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The British Government and the City of London

in the Twentieth Century
The relationship between the British government and the City of
London has become central to debates on modern British economic,
political and social life. For some the Citys nancial and commer-
cial interests have exercised a dominant inuence over government
economic policy, creating a preoccupation with international mar-
kets and the strength of sterling which impaired domestic industrial
and social well-being. Others have argued that government seriously
constricted nancial markets, jeopardising Britains most successful
economic sector. This collection of essays is the rst book to address
these issues over the entire twentieth century. It brings together leading
nancial and political historians to assess the governmentCity rela-
tionship from several directions and by examination of key episodes. As
such, it will be indispensable not just for the study of modern British
politics and nance, but also for assessment of the worldwide problem
of tensions between national governments and international nancial
centres.
The editors are professors of history at the University of Durham.
Ranald Michies many publications in international nancial history
include The London and New York Stock Exchanges 18501914 (1987),
The City of London. Continuity and Change Since 1850 (1992) and The
London Stock Exchange: A History (1999). Philip Williamson is author
of National Crisis and National Government. British Politics, the Economy
and Empire 19261932 (1992), Stanley Baldwin. Conservative Leadership
and National Values (1999) and articles on interwar politics and nance.
The British Government and
the City of London in the
Twentieth Century
edited by
Ranald Michie and Philip Williamson
caxniioci uxiviisir\ iiiss
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, So Paulo
Cambridge University Press
The Edinburgh Building, Cambridge cn: :iu, UK
First published in print format
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Contents
Notes on contributors page vii
Acknowledgements x
Conventions and abbreviations xi
Introduction 1
Part I The long perspective
1 The City of London and government in modern
Britain: debates and politics 5
ini Li i wi LLi a:soN
2 The City of London and the British government: the
changing relationship 31
naNaLb :i cni c
Part II Markets and society
3 Markets and governments 59
ronncs1 caii c
4 Financial elites revisited 76
vocsscr cassi s
5 The City and democratic capitalism 19501970 96
ni cnanb wni 1i Nc
Part III Government and political parties
6 The Treasury and the City 117
c. c. icbcN
7 The Liberals and the City 19001931 135
aN1noNv nowc
v
vi List of contents
8 The Conservatives and the City 153
c. n. n. cnccN
9 Labour party and the City 19451970 174
i : 1o:Li NsoN
Part IV The interwar period
10 Moral suasion, empire borrowers and the new issue
market during the 1920s 195
ncnNanb a11anb
11 GovernmentCity of London relations under the gold
standard 19251931 215
noncn1 novcc
12 The City, British policy and the rise of the Third
Reich 19311937 236
Nci L ronncs
Part V 19452000
13 Keynesianism, sterling convertibility, and British
reconstruction 19401952 257
sco11 Ncw1oN
14 Mind the gap: politics and nance since 1950 276
an1ncn 1no:as
15 Domestic monetary policy and the banking system in
Britain 19451971 298
bcNcaN :. noss
16 The new City and the state in the 1960s 322
ca1ncni Nc n. scncNk
17 The Bank of England 19702000 340
c. a. c. coobnan1
Select bibliography 372
Index 377
Notes on contributors
ncnNanb a11anb is a Lecturer in Economic History at the University
of Leicester. He has published several articles on Australian overseas
borrowing and the London Stock Exchange.
noncn1 novcc is Senior Lecturer in International History at the
London School of Economics. He is author of British Capitalism at
the Crossroads, 19191932: A Study in Politics, Economics, and Interna-
tional Relations (1987) and articles on aspects of contemporary history.
He is currently writing a history of the world political-economic crisis
of 192733.
ronncs1 caii c is Professor of Economic History at Cass Business
School, London. He has published widely on monetary and nancial
history and on commercial policy. Recent publications include Capi-
tal Controls (2002) and, co-edited with G. E. Wood, Monetary Unions
(2003). He is now working on the political economy of nancial regu-
lation.
vocsscr cassi s is Professor of Economic History at the University
Pierre Mend` es France, Grenoble, and a visiting research fellow in the
Business History Unit at the London School of Economics. His many
publications include City Bankers 18901914 (1994) and Big Business:
the European Experience in the Twentieth Century (1997). He is currently
working on the performance of European business and on the history
of international nancial centres during the last two centuries.
Nci L ronncs is Head of the Department of History, International
Relations and Politics at Coventry University. His publications include
Doing Business with the Nazis: Britains Economic and Financial Rela-
tions with Germany, 193139 (2000) and he is currently writing a study
of how multinational enterprises managed political risk in interwar
Europe.
vii
viii Notes on contributors
c. a. c coobnan1 worked in the Bank of England from1968 to 1985,
becoming Chief Adviser, and returned as an external member of the
Monetary Policy Committee from 1997 to 2000. He was Norman
Sosnow Professor of Banking and Finance at the London School of
Economics until 2002, and is now deputy director of the Schools
Financial Markets Group. He has written extensively on economic and
monetary history, central banking, and nancial regulation.
c. n. n. cnccN is Reader in Modern British History at the University
of Oxford, and a Fellow and Tutor at Magdalen College. He is the
author of The Crisis of Conservatism 18801914 (1995) and Ideologies of
Conservatism (2002). His study of Margaret Thatchers reputation will
appear in 2005.
aN1noNv nowc is Professor of Modern History at the University of
East Anglia. He is the author of Free Trade and Liberal England, 1846
1946 (1997) and several articles on the City of London and economic
policy. He is currently working on the international history of free trade
and globalisation since 1776.
naNaLb :i cni c is Professor of History at the University of Durham.
His many publications in nancial history include The City of London.
Continuity and Change Since 1850 (1992), and The London Stock
Exchange. A History (1999). He is now working on the London for-
eign exchange market.
sco11 Ncw1oN is Senior Lecturer in History at Cardiff University. He
has written extensively on twentieth-century British economic history
and policy and is currently writing a history of the global economy
from 1944 to 2000. His most recent book is Prots of Peace: the Political
Economy of Appeasement (1996).
c. c. icbcN is Professor of History at the University of Stirling. His
publications include British Rearmament and the Treasury, 19321939
(1979) and The Treasury and British Public Policy, 19061959 (2000).
He is currently working on Treasury responses to Keynes in the period
192546.
bcNcaN :. noss is Senior Lecturer in Economic History at the
University of Glasgow, and co-editor of Financial History Review.
Among his recent publications are essays in Mission Historique de
la Banque de France, Politiques et Pratiques des Banques dEmission en
Europe, XVIIeXXe si` ecle (2003), and S. Battilossi and Y. Cassis (eds.),
European Banks and the American Challenge (2002).
Notes on contributors ix
ca1ncni Nc n. scncNk is Professor of International Economic His-
tory at the University of Glasgow. She has published widely on inter-
national monetary and nancial relations since 1945 including Britain
and the Sterling Area: from Devaluation to Convertibility in the 1950s
(1994) and Hong Kong as an International Financial Centre (2001). She
is currently engaged on a project reassessing Britains sterling policy
195873.
an1ncn 1no:as is Senior Lecturer in the School of Management,
University of Liverpool. Among his publications are The Finance of
British Industry 19181976 (1978), The Big Bang (1986) and The Secu-
rities Markets (1989). He is currently working on the gilt-edged market
in the latter half of the nineteenth century.
i : 1o:Li NsoN is Professor of Economic History at Brunel Univer-
sity, London. He has written widely on twentieth-century British
economic history and policy. His work relating to the Labour party
includes Democratic Socialism and Economic Policy. The Attlee Years,
19451951 (1997), and The Labour Governments 19641970, III:
Economic Policy (2004).
ni cnanb wni 1i Nc is Reader in Modern History at the University of
Leeds. His recent publications include The Labour Party and Taxation:
Party Identity and Political Purpose in Twentieth-Century Britain (2001),
and he is now interested in labour law and the nature of work.
ini Li i wi LLi a:soN is Professor of History at the University of
Durham, and author of National Crisis and National Government. British
Politics, the Economy and Empire 19261932 (1992), Stanley Baldwin.
Conservative Leadership and National Values (1999), and articles on
interwar politics and nance.
Acknowledgements
This book draws on papers submitted to a conference held in the Univer-
sity of Durham in 2001. The purpose of that conference was to explore
the issues and allow all participants to develop their arguments. Unfor-
tunately it was not possible to publish all the conference papers, but the
editors are grateful to all the speakers and contributors to the debate.
They are grateful also to the London Stock Exchange for funds which
supported both the organisation of the conference and the preparation of
the book, and to Christine Woodhead for her editorial assistance.
x
Conventions and abbreviations
Full names of historical individuals are given in the index. This also gives
the terms of ofce of the Bank of England Governors, Chancellors of the
Exchequer and the Prime Ministers mentioned in the text.
Unless otherwise stated, the place of publication is London.
BEQB Bank of England Quarterly Bulletin
BoE Bank of England Archives
BT Board of Trade papers, in the National
Archives/Public Record Ofce
CAB Cabinet Ofce papers, in the National
CO Colonial Ofce papers, in the National
CPA Conservative Party Archives, Bodleian
Library, Oxford
EcHR Economic History Review
FO Foreign Ofce papers, in the National
GATT General Agreement on Tariffs and Trade
HC Deb House of Commons Debates, 5th series, with
volume and column (c., cc.) numbers
Kynaston, City of London David Kynaston, The City of London, in
4 volumes:
I A World of its Own 18151890 (1994)
II Golden Years 18901914 (1995)
III Illusions of Gold 19141945 (1999)
IV A Club No More 19452000 (2001)
LPA Labour Party Archives, National Museum
of Labour History, Manchester
PP Parliamentary Papers
xi
xii Conventions and abbreviations
PREM Prime Ministers private ofce papers, in
the National Archives/Public Record
Ofce
Radcliffe Committee Committee on the Working of the
Monetary System, 19579
T Treasury papers, in the National
Wilson Committee Committee to Review the Functioning of
Financial Institutions, 19779
Introduction
The nature of the relationship between the government and the City of
London, or more abstractly between politics and nance, is a central
issue in studies of modern Britain. The relationship is assumed to have
been close and to have had wide repercussions, but thereafter disagree-
ments have emerged. It is a problem in economic and nancial history:
to what extent has the relationship affected the performance and struc-
ture of the economy in general, and the development of its nancial and
industrial sectors in particular? It is a problem in political history and
political science: have government and the City had shared or divergent
interests? Which has been more powerful? Has government unduly con-
stricted the Citys nancial markets, or has the City exerted excessive
inuence over the policy agenda and particular decisions? For imperial
historians the question has been how far did City interests shape British
overseas expansion and, later, the character of decolonisation? Historians
of international relations have asked howfar City interests have supported
or conicted with particular government foreign policies. The relation-
ship is also an issue in social history and sociology: was there a signicant
merger of personnel and interest between the Citys nancial elite and
the governing elites, at the expense of other socio-economic groups?
This book brings together political and nancial historians to investi-
gate the governmentCity relationship during the twentieth century, con-
sidered from various directions and by attention to revealing episodes. In
the rst section, the opening chapter describes the issues as these have
emerged in recent historical studies and assesses them from a political
perspective, while the second chapter traces the relationship over the
long-term from a nancial and economic perspective. The next section
of three essays then considers issues relating to the broad economic and
social environments: the boundaries between markets and government,
the debate over the extent to which the City generated a distinctive socio-
political elite and, in contrast, postwar efforts to democratise ownership
of nancial assets. The essays in the third section examine the perspective
of the Treasury, as the department of government most in contact with
1
2 Introduction
City institutions, and then those of each of the main political parties:
the Conservative party throughout, and the Liberal and Labour parties
during their periods of greatest potential impact on City activities.
Before 1914 governmentCity interactions were limited, while both
world wars produced exceptional conditions, in which the state imposed
detailed control over the Citys activities, with its co-operation or acqui-
escence. Examination of the particular character and changing nature of
governmentCity relations is therefore best undertaken on the interwar
and the post-1945 years. The section on the interwar period has chapters
on the attempt to restore the pre-1914 relationship in radically changed
economic and political conditions, and examples of how it operated in
the spheres of two other government departments, the Colonial and For-
eign Ofces. The chapters in the post-1945 section examine aspects of
the governmentCity relationship during the long period of a managed
and increasingly beleaguered economy, followed by the impact of a new
nancial internationalism. It concludes with an overview of the relation-
ship over the last thirty years of the century from the perspective of the
Bank of England.
The aim of this book has been to advance debate on the government
City relationship by adding historical depth and understanding, not to
seek agreement among the contributors nor to draw general conclusions.
What can be said is that the relationship is in the process of fundamental
change because of the growing involvement of more players on each side.
It is no longer sufcient to consider only the role of the British govern-
ment, because the European Union is becoming increasingly important in
determining the laws, rules and methods of all in the City of London. Nor
can the City any longer be identied just with British banks and British
nancial institutions serving British clients, not only because it is a major
participant in global nancial markets but also because, with many of
its major businesses now foreign-owned, it is answerable to head ofces
located all around the world. The debate on the relationship between the
British government and the City of London is increasingly just one part
of the debate on the relationship between any nancial centre and its host
government, between those who regulate and those who are regulated,
and between national sovereignty and trans-national power at a time of
nancial globalisation. These are not new issues, but they have entered a
new phase over the last twenty-ve years.
naNaLb :i cni c
aNb ini Li i wi LLi a:soN
Part I
The long perspective
1 The City of London and government
in modern Britain: debates and politics
Philip Williamson
Substantial historical interest in the City of London is a recent
development. Financial historians studied its main institutions, some of
its leading banks and aspects of monetary policy, but it received little
comment even from other economic historians and was usually ignored
in more general histories. Only in the 1980s did the City, considered
as a whole, become a unit of study and enter the mainstream of histori-
cal attention, and only then did it attract interest from political scientists
and sociologists. Partly this reected the contemporary prominence of
the City, due to the transformations which were then taking place in the
nancial systemand the publicity given to the fabulous incomes and con-
spicuous consumption of nancial dealers. A larger reason was a shift in
the long-running debate about the relative decline of the British econ-
omy, meaning primarily manufacturing industry. After numerous other
possible causes had been investigated, the nancial sector now seemed
to be the chief culprit. At rst attention focused on the supposed failure
of the banks and the Stock Exchange to supply industry with adequate
amounts or appropriate forms of capital.
1
Increasingly, however, the dam-
age inicted by the City seemed more wide-ranging: except during the
two world wars, it had exercised the dominant inuence over government
economic policy. Such claims connected with work by historians in other
elds, and gave the City, and indeed nancial history, an entirely new
salience. Soon the issue of the relationship between the British govern-
ment and the City of London acquired its own momentum, as it appeared
to offer cogent explanations for many features of Britains domestic and
international experience since 1850.
The author is indebted to the British Academy for the award of a research readership,
during which this chapter was completed.
1
Helpful reviews of this debate are Y. Cassis, British nance: success and controversy, in
J. van Helten and Y. Cassis (eds.), Capitalism in a Mature Economy (Cheltenham, 1990),
pp. 122, and F. Capie and M. Collins, Have the Banks Failed British Industry? (Institute
of Economic Affairs, Hobart Paper 119, 1992).
5
6 Philip Williamson
The cases made for the Citys inuence over government have been
challenged, and some specic claims have provoked debates. This chapter
reviews the various arguments, and from a political perspective suggests
ways in which the discussion might be advanced. It urges more careful
specication of its leading terms, fuller consideration of the character of
its main participants, particularly what is understood by government,
and a wider investigation of inuences on the policy process. Both the
City and the government have been more complex and more uid enti-
ties, and been subjected to a broader range of pressures, than is some-
times allowed. The discussion of governmentCity relations has had the
strength of drawing together historians and social scientists from the var-
ious elds of economics, nance, sociology, government, politics and
imperial relations; even so, some disciplinary barriers remain, inhibiting
a more precise understanding of the extent and nature of the interactions.
Debates
One of the earliest historical discussions of governmentCity relations
emerged from the debate on the causes of interwar unemployment. For
Sidney Pollard, the governments determination in the early 1920s to
re-establish the gold standard was a bankers policy: it expressed the
specic self-interest of a narrow section of the City and its spokesman,
the Bank of England, while the Treasury as ever reected the needs
of the City rather than the country, with terrible costs for industry and
employment.
2
Later, this type of argument was broadened as the main
issue became Britains relative industrial decline, regarded as a persis-
tent problem dating from the late nineteenth century. For Pollard again,
industry has every time to be sacriced on the altar of the Citys and
the nancial systems primacy, because the Bank of England and the
banking community largely determined the Treasurys priorities.
3
Such conceptions also became integral to general interpretations of
Britains long-term socio-economic and political development. At their
heart was a growing realisation that notwithstanding the industrial revo-
lution the nancial and commercial sector had always been a strong and
dynamic element in the British economy, indeed arguably more impor-
tant for its performance than the manufacturing sector. The general inter-
pretations drew support from socio-economic and cultural studies which
2
S. Pollard, Introduction to S. Pollard (ed.), The Gold Standard and Employment Policies
between the Wars (1970), pp. 126.
3
S. Pollard, The Wasting of the British Economy. British Economic Policy 1945 to the Present
(1982), pp. 345, 73, 858, 1501; also S. Pollard, Britains Prime and Britains Decline.
The British Economy 18701914 (1989), pp. 23556.
City and government: debates and politics 7
independently concluded that the leaders of nance capital were more
powerful than those of industrial capital, and after 1850 acquired a spe-
cial relationship with the governing landed classes. William Rubinstein
established that the wealth of the nancial and commercial middle class
of metropolitan southern England exceeded that of the industrial mid-
dle class of provincial northern Britain.
4
Youssef Cassis argued that a
merger of the Citys nancial elite with the landed elite had produced an
acceptance of City views on economic policy.
5
For Martin Wiener the
social and cultural absorption of new middle-class wealth by old landed
wealth had produced a gentrication of dominant values, smothering
the industrial spirit.
6
The earliest of the general interpretations came from the new left.
Perry Anderson argued that the survival of a pre-modern ruling class
and its penetration by monied interests explained both the conservatism
of the British state and the hegemonic position of the City.
7
For Frank
Longstreth the banking fraction of capital had achieved primacy in the
state system, which enabled the City to dominate economic policy and
the political realm.
8
Geoffrey Ingham, in a sociological challenge to
these neo-Marxist interpretations, gave a different explanation. The Bank
of England and the Treasury were not mere instruments of the City, but
had independent sources of power and independent interests. Rather, the
Citys hegemony was the product of a core institutional nexus of the
City, the Bank and the Treasury, bound together by their one mutual
interest preserving stable money forms.
9
From a different perspec-
tive, Peter Cain and Anthony Hopkins argued that prolonged alliance
between the landed and nancial interests had generated a gentlemanly
capitalism, whose character explained the form not just of the British
4
W. D. Rubinstein, Wealth, elites and the class structure of modern Britain, Past and
Present 76 (1977), 99126, and W. D. Rubinstein, Men of Property (1981).
5
Y. Cassis, City Bankers 18901914 (Cambridge, 1995; rst edn in French, 1984), esp.
ch. 8; and see similarly, reaching further into the twentieth century, M. Lisle-Williams,
Beyond the market: the survival of family capitalism in the English merchant banks, and
M. Lisle-Williams, Merchant banking dynasties in the English class structure: ownership,
solidarity and kinship in the City of London, British Journal of Sociology 35 (1984), 241
71, 33362.
6
M. Wiener, English Culture and the Decline of the Industrial Spirit 18501980 (Cambridge,
1981), with specic references to the City on pp. 1289, 145.
7
P. Anderson, Origins of the present crisis, New Left Review 23 (1964), 2653, and
P. Anderson, The gures of descent, New Left Review 161 (1987), 2077; and see
A. Gamble, Britain in Decline. Economic Policy, Political Strategy and the British State (1981),
pp. 13443.
8
F. Longstreth, The City, industry and the state, in C. Crouch (ed.), State and Economy
in Contemporary Capitalism (1979), pp. 15790.
9
G. Ingham, Capitalism Divided. The City and Industry in British Development (1984), esp.
pp. 911, 37, 12739, 1789, 21516, 219, 22932.
8 Philip Williamson
state but also of the British empire. As a branch of gentlemanly capital-
ism the City had a disproportionate inuence in British economic life
and economic policy making.
10
These converging characterisations of the Citys inuence over the gov-
ernment, especially Inghams concept of a CityBankTreasury nexus,
have had considerable inuence. This is evident in studies of the bi-
metallism controversy in the late nineteenth century and the nancial
crisis at the outbreak of the First World War; in Robert Boyces discus-
sion of the politics of economic internationalism under the gold standard
regime of 192531; in an investigation of the emergence of Euromarkets
in the 1950s, and in a much-noticed 1990s critique of the contemporary
state.
11
In Ewen Greens review of the issues from the 1880s to 1960, the
Citys lobbying power, structural links with the state and overlapping eco-
nomic ideology with the Treasury ensured that, in the long run, banking
sector priorities were translated into government priorities.
12
For Scott
Newton and Dilwyn Porter the power of the core nexus was a lead-
ing explanation for the failure of industrial modernisation since 1900.
13
In such accounts government economic policy turned upon a contest
between the international interests of the City or nance and the more
national concerns of industry or production, with the Citys interests
normally prevailing. This was not simply because of its economic impor-
tance and its provision of funds to the government. It also resulted from
further forms of power: an early integration of the nancial and ruling
landed elites; the Citys economic cohesion, geographical concentration
and physical proximity to, and institutional connections with, the gov-
ernment. The effect was that government always tended to identify the
Citys interests with the national interest.
In their coherence, explanatory economy and treatment of a long time-
scale, these conceptualisations of governmentCity relations have seemed
10
P. J. Cain and A. G. Hopkins, Gentlemanly capitalism and British expansion overseas.
I. The old colonial system 16881850 and II. New imperialism 18501945, Economic
History Review 39 (1986), 50125, and 40 (1987), 126; and P. J. Cain and A. G.
Hopkins, British Imperialism, 2 vols. (1993; revised one-volume edn, 2001).
11
E. H. H. Green, Rentiers versus producers? The political economy of the bimetallic
controversy c. 18801898, English Historical Review103 (1988), 588612; J. Peters, The
British government and the Cityindustry divide: the case of the 1914 nancial crisis,
Twentieth Century British History 4 (1993), 12648; R. W. D. Boyce, British Capitalism
at the Crossroads 19191932 (Cambridge, 1987), esp. ch. 1; G. Burn, The state, the
City and the Euromarkets, Review of International Political Economy 6 (1999), 22561;
W. Hutton, The State Were In (1995), pp. 223, 7981, 11236.
12
E. H. H. Green, The inuence of the City over British economic policy c. 18801960,
in Y. Cassis (ed.), Finance and Financiers in European History 18801960 (Cambridge,
1992), pp. 193218.
13
S. Newton and D. Porter, Modernization Frustrated. The Politics of Industrial Decline in
Britain since 1900 (1988): see the themes stated on pp. xixv.
powerful and persuasive. Yet like other general interpretations they risk
becoming schematic and reductionist, establishing assumptions which
foreclose further investigation and exclude alternative explanations. Such
terms as the City and government might be given excessive force, and
be presented as unitary agents capable of uniform intentions. Coinci-
dences of outlook between the two might be mistaken for causation;
opinions of particular bankers might be elevated into proof of City dom-
ination, when quite different and more adequate explanations of govern-
ment decisions could be found. There certainly seem to be difculties
with these approaches. Doubts have been expressed about the extent
of the Citys cohesion, its distance from industry and its political inu-
ence.
14
Episodes which appeared to be prime cases of division between
nance and industry, notably the debates on bimetallism and tariffs
before 1914, have on further scrutiny been found to be less clear cut.
15
The notion of an Edwardian identity of views between political circles
and banking circles
16
sits uneasily with the Unionist partys adoption
of tariff reform, which challenged the Citys long-standing attachment
to free trade, and the Liberal governments 1909 budget, which aroused
considerable City protest for threatening capital accumulation. Against
the government decision in 1925 to restore the gold standard might be
set its original 1919 decision to abandon it, despite the recommendation
of its own banker-dominated ofcial committee, largely because of con-
cerns about unemployment and the attitudes of industrial labour.
17
The
outcomes of the sterling and budget crises of 1931, for all the allegations
of a bankers ramp, were more the product of party-political manoeu-
vres than City or Bank of England pressure.
18
Nor is it difcult to nd
friction between the Bank of England and Treasury ofcials or govern-
ment ministers, whether over use of the gold reserves in 1917, bank rate
14
See the important sceptical commentaries by M. Daunton: Gentlemanly capitalism
and British industry 18201914, Past and Present 122 (1989), 11958; Financial elites
and British society 18801950, and Finance and politics: comments, in Y. Cassis (ed.),
Finance and Financiers, pp. 12346, 28390; and Home and colonial, Twentieth Century
British History 6 (1995), 34458.
15
See the A. C. Howe and E. H. H. Green debate in English Historical Review 105 (1990),
37791, 67383; Daunton, Gentlemanly capitalism, pp. 14951; A. C. Howe, Free
Trade and Liberal England, 18461946 (Oxford, 1997), pp. 199204, 2336; E. H. H.
Greens modied analysis, Gentlemanly capitalism and British economic policy 1880
1914: the debate over bimetallism and protectionism, in R. E. Dumett (ed.), Gentle-
manly Capitalism and British Imperialism (1999), pp. 4467, and the Howe and Green
chapters 7 and 8 below.
16
Cassis, City Bankers, p. 308.
17
P. Cline, Reopening the case of the Lloyd George Coalition and the postwar economic
transition 191819, Journal of British Studies 10 (1970), 16275.
18
P. Williamson, National Crisis and National Government. British Politics, the Economy and
Empire 19261932 (Cambridge, 1992), chs. 811.
10 Philip Williamson
in the 1920s, credit control in the 1950s and 1960s, or public sector
expenditure in the 1960s and 1970s. Even combined Bank and Treasury
advice did not necessarily prevail: in 1952 a joint plan for an immediate
return to sterling convertibility (Robot) was defeated by Conservative
ministers. Three major government enquiries on the nancial system
in 192931, 19579 and 19779
19
attest to recurrent political doubts
about City activities.
More considerable still is the perspective in studies of the City of
London itself. For the period after 1914 these reveal much government
or Bank of England control, regulation and intervention, not only dur-
ing the emergencies of the two world wars and their immediate after-
math when it is accepted that the government overrode most City
activities but even during normal periods of peacetime. The gov-
ernments borrowing and funding requirements, measures to support
the balance of payments, taxation policies, nationalisation of utilities,
credit restrictions and even labour legislation all affected, and frequently
inhibited, the business and international competitiveness of City rms
and markets.
20
In the 1970s a common City view was that the nancial
community was the victim of government action and was incapable of
putting its case effectively in Whitehall or Westminster.
21
When after
1971, culminating in Big Bang in 1986, the government and the Bank
took measures to overcome restrictive practices within the City prac-
tices created or encouraged by their own earlier interventions its struc-
tures and activities were again decisively shaped by government action,
even though the outcomes were often different from what had been
intended.
Neither particular cases of Citygovernment tensions nor a persistent
government imprint on the City are necessarily incompatible with the
argument that the City had a strong inuence over economic policy. The
weight of particular episodes might still seem to favour the prevailing
interpretations, while the effects of government within the City could have
been of a different order to the Citys effects on government. Neverthe-
less, such counter-cases and contrary perspectives emphasise the need for
caution. It may be that, as Martin Daunton has written, the notion that
economic policy was dominated by an alliance of the City and Treasury
19
Respectively the (Macmillan) Committee on Finance and Industry, the (Radcliffe) Com-
mittee on the Working of the Monetary System, and the (Wilson) Committee to Review
the Functioning of Financial Institutions.
20
These are leading themes in R. C. Michie, City of London. Continuity and Change Since
1850 (1992), and R. C. Michie, The London Stock Exchange. A History (Oxford, 1999).
21
M. Moran, Finance capital and pressure-group politics in Britain, British Journal of
Political Science 11 (1981), 382, 399.
is a regrettable commonplace of modern British history which obscures
other, and more interesting, features of policy formation.
22
The City
The contrasting histories of the City of London by Ranald Michie and
David Kynaston have both shown that as an economic entity the City
dees easy generalisation. It might be dened as a national and inter-
national clearing house, a collection of markets used by intermediaries
in trade, money, securities and nancial services. As such its essence
and its strength consisted in the remarkable diversity and exibility of its
activities.
23
Its markets and rms were highly specialised in their func-
tions, types of client and geographical areas of expertise, and even within
the City itself they operated in a highly competitive environment. Pre-
cisely because it was an international clearing house the City was vul-
nerable to sharp structural changes in the world economy especially
the two world wars and the 192932 depression as was its nancial
sector to sudden international capital ows. Some instances of supposed
City pressure on government, notably during successive sterling crises,
are more fully understood as emanating from foreign markets and insti-
tutions. Another of the Citys core businesses, providing funds for the
British state, meant that from the First World War onwards many of
its activities were subordinated to the demands of a massively enlarged
national debt. The effect was that the Citys activities and its structure of
rms changed considerably over the century from1914 to the 1950s los-
ing much of its long-established commercial and international nancial
business and becoming increasingly concerned with domestic nance,
before new forms of trans-national nance emerged during the 1960s
and re-established its international pre-eminence.
24
Assessments of the City of Londons long-term inuence over govern-
ment policy need to give careful attention to these changes in composi-
tion. Yet so diverse, uid, competitive and prone to external pressures
were its activities, and so tied to the immediate conditions and uctua-
tions of their specialist markets were its brokers, bankers and merchants,
that the ability of the City as a whole to form a coherent policy interest
requires demonstration, rather than being taken for granted.
25
It can be
22
M. Daunton, How to pay for the war: state, society and taxation in Britain 191724,
English Historical Review 111 (1996), 916.
23
Michie, City of London, pp. x, 213, and see the evocation of complexity and uidity in
D. Kynaston, The City of London, 4 vols. (19942001).
24
See Michie, City of London, and his chapter 2 below.
25
For further comment from various directions, see Daunton, Gentlemanly capitalism,
14651, and Daunton, Financial elites, pp. 13942; R. C. Michie, Insiders, outsiders
argued that the demands of its various businesses for easy access to and
ready international exchange of money did create common interests in
open markets, free international trade, a stable and convertible currency,
government credit-worthiness and low taxes. These were, however, very
general concerns which left room for differences over extent and means;
and once each was expressed as a specic policy preference, they could
conict. For example, during the Edwardian period City men were faced
with a choice between free trade and low direct taxation. Most opposed
Joseph Chamberlains tariff reformcampaign when it started in 1903, but
after 1906 an increasing number accepted it as preferable to the Liberal
governments tax increases.
26
In practice, when historians use the termthe City they rarely mean the
whole accumulation of economic activities located in the City of London.
Most often it is treated as a synonym for the City-based banks, leaving
aside the commodity markets, trading companies, shipping interests, and
even the insurance markets and the Stock Exchange. Yet even here there
are complications. This City is usually identied with only some of
the banks, and at different times with different types of bank. Before
the 1930s these are the leading merchant banks, with their international
businesses, but from the 1940s they become the clearing banks, whose
principal concerns were domestic.
Such semantic shifts in the historical literature indicate an important
point about contemporary meanings. Fromthe perspective of the govern-
ment and the Bank of England, what principally constituted the City
varied, not just over time but according to what seemed most relevant
for their purposes. There was the City which rarely impinged on their
concerns, and which when it did tended to be regarded as a problem
or irritant. This was true of the Stock Exchange, whose interests and
opinions usually carried little weight in government or with the Bank.
27
There was the City which handled the technical and normally routine
business of government borrowing. Its leading bankers were important
and needed to be consulted, but this business rarely gave rise to issues
which can properly be termed economic policy. The City whose views
were considered signicant for policy reasons might consist of a different
and the dynamics of change in the City of London since 1900, Journal of Contemporary
History 33 (1998), 54771; M. Moran, Power, policy and the City of London, in
R. King (ed.), Capital and Politics (1983), pp. 4951; S. Checkland, The mind of the
City, Oxford Economic Papers, n.s. 9 (1957), pp. 2645, 2734, 2768; R. Roberts and
D. Kynaston, City State. How the Markets Came to Rule Our World (2001), p. 17.
26
See Howes chapter below, pp. 1413.
27
Michie, London Stock Exchange, pp. 186, 4235, 601.
set of bankers; and as economic policy objectives changed from maint-
enance of the gold standard to management of the domestic economy so
the relevant types of bankers altered. Is the City said to be important for
government policy in the 1900s the same City which seems to inuence
policy in the 1950s? How far can cases made for the Citys capacity and
means for inuencing government in the 1900s be generalised to apply
to the 1950s?
The City as a whole was not organised as a pressure group or interest.
In the early part of the century, occasional petitions to senior ministers
were organised by the bankers and merchants of the City, notably on the
issue of the 1909 budget.
28
In 1920 there was even a joint representation
from the heads of the Bank of England, clearing and merchant banks,
Stock Exchange and London chamber of commerce, proposing a radical
solution to the problem of the postwar oating debt.
29
But these were
exceptional actions at the height of perceived crises, not part of sustained
efforts to shape policy and they had little or no impact on govern-
ment. A parliamentary committee of bankers had only an indistinct and
transitory existence before 1914. From the 1960s some attempts were
made to unite nance capital, embracing all the various nancial busi-
nesses within one organisation, but without success. Particular types of
bank or market members did form representative associations, such as
the Accepting Houses Committee and London Discount Market Associ-
ation, but compared to industrial and trade associations these were slow
to develop and, like them, were concerned with self-regulation, imple-
mentation of ofcial requirements, and technical issues of direct con-
cern to their members, not matters of general economic policy. Some,
including the Accepting Houses Committee, were also weak and for long
periods practically moribund. Only during the 1970s, in response to
increased government intrusion in the City, did pressure groups emerge
or older associations become lobbying bodies.
30
Until then such activity
had seemed unnecessary, because the leading banks regarded the Bank of
England as its representative and channel of communication in dealings
with the government.
28
The Times, 15 May 1909, and see Kynaston, City of London, II, pp. 4946, and below,
pp. 1212, 140.
29
M. Daunton, Just Taxes. The Politics of Taxation in Britain, 19141979 (Cambridge, 2002),
p. 77. For another example, of coordinated letters from leading bankers during the 1931
crisis, see Williamson, National Crisis, pp. 282, 293.
30
Cassis, City Bankers, pp. 27184; Moran, Finance capital and pressure-group politics,
pp. 3856, 38993, 3979. In a similar shift, in 1979 the Stock Exchange joined the
Confederation of British Industries: Michie, London Stock Exchange, pp. 4867.
The Bank of England
For some historians the Bank of England is part of the City, for others
an instrument of the government. This reects both an ambiguity which
was always inherent in its various functions, and its changing relation-
ship with the government during the century. In some respects the Bank
obviously did act on behalf of the City, meaning those sectors of the
City which it considered especially important at particular times. As its
responsibilities included the stability of the nancial system, it helped to
reorganise markets disrupted by war or depression, and to rescue ailing
banks and nance houses; indeed until the 1980s it tacitly guaranteed
the solvency of all the Citys leading banks. Its expanding supervision
of the banking system and later other City markets and rms became a
means of protecting them from government interference. As the Citys
contact with the Treasury and the elected government, it upheld or advo-
cated policies which it believed would benet the nancial system, and
protested against government measures which it considered damaging to
that systemor its particular parts on occasion placing severe pressure on
ministers by insisting that preservation of nancial condence should take
priority over all other policies. Sometimes, as over credit restriction in the
1950s, it even obstructed government policies.
31
For all these purposes,
as far and as long as possible the Bank distanced, even insulated, itself
from government and defended its independence as an institution and
its control of monetary policy. These originally seemed to be guaranteed
by its delegated powers under the gold standard, and its being in private
ownership. Even after the nal departure from the gold standard in 1931
transferredultimate monetary authority to the Treasury andevenafter the
Bank was nationalised in 1946, it still asserted its operational autonomy
and right to give independent advice, even though this could contradict
the governments electoral or other public commitments.
32
The Bank
31
J. Fforde, The Bank of England and Public Policy 19411958 (Cambridge, 1992), ch. 10;
A. Ringe and N. Rollings, Domesticating the market animal? The Treasury and the
Bank of England 195560, in R. A. W. Rhodes (ed.), Transforming British Government,
I, Changing Institutions (2000), pp. 1237.
32
For excellent studies of these various aspects, see D. Kynaston, The Bank of England
and the government and R. Roberts, The Bank of England and the City, in R. Roberts
and D. Kynaston (eds.), The Bank of England. Money, Power and Inuence, 16941994
(Oxford, 1995), pp. 1955, 152184; A. Cairncross, The Bank of England: relationships
with the government, the civil service and Parliament, in G. Toniolo (ed.), Central
Banks Independence in Historical Perspective (Berlin, 1988), pp. 3972; M. Collins and
M. Baker, Bank of England autonomy: a perspective, in C.-L. Holtfrerich, J. Reis and
G. Toniolo (eds.), The Emergence of Central Banking from 1918 to the Present (Aldershot,
1999), pp. 1333; M. Moran, Monetary policy and the machinery of government,
Public Administration 59 (1981), 4761.
was notably successful in ensuring that the nationalisation act preserved
its position as the intermediary or barrier between government and
the banking system, denying the Treasury powers of direction over the
clearing banks.
33
Nevertheless the Bank did not regard itself as merely the representa-
tive or voice of the City. As its deputy Governor told the Macmillan
Committee in 1929, it considered its main duty to be to conduct its
operations in the interests of the community as a whole . . . free from
the control of particular groups or interests. While such statements were
chiey intended to justify the Banks political independence, they also
implied a position of independence within the City and a readiness, where
judged appropriate, to direct, control and discipline the activities of its
rms and markets.
34
In the 1930s and 1940s this could involve pres-
sure on merchant and clearing banks to assist depressed industries or
small industrial companies, against the banks own sense of appropriate
or sound banking business.
35
On a much larger scale, under the pressures
of war, depression and government economic management the Banks
responsibilities as banker to the government and guardian of the cur-
rency and the nancial system obliged it to play a large part in shaping
the Citys nancial structures and activities. By its own operations or by
moral suasion it organised or regulated the money markets and capital
issues to suit the governments borrowing requirements and the funding
of its short-term debt. Together with the Treasury it imposed exchange
controls and embargos or restrictions on overseas investment in order to
stabilise the currency and the exchange rate.
36
From the 1940s it issued
requests always treated as instructions to clearing banks and other
nancial houses for restraint in their advances: its objections were not to
the principle of credit restriction, but to Treasury views on method and
33
S. Howson, British Monetary Policy 194551 (Oxford, 1993), pp. 11017; Fforde, Bank
of England, pp. 1013.
34
See P. Williamson, Financiers, the gold standard and British politics, 19251931, in
J. Turner (ed.), Businessmen and Politics. Studies of Business Activity in British Politics 1900
1945 (1984), p. 109. For an account of this period with different emphases, see Boyce,
chapter 11 below.
35
R. S. Sayers, The Bank of England 18911944, 3 vols. (1976), I, ch. 14; W. R. Garside
and J. I. Greaves, The Bank of England and industrial intervention in interwar Britain,
Financial History Review 3 (1996), 749; R.Coopey and D. Clarke, 3i: Fifty Years Invest-
ing in Industry (Oxford, 1995), pp. 1623. Among the Banks reasons was a desire to
pre-empt government intervention in industry as well as in banking: defence of private
enterprise extended beyond the City to manufacturing companies.
36
Roberts, The Bank of England and the City, 16076, 17881; Sayers, Bank of England,
I, chs. 9, 13, andII, ch. 19; S. Howson, Domestic Monetary Management in Britain 191938
(Cambridge, 1975); J. Atkin, Ofcial regulation of British overseas investment 1914
1931, EcHR 23 (1970), 32435; D. Moggridge, British Monetary Policy 19241931. The
Norman Conquest of $4.86 (Cambridge, 1972), chs. 79.
degree. While these interventions were presented as being in the Citys
general interest as well as the national interest, they nevertheless curtailed,
redirected, or cushioned the business of particular markets and individ-
ual rms. They were also the main reason for the growth of organisation
among City rms. These associations were encouraged or initiated by the
Bank in order to facilitate the implementation of controls, regulations and
requests.
In signicant respects the discount houses and leading banks became
unpaid agents of the state, indeed were incorporated into public policy
making.
37
Of course the relationship was far fromoperating in one direc-
tion only. In order to ensure the banks co-operation, the Bank conferred
privileges on them, accepted their systems of self-regulation and restric-
tive practices, and had to be solicitous about their interests. Yet even this
tended to tie the banks to the Bank of England, as they became dependent
on its assistance in preserving their cartels against unregulated competi-
tors. As the historian of the Bank during the 1950s commented, a wider
effect was that civil servants and ministers came to regard the banking
system as a creature to be manipulated through the Bank in the inter-
ests of short-term macro-economic policies. Despite occasional public
and private protests the banking system became used to accepting such
manipulation, with damage to their own efciency and to the services
provided to its customers.
38
The Stock Exchange underwent a similar
process. From 1914 onwards its business was impaired by Treasury as
well as Bank of England restrictions, but it learned to exploit these to
strengthen itself against competitors and became so accustomed to exer-
cising quasi-ofcial responsibilities that it seemed almost an arm of the
state.
39
Although the Bank hadresponsibilities towards the government, plainly
it was not just the instrument of government any more than it was simply
the representative of City bankers. From Montagu Normans early gov-
ernorship during the 1920s it had its own opinions not just on banking
matters but also on wider domestic and international economic issues.
Moreover, as the leading nancial institutions and associations communi-
cated with the government through the Bank, their concerns were liable
to be ltered through its own perceptions and objectives. In practice,
within government City inuence chiey amounted to the views and
interpretations of the Bank of England. These were expressed forcefully
37
Moran, Finance capital and pressure-group politics, 383, 3878, 3939; B. Grifths,
The development of restrictive practices in the U.K. monetary system, Manchester
School 41 (1973), 318.
38
Fforde, Bank of England, p. 782.
39
Michie, London Stock Exchange, esp. pp. 18296, 2914, 3245, 330, 3657, 4257,
545, 594, 637.
and tenaciously, and carried weight with Treasury ofcials. Nevertheless
after 1914 the Bank was always acutely aware of where the real power
lay. Even during the 1920s, a supposed peak of its inuence, it accepted
that its monetary measures should take account of political considera-
tions, so contrary to gold standard rules it managed the exchange
rate in order to minimise controversial bank rate increases.
40
Insulation
from direct government intervention, though a form of power in terms of
banking affairs, from the 1940s probably became a weakness in relation
to economic policy, in that the Bank was detached from the processes
of demand management.
41
From its perspective, assertions of indepen-
dence, even including its efforts to have the gold standard restored in
1925, were less demonstrations of strength than defensive or rearguard
actions against the expansion of government and against political pres-
sures for policies it regarded as harmful. After 1931 its sphere of inde-
pendence contracted by stages, as the governments efforts to stabilise
and then, from the 1940s, to manage the economy intensied. Not until
1970, however, did a Bank of England Governor state that the Bank is
an arm of Government in the City though even then OBrien insisted
on its special advisory role and his successor, Richardson, spoke of it as
having independence within government.
42
Plainly enough, the keys to
explaining the Banks relative (but until the 1990s, declining) autonomy
and to assessing the extent of City inuence lie in the attitudes and
actions of the Treasury and the elected government.
The Treasury
Even more than the Bank of England, the Treasury manifestly had its
own distinctive concerns. For Ingham, this remains compatible with the
Citys power because the Treasurys institutional interests within the state
bureaucracy caused it to align itself with the Bank and the wider City.
Certainly the Treasurys claims to be the chief department of government
were reinforced by its connection with the Bank as the main channel for
bankinggovernment communications, and by their joint responsibility
for monetary policy. It was a relationship which Treasury ofcials jeal-
ously guarded, on occasion co-operating with the Bank to exclude partici-
pation by other departments.
43
Negatively, though, Inghams point has
40
Moggridge, British Monetary Policy, chs. 79; Kynaston, The Bank of England and the
government, pp. 278.
41
M. Moran, The Politics of Banking. The Strange Case of Competition and Credit Control
(1984), p. 24; Moran, Power, policy, pp. 545.
42
Kynaston, The Bank of England and the government, pp. 512; Moran, Monetary
policy, p. 49.
43
Agood example, directed against the Board of Trade, is noted in George Pedens chapter
below, p. 131.
an underexplored implication. Government relations with the City were
not conned just to the Treasury, and investigation of other departments
or government agencies with interests and responsibilities in commer-
cial and nancial affairs might complicate verdicts on the directions of
Citygovernment inuence. For example, the Foreign Ofce had assis-
tance before 1914 from merchant bankers ready to lubricate its diplo-
matic objectives with loans, and in the 1920s from the Bank of Englands
nancial diplomacy in its efforts to advance European re-stabilisation.
44
Between the wars the Colonial and Dominions Ofce resisted Treasury
and Bank efforts to ration imperial capital issues.
45
Fromthe 1960s inves-
tigations emanating from the Board of Trade and Department of Trade
and Industry forced the end of restrictive practices among clearing banks
and in the Stock Exchange.
It is also true that the Treasurys responsibility for public nances nec-
essarily made it attentive to the Citys nancial markets. Government
debt had to be made attractive to investing institutions, and these wanted
to be sure of government efforts to maintain sound nance and to resist
ination. But this did not mean that the governments position was weak
or dependent: the money markets and the banks needed the gilt-edged
securities and Treasury bills, as these formed the fundamental assets and
instruments for many of their activities. Nor did the Treasury require
Bank or City pressure in order to balance the budget, restrain public
expenditure, and check excessive public borrowing, because these were
precisely its own functions. As George Peden has commented, the Trea-
sury had its own reasons for pursuing policies of sound nance even
when these met the approval of the City.
46
It had its own reasons too
for supporting sound money and open markets, because aside from their
supposed economic benets it regarded these as supplying the economic
disciplines which reinforced its control of public nances. So, for exam-
ple, the decisions from December 1919 to impose deation and return
to the gold standard were taken primarily on Treasury advice, reacting as
much to chronic domestic budget and debt management problems as to
Bank of England concerns with the Citys international position.
47
Any
wider City inuence was superuous. Although Treasury ofcials and
Chancellors of the Exchequer readily admitted their (surely inevitable)
44
P. Thane, Financiers and the British state. The case of Sir Ernest Cassel, Business
History 28 (1986), 8099; Sayers, Bank of England, I, chs. 8, 15; but for later tensions
see Neil Forbess chapter 12 below.
45
See Bernard Attards chapter 10 below.
46
G. C. Peden, The Treasury and Public Policy, 19061959 (Oxford, 2000), pp. 12, 518;
and see also his chapter 6 below.
47
Howson, Domestic Monetary Management, pp. 1223, 259, 3343; Peden, Treasury,
pp. 14058.
reliance on the Banks expertise in the nancial markets,
48
such state-
ments should not be mistaken for subservience towards the Bank, still
less the wider City, on broader nancial and economic issues. Although
it was not until the late 1940s that the Treasury developed from a pub-
lic nance department into an economic ministry, George Peden, Susan
Howson, Roger Middleton and Peter Clarke have shown that during the
interwar years its ofcials were already generating their own sophisti-
cated economic understandings, which included the bearing of monet-
ary conditions on the broader economy.
49
There seemed good reasons
for regarding international nancial stability and the international use of
sterling as benecial for the British economy; for considering the Citys
overseas earnings and its contributions to the balance of payments and
to the demand for British manufactured exports as valuable for general
economic well-being; and, after the Second World War, for preserving the
Sterling Area and being worried about the potential damage of the ster-
ling liabilities and an adverse balance of payments. There seemed good
reasons too for defending sterling and the credit of British banks against
international nancial panics or speculation, even if this meant asking
for assistance from foreign central banks or the International Monetary
Fund and as already noted, Treasury reactions to such crises should
not be equated in any simple way with responses to City interests.
50
In
themselves these Treasury attitudes do not require explanation by general
notions of Bank of England or City dominance over policy, though this
is not to deny that their inuence was signicant in particular Treasury
responses.
Yet the Treasury always had to attend to far more than just Bank advice
and any further City interests. Examination of particular episodes sug-
gests not only that where it agreed with themit did so for its own purposes,
but also that it was perfectly capable of rejecting their views or taking a
different approach. It was quite unmoved by the City protest over the
1909 increases in direct taxation, and despite the imposing gures behind
the 1920 City plan for the oating debt a remarkable (indeed ironic)
proposal for a temporary addition to the already war-inated rates of
48
E.g. Kynaston, The Bank of England and the government, pp. 345.
49
Peden, Treasury; Howson, Domestic Monetary Management; R. Middleton, Towards the
Managed Economy (1985), esp. chs. 3, 5, 8; P. Clarke, The Treasurys analytical model
of the British economy between the wars, in M. Furner and B. Supple (eds.), The State
and Economic Knowledge (Cambridge, 1990), pp. 171207.
50
The point is well made for the mid 1960s in R. Stones, Governmentnance relations
in Britain 19647: a tale of three cities, Economy and Society 19 (1990), 3641, 52, but
it applies also to other sterling crises from 1931 to 1992; and see the distinction made in
Roberts and Kynaston, City State, p. 17, between City rms and international nancial
markets.
income tax and super-tax it dismissed it as politically impossible.
51
Once Treasury ofcials took overall charge of monetary policy after the
1931 crisis they ignored the Banks wish to return once again to the gold
standard, and ensured that exchange rates and interest rates were sta-
bilised at levels which assisted industrial recovery.
52
While sympathetic
towards the Banks efforts to restore market disciplines from the late
1940s, over the following decades they could not accept its views on the
extent to which the balance-of-payments and ination problems should
be met by public sector cuts and incomes policies. Indeed, for much of
the century the levels of public expenditure and taxation were a recurrent
source of difference between them. Here the Treasury was itself usually
ghting rearguard actions, under Conservative governments as well as
Liberal and Labour applying what brakes it could, but unable to arrest
the long-termtrend towards increased spending and an expanding public
sector. It was not just that the Treasury could never wholly resist unwel-
come pressures from the spending departments. Nor was it just that as
part of the government it could not ignore interests other than those of
the City those of industry, labour, welfare recipients, and taxpayers.
53
The Treasury also had its own views on what constituted the best interests
of the government and the nation, perceptions which were independent
of particular economic interests because its responsibilities were not just
economic or nancial: it had also to help preserve the political stability,
military security and diplomatic weight of the state. Most obviously of
all, the Treasury was not a free agent.
Government and policy
The strongest claims for the Citys inuence on government have come
from economic, social or Marxist studies. For political historians these
claims have surprising features. One is their socio-economic reduction-
ism, the narrowing of explanation to economic interests, nancial elites
or gentlemanly capitalists this at a time when even social history and
studies of popular movements andelections were abandoning or consider-
ably qualifying notions of economic or social determination. Although
the concept of a CityBankTreasury nexus does emphasise an inde-
pendent role of sorts for the Treasury, it practically ignores the most
public aspect of the state: the elected governments which, after all, had
nal responsibility for nancial and economic policies. Still less does it
51
Peden, Treasury, p. 45; Daunton, Just Taxes, pp. 778.
52
Howson, Domestic Monetary Management, pp. 8095.
53
In addition to the studies in note 49, see for a more recent period C. Thain, The Treasury
and Britains decline, Political Studies 32 (1984), 58195.
encourage consideration of the further elements in the political system
to which Cabinet ministers had to attend: their own political parties, the
rival parties, parliament and the electorate. Politicians are very largely
disregarded, as if they were puppets manipulated by the Treasury or by
nancial or producer interests. This effect is reinforced by the tendency of
histories of policy to be based overwhelmingly on the records of ofcials
held in the Public Record Ofce, perhaps supplemented by some gen-
eral political histories and ministerial biographies, but failing to engage
adequately or at all with the private papers and speeches of senior politi-
cians and with the specialist literature on party and electoral politics.
Two crucial dimensions of policy, those of party-political strategies and
broader political-cultural assumptions, can be entirely missed. While
permanent ofcials manifestly could exert a considerable inuence over
transitory and less expert ministers, it must always be recalled that their
function was to serve those ministers and, ultimately, to supply advice
tailored to their concerns. As an economist with much experience as a
government adviser has emphasised, policy is inherently political and
has to be politically acceptable.
54
Bringing the state back in
55
to the analysis accepting that elected
governments and party-political competition are autonomous, and can
themselves shape economic interests, ideas and structures has large
implications for understanding governmentCity interactions. Politics
generated its own preoccupations and imperatives, and it should not be
assumed that senior politicians identied themselves with, or responded
to the promptings of, a particular economic interest. For them the
national interest involved not just economic assumptions but sets of polit-
ical, social, moral and international concerns, while the party-political
struggle turned on efforts to combine support from numerous differ-
ent social groups and diverse bodies of opinion. No party, not even the
Labour party, could succeed by seeming to favour one economic interest
alone.
Considered in these terms, the concentration on economic policy in
discussions of City inuence can be narrowand one-dimensional. It gives
insufcient attention to other types of policy decision which placed pres-
sure on economic policy and affected the context within which the City
had to operate. It is salutary to take a long perspective: much of what
leading City elements in the 1900s wished to defend was lost during the
54
A. Cairncross, Economic Ideas and Government Policy. Contributions to Economic History
(1996), p. 255. As Peden, Treasury, p. 160, notes, from PRO evidence alone it is difcult
to know whether or not Treasury ofcials were writing to order.
55
P. Evans, D. Rueschemeyer and T. Skocpol (eds.), Bringing the State Back In (Cambridge,
1985).
next seventy years. These defeats on free trade, sterlings international
status, taxation, Bank of England independence were the outcome not
just of inexorable forces of global economic change, but of government
decisions and political debate. Above all there was war. The activities
and prosperity of much of the City from the 1850s depended on a stable
international economy: it needed peace, indeed from the 1890s some
leading bankers made efforts to reduce Anglo-German tensions.
56
In
contrast to the governments eighteenth-century wars which stimulated
the Citys development, those of the twentieth century were hugely dam-
aging to the City. After 1945 both Labour and Conservative governments
retained great-power aspirations, which gave them their own reasons for
continuing to attach importance to the international strength of sterling.
In 1964 it was very much the Labour leaderships decision to resist deval-
uation.
57
Yet from the late 1950s there were growing Treasury and Bank
doubts about the nancial costs of post-imperial power politics and the
viability of the sterling exchange rate, while a new nancial City was
emerging which dealt in currencies other than sterling, and had little
interest in its fate. In domestic policies the priority that governments
gave to social and political objectives, especially following the impact
of the two world wars, expansions of the electorate in 1918 and 1928
and emergence of the Labour party, had similarly transforming effects.
The increased provision of social services and from 1945 the commit-
ments to full employment, demand management and nationalisation had
major implications for sound nance and the operations of the nancial
system. Yet in these policy fundamentals the Bank of England had no
inuence. As government grew hugely in size, scope and impact on the
economy, and as political faith in the efcacy of the market declined or
was qualied (until the 1970s), so the signicance attached to Bank of
England advice and City views on matters beyond the nancial markets
declined considerably. Just as the nature of the City changed during the
century so, still more obviously, did that of government: verdicts about
policy inuence over the long term are doubly hazardous.
The sources of and constraints upon economic policy have been
complex, with party commitments and political manoeuvres being as
important as ofcial advice, competing economic ideas and pressure
from economic interest groups. Nor have these elements been discrete:
what economic groups perceive as their interest could be shaped by
past or potential government action; City bankers could be inuenced
56
P. Thane and J. Harris, British and European bankers 18801914: an aristocratic
bourgeoisie?, in P. Thane, G. Crossick and R. Floud (eds.), The Power of the Past
(1984), p. 223.
57
A. Cairncross and B. Eichengreen, Sterling in Decline (1983), pp. 16093.
more by their party allegiance than conventional views about their
economic interests.
58
The concept of economic policy itself can be one-
dimensional, if it is treated as unitary rather than as a set of policies.
Given the party-political concerns of ministers and the pressures upon
them, these policies rarely had perfect economic coherence: their primary
rationale was political, not economic. As Rob Stones has argued, overall
policy was the result of a fractured and fragile set of processes, with
specic policies pointing in different, even contradictory, directions as
ministers attempted to achieve several objectives and to placate numer-
ous groups at once, with the effect that the government was placed in
several different relationships with any particular group such as the City
bankers. His example is the Labour government in 19647 taking mea-
sures to preserve condence in sterling, while simultaneously pursuing
its own objective of domestic growth through credit and taxation poli-
cies which the Bank of England and City nanciers intensely disliked.
59
Other cases can readily be found. During the early 1930s a display of
strict budgetary orthodoxy helped sustain nancial condence at a time
when cheap money, managed exchange rates and tariffs were being intro-
duced. Assessment of the presence or degree of Bank or City inuence
may depend on the selection of the policy or policies being examined.
Of course some, perhaps many, senior politicians took no interest inand
were ignorant of banking and monetary issues, leaving themselves at the
mercy of Treasury and Bank advice. Notoriously, Lord Passeld (Sidney
Webb) as a former member of the 1931 Labour Cabinet declared after
the suspension of the gold standard that nobody even told us we could
do that.
60
But too much should not be concluded from such examples.
As Anthony Howe, Ewen Green and Jim Tomlinson show,
61
each party
had politicians who were certainly not intimidated or much impressed by
Bank or even Treasury views. In contrast to the Labour ministers during
the 1931 crisis, Conservative ministers in the newNational Coalition gov-
ernment were so self-assured in their own assessments of nancial con-
dence and so intent on their party objectives that they ignored the Banks
direst warnings, until the Bank eventually concluded that further defence
58
Good instances of economic histories of policy which address its complexities, includ-
ing the political dimensions, are J. Tomlinson, Public Policy and the Economy since
1900 (Oxford, 1991), and R. Middleton, Government versus the Market. The Growth
of the Public Sector, Economic Management and British Economic Performance c. 18901979
(Cheltenham, 1996).
59
Stones, Governmentnance relations in Britain, 33 and passim.
60
As originally noted in Dalton diary, 12 Jan. 1932, quoted in Williamson, National Cri-
sis, p. 14. Matters had, however, been considerably more complicated than this artless
statement implies: see Williamson, National Crisis, ch. 9.
61
Chapters 79 below.
of sterling was futile.
62
A common politicians view of City opinion was
that it was hopelessly irrational, ckle, self-interested, politically unreal-
istic, and anyway likely to be divided.
63
One striking suggestion about
City inuence, that it could be decisive in the choice of Chancellors of
the Exchequer, should be treated with scepticism: party and personal
considerations were always more important.
64
Nevertheless, it may seem
remarkable that governments for long left the Bank of England and the
nancial City with substantial independence and that, with the excep-
tion of the Labour party from 1931 to 1945, the political parties did not
make them subjects for political campaigns or election manifestos. Part
of the explanation was the political promise, pressure or constraint of
other, apparently more pressing, issues. Of greater importance were the
successive forms of governing political economy.
The politics of political economy
In the commonly Marxist or marxisant accounts of City hegemony over
economic policy, the British state is assumed to have been a committee for
organising the affairs of the dominant socio-economic elite or alliance.
There is, however, a different understanding of the state which better
explains the nature of government and policy over the last two centuries.
By directing attention to the political aspects of the orthodox economic
doctrines inherited from the nineteenth century, this also explains the
unusual position of the Bank of England and the City without making
excessive claims about their power.
The purpose of the major nancial and commercial reforms from the
late 1810s to the 1850s was not simply economic. Faced with severe
social unrest and radical protest, the chief preoccupations of successive
governments were political stabilisation, integration and legitimation.
65
62
Williamson, National Crisis, pp. 32830, 41016.
63
E.g. Thane, Financiers and the British state, pp. 89, 95; Kynaston, City of London, III,
pp. 5, 62, 110; Daunton, How to pay for the war, pp. 9058.
64
Cf. Boyce, British Capitalism at the Crossroads, pp. 21, 723, 380n.64, and Peden, Trea-
sury, pp. 12, 193, 430. There are difculties with the evidence adduced for the cases
usually cited. That for the 1919 appointment consists of speculation by the Chancel-
lor, Austen Chamberlain, not an explanation from the Prime Minister, Lloyd George.
Baldwin as Prime Minister in 1923 and 1924 did mention City opinion, but only as one
factor and only in the context of trying to persuade a reluctant Neville Chamberlain
to accept the chancellorship, statements unlikely to have revealed the main reasons for
his choice. Horne, supposedly disliked in the City for his 19212 chancellorship, had
nevertheless been Baldwins rst choice in 1923, and his refusal then (and changed party
circumstances) meant that there was no question of his being offered the post in 1924.
The evidence for Lyttelton in 1951 is retrospective and ambiguous.
65
For this paragraph and the next, see P. Harling and P. Mandler, From scal-military
state to laissez-faire state, Journal of British Studies 32 (1993), 4470; B. Hilton, Corn,
Senior politicians of all parties, sharing an autonomous ethos of good
government, sought to defend authority, hierarchy and property in gen-
eral, more than the interests of any specic economic group or section
of the propertied classes. Indeed, in order to disarm radical criticism
and restore condence in established institutions, the agreed principle
was that government had to be seen to be free from dependence upon,
obligation towards and pressure from particular interests including the
Bank of England and the City. Accordingly, as far as possible the state
ceased to be a participant in economic activities. With the gold standard,
the Bank Charter Act, free trade and balanced budgets, governments cre-
ated a framework for free markets, an automatic mechanismfor economic
adjustments and rules for public nance. This was the political essence
of Victorian laissez-faire, later extended to that other highly sensitive area,
industrial relations. Aminimal, non-interventionist state that was or was
successfully presented as impartial towards competing interests would
also be a strong state, able within conventional political limits to pursue
its own purposes and meeting little resistance in nancing its activities.
These reforms were carried against opposition from the Bank of
England and City commercial interests, some of which were severely hit
by the loss of mercantilist and tariff legislation. On the other hand, the
reforms assisted a new breed of merchants and nanciers able to exploit
the great expansion of the international and British economies from the
1850s to 1914. Government had not just exerted its supremacy over the
City; however unintentionally, it hadalso takena large part inreconstruct-
ing its economic activities. Although in the event new City interests were
beneciaries of the reforms, it does not followthat the gold standard, free
trade and sound public nance became their special ideological prop-
erty.
66
These doctrines and the associated concept of a disinterested
state continued to serve the purposes of the political parties and gov-
ernment ofcials, by excluding from politics a range of actions which
might destabilise not just the nancial and economic system, but also
each partys political position and even the political system itself. These
doctrines also became embedded in general political culture, because
notwithstanding some challenges from the 1880s they were on balance
Cash, Commerce (Oxford, 1977), esp. chs. 2, 8, and conclusion; Howe, Free Trade and
Liberal England, pp. 1323, 5564; R. McKibbin, The Ideologies of Class. Social Relations
in Britain 18801950 (Oxford, 1990), pp. 2632, 38; P. Thane, Government and society
in England and Wales, 17501914, in F. M. L. Thompson (ed.), The Cambridge Social
History of Britain 17501950, 3 vols. (Cambridge, 1990), III, esp. pp. 2633; Daunton,
Home and colonial, pp. 3516, and Daunton, Trusting Leviathan. The Politics of Taxation
in Britain 17991914 (Cambridge, 2001), pp. 267, 378, 388.
66
Cf. Ingham, Capitalism Divided, pp. 112, 1301; Cain and Hopkins, British Imperialism,
I, p. 83.
perceived as being to the economic and political advantage of all signi-
cant groups, including the working population, which was especially loyal
to free trade as a guarantee of low living costs.
For the period up to 1914 the term economic policy is a misnomer.
Governments directed their own nances without supposing this to have
economic implications. They devolved monetary supervision as a purely
technical issue, under gold standard conventions, to the Bank of England;
and they recognised no responsibility for general economic activity, or
for industry and banking. Economic life and political life were separate
spheres. The Bank and the City had independence from government,
not power over its policies. Party politics was concerned with constitu-
tional, denominational and moral issues, and to a lesser extent foreign
policy and social reform. This explains why tariff reform, an attempt to
change the terms of political debate and in its inception and defeat it
was always a party-political episode, not a competition between industrial
and nancial sectors
67
caused such party and electoral dislocation.
The impact of the First World War placed economic and social issues
rmly on the political agenda. Yet these new conditions made the tradi-
tional nancial constraints on government seem still more essential. The
wartime experience of government controls and negotiation with eco-
nomic interests, the enlarged postwar electorate, and the strength and
radicalism of the Labour movement increased the likelihood that party-
political competition and pressure from economic groups would subvert
public nance and the currency. The postwar ination, occurring while
the nancial disciplines remained suspended, gave practical and fright-
ening demonstration of the dangers. For the Bank of England and the
Treasury the gold standard, the balanced-budget rule and a new ele-
ment, the Treasury view inhibiting public investment, nowacquired still
stronger political purposes. A good indication is the heightened rhetoric:
that of Treasury ofcials when defending the Banks independence in
setting bank rate, of the Bank in insisting on its political neutrality and
of the leading government advisor, Bradbury, in famously describing the
gold standard as knave-proof. It could not be rigged for political or even
more unworthy purposes.
68
These Bank and Treasury efforts to rein-
force political checks were directed not just against the Labour party, but
67
Green, Gentlemanly capitalism, p. 58, suggests that the tariff reform campaign was a
political attempