘We may be in for a real exchange tussle,’ Mynors wrote in early September to an absent director (the Court’s by now semi-obligatory trade unionist, Sir Alfred Roberts) in response to August’s alarming exchange figures. ‘I remain convinced that our prosperity and standard of living will suffer a mortal blow if the pound goes again, even though it is not easy to put this across as it is not apparent in everyday life.’ Over the next week or so there developed what was tantamount to a constitutional crisis: the chancellor was adamant about the necessity of a 5 per cent reduction in bank advances; the clearing banks were equally adamant that such a policy was not only ‘unwise’ but also ‘unworkable’; and as usual the Bank was stuck somewhere in the middle, though with Mynors making it very clear to Thorneycroft that a) it was highly undesirable that the voluntary approach to bank credit be jettisoned, and that b) under the terms of the 1946 Act the government would require fresh powers if it sought to limit bank advances without doing so via the Bank. That left the possibility of Thorneycroft issuing a formal directive to the Bank to get the banks to do his bidding – a drastic option that in the end he pulled back from. Instead, the inevitable outcome was a major hike in Bank rate, with Cobbold persuading the reluctant politician that there was no alternative to a stiff 2 per cent rise – from 5 to 7 – if the pound was to be saved. Thorneycroft duly made the announcement on 19 September. ‘There has recently been a good deal of speculative pressure against the pound,’ a Bank spokesman declared in strikingly robust language. ‘People have been selling sterling. This will show them “where they get off”.’21

  The hike did its job – pressure on sterling soon easing – but left a vexed Thorneycroft convinced that proper control over the money supply was imperative if creeping inflation was to be mastered. Cobbold, for every reason, was sceptical. ‘I do not accept the view that we have lost control of the money supply,’ he wrote to Thorneycroft in early October, warning at the same time about the danger of making ‘this country the only leading democracy where the Treasury (as opposed to the Central Bank) has powers to direct the commercial banks’. Or again, later that month in a note on a meeting with Thorneycroft ahead of an economic debate in the Commons: ‘I hoped that the Chancellor would not allow himself to get pinned down in the Debate too exclusively to his money supply arguments. I thought it would be unwise to get too far into an academic argument anyway and, as he was aware, I did not feel that the total money supply was by any means the whole question.’ Such sentiments were entirely consistent with the governor’s general reluctance to pin everything on monetary policy, as he explained to the Radcliffe Committee in early November, reflecting on the six often charged years since the reactivation of monetary policy:

  I think, if I examine my conscience, I should find it difficult to feel that we really hoped in any of these Bank Rate moves really to reverse the situation. We have felt throughout this period that we could not reverse the situation by Bank Rate or monetary measures in the private sector unless they were in line with and only used in support of action on a wider field, more particularly on overall Government expenditure. We have felt that it would be not only useless but a mistake to try to overload or overburden the monetary weapon …

  Even so, Cobbold’s political antennae told him that it would be a serious error to have a re-run of the September confrontation – and that it was necessary to make a concession on the monetary front in order to avoid the government assuming powers that would enable it to issue diktats to the clearing banks directly, in other words circumventing the Bank. Fortunately from his point of view, there emerged during the winter of 1957–8, as the Radcliffe Committee considered ‘Alternative Techniques’ of credit control, a Bank/Treasury consensus that resisted any extremes of compulsion, with the Treasury explicitly accepting the Bank’s emphasis on ‘the risks of rigidity and dislocation of bank practice’. Accordingly, the concession itself was relatively minor, namely the introduction in due course of a system of ‘special deposits’ – deposits placed by clearing banks, on the Bank’s instructions, with the Bank itself in order to limit the amount of credit the banks could create. Macmillan and his ministers might have hoped for something more dramatic, but for them there was always the sobering thought of a future Labour government having direct access to the resources of the banking system.22

  Labour – and specifically, the shadow chancellor Harold Wilson – was also on the Bank’s mind during the winter of 1957–8. ‘I’m spending far too much of my time on this damned leak business,’ Cobbold expostulated to a colleague shortly after the dramatic Bank rate rise in September, with rumours spreading that powerful figures in the City had had advance warning of that rise and had taken advantage of it to sell heavily in the gilt-edged market.23 Wilson pressed hard for an inquiry, and eventually Macmillan gave way, with a tribunal being appointed under Lord Justice Parker.24 Two of the Bank’s non-executive (that is, part-time) directors now found themselves under enemy fire – the second Lord Kindersley (of Lazards) and W. J. (‘Tony’) Keswick (of Mathesons) – as evidence was taken at Church House, Westminster during the weeks before Christmas. The case against Keswick was that, while shooting on the Scottish moors in early Se
ptember, he had heard from Mynors that ‘a swingeing rise in the Bank Rate was in the offing’; that on the 16th, in person at the Bank, he had been told again by the deputy governor that this was a distinct possibility; and that next day, two days before the actual rise, he had cabled Jardine Matheson in Hong Kong, anticipating tighter money and recommending that gilts be sold, which they duly were. As for Kindersley, the uncomfortable fact was that the three major concerns he chaired – Lazards, Royal Exchange Assurance and the British Match Company – had between them sold almost £2½ million of gilts during the day and a half before the Bank rate announcement.

  Neither man had a comfortable time (Keswick not helping himself by observing that ‘it is difficult for me to remember the exact timing of conversation on a grouse moor’) as they were questioned by the attorney general, Sir Reginald Manningham-Buller, while Cobbold was also ill at ease. ‘The City is in a rage against Ministers over the Bank Rate Inquiry, because they think the Attorney-General attacked the Governor and the Court and let off the politicians,’ noted the Treasury’s Hall, and indeed there was no doubting the outrage. ‘I thought the Attorney General went out of his way to be offensive about the Governor in his big winding-up speech,’ Kindersley wrote to Bolton (no longer at the Bank) just before Christmas. ‘If he was the next gun to me tomorrow I would certainly use my cartridges in a different direction to the pheasants!!!’ As for the outside world, it watched fascinated, with one observer, Mollie Panter-Downes, evoking for her New Yorker readers ‘a succession of spruce, pink-jowled City gentlemen easing themselves and their briefcases into the witness chair’ and speaking a ‘totally different language’ about ‘“comparatively small”’ deals of a million or so pounds. ‘It has all been a revealing glimpse into a special, jealously guarded world …’ And one Labour politician, Michael Foot, made a prediction: ‘My prophecy is that this whole amazing story of how the City works is bound to lead, at the very least, to plans for the reconstruction of the Bank of England.’25

  While Parker over the holiday season pondered his findings, there began to unfold one of the seminal episodes of British post-war political history. ‘I am bound to express the view,’ Cobbold wrote gravely to Thorneycroft on 27 December, ‘that if HM Government accept estimates of the order which you mentioned to me this morning, it will be seen at home and abroad to be in flat contradiction with your statement of 19th September’ – a reference to how that statement had featured not only the Bank rate hike but also a two-year standstill in public sector investment. The governor then went on to warn that despite ‘a distinct improvement in atmosphere and small increase in the reserves’ since those measures, ‘there is no prospect that any weakening of policy … would escape immediate notice and strong criticism’. How much that further fortified an already determined chancellor is impossible to tell; but over the next ten days a bitter battle within the Cabinet culminated on 6 January with the resignation of Thorneycroft and the other two Treasury ministers (one of them Enoch Powell), unable to accept draft estimates for public expenditure for 1958–9 showing an increase of £50 million, viewed by the trio as incompatible with the principle of restraining government spending. ‘I myself think he is right,’ Cobbold wrote that day to Macmillan. ‘I am very sorry, because I felt with P.T.’s courage and with you behind him at No. 10, we were on an improving wicket from the currency’s point of view. And I still feel – perhaps I am prejudiced! – that the success or failure of the next two years depends more on the currency than on anything else.’ But for Macmillan, instinctively a Keynesian and with an understandable eye on the need for a significant degree of reflation before the general election due by 1960, the priorities were rather different as he prepared to ride out the storm – or what, in his blithely immortal words, he called a ‘little local difficulty’. Did the governor, in his sense of regret, have the City behind him? Only up to a point. ‘I would like to see the Government cutting every penny off expenditure,’ a leading broker reported to the minister charged with gauging reaction there. ‘But if it is a matter of political judgement I would prefer to trust Macmillan rather than Thorneycroft.’26 Put another way, if the socialists could be kept out, then a certain loss of free-market purity was an acceptable price to pay. It was a trade-off that, for almost another twenty years, would continue to govern City assumptions – and could not help but influence those in the admittedly somewhat less tribal and more objective central bank.

  By now Lord Justice Parker was ready to pronounce. ‘I have just read the Report,’ the Treasury’s Makins on 10 January 1958 informed his new chancellor, Derick Heathcoat Amory. ‘It could scarcely be more satisfactory from the point of view of the government, the Bank of England and the City. Everybody connected with the Government and Bank of England is completely exonerated.’ So it proved when the report was published on the 21st. There was, it declared, ‘no justification for allegations that information about the raising of the Bank Rate was improperly disclosed to any person’; as for those in receipt of advance warning of the rise, ‘in every case the information disclosed was treated by the recipient as confidential and … no use of such information was made for the purpose of private gain’. That evening, returning to London after a Rolls-Royce meeting in Derby, Kindersley was handed a copy at St Pancras Station. ‘I am very pleased,’ he told a reporter before leaving in a chauffeur-driven Roller to attend a diplomatic reception. ‘It is very pleasant indeed.’ And next day, Cobbold sent a message to all the staff, noting the complete exoneration of the Bank and acknowledging that it had been ‘a very worrying time for all of us’. Certainly that was how it felt in Threadneedle Street – both then and later. In 1987, paying tribute to Cobbold at his memorial service, his successor but one, Leslie O’Brien, recalled the leak and tribunal as a ‘damaging affair, in which good men and true were pilloried to provide a roman holiday for lesser men’. Yet looked at from the outside it is quite possible that Keswick and Kindersley got away with it. Forrest Capie, in his successor volume to Fforde, suggests that the latter anyway may have done so, pointing to how the British Match Company had for several years faithfully held around £250,000 of gilts – until it abruptly got rid of them the day before the Bank rate hike was announced. ‘They sold that stock,’ the last government broker, Sir Nigel Althaus, would recall almost half a century after the event, ‘and that seemed to me the absolute clincher, and I think Lord Kindersley was very lucky.’27

  At the time, what was unavoidable for the Bank was an intense fortnight or so in the public spotlight, culminating in a two-day debate in the Commons instigated by Labour. Immediate press reaction to the report had a distinctly critical tinge, identifying a whitewash, while the leftish economic journalist Andrew Shonfield gave a radio talk on ‘The Future of the Bank of England’, in which he deployed evidence from the tribunal to create a verbal picture of a ‘slow-footed’ institution with ‘too little professionalism’ where ‘the national cult of the not-so-gifted amateur has got out of hand’. Looking ahead, he did not deny that ‘a central bank inevitably has a certain measure of independence in some spheres of policy’, but demanded a firmer, more precise definition of ‘the respective areas controlled by the Bank and the Treasury’; as for the Bank’s relations with the City, he argued that because of its reliance on prestige-cum-persuasion, ‘it acts, in fact, like a head prefect, whereas the real task of a central bank today is to behave like a headmaster’. Shonfield ended by calling on the Bank to ‘now come down firmly on the side of the masters in Whitehall’, rather than be ‘unduly influenced by its special role in relation to the business interests of the City’.

  Early February saw the Commons debate, in which Wilson gave an aggressive, virtuoso performance: disparaging not only the Court (‘we cannot defend a system where merchant bankers are treated as the gentlemen and the clearing bankers as the players using the professionals’ gate out of the pavilion’) but the Bank more generally – ‘supposed to be a nationalised industry’, but behaving ‘like a sovereign St
ate’ and conducting its relations with the Treasury ‘with too much out-dated stiffness and protocol’. An even more direct broadside came from Harold Lever, in the process of establishing his reputation as Labour’s expert on monetary matters:

  The policies of the Bank of England directorate have meant that our dollars have been diddled away into the hands of every second-rate currency dealer on the Continent. Every commodity shunter has outwitted them. Every dealer in American stocks and shares appears to have been able to get hold of our dollars. Yet all the time the charades of the Bank are religiously maintained. Simple, honest, patriotic and highly talented people have, with great social discipline, continued their efforts to put the country on its feet again, and all the time their efforts have been frustrated because, at one stroke, these blind doctrinaires have poured out the wealth which our people have laboured so hard, so patriotically and with such discipline to produce.

  ‘Let them answer that one,’ called out Labour’s Jennie Lee at this point, but sadly no one did.

  Less than a fortnight later, speaking at the Guildhall to the Overseas Bankers’ Club, the governor sought to answer the critics. After observing that it had recently become a popular national pastime to suggest how the Bank ought to be run, he made a series of assertions: that of the twelve non-executive directors, only three came from merchant banks, while seven ‘have their main experience in industry and commerce’; that ‘both in everyday business and in top-level contacts’ the Bank’s relationship with the clearing banks was ‘second only in importance to the Bank’s relationship with Government’; that although ‘the Bank of England must be a bank and not a study group’ (a no doubt conscious nod to Norman), the ‘charge that the Bank is bereft of economic thinking does not bear examination’ (with Cobbold pointing to ‘two former dons from Oxford on our senior permanent staff’, supplemented by a deputy governor ‘who may still remember something from his ten years at Cambridge’); and finally, that the Bank’s policy remained that of moving ‘gradually in the direction of saying more about what we are doing’. It was a reasoned defence that did its job well enough – albeit one financial editor commented, ‘Two economists for the whole Bank!’ Even so, more was clearly needed and in May the governor opened up a whole front by agreeing to allow the TV cameras into his room and film him being grilled by Robin Day for the ITN series Tell the People. Concentrating mainly on the Bank’s functions and carefully elaborating the nature of its relationship with government – that of a ‘very dutiful wife’ who offered her advice very freely ‘as a good wife should’ and had even been known to nag – he made a favourable impression, displaying, noted the Manchester Guardian, ‘none of the starchiness in his telling which people with low bank accounts might have expected’. In addition, clinching this PR triumph after a somewhat harrowing period, ‘the beadle, the messenger, even the gentlemen in top hats, entered thoroughly into the spirit of the occasion’.28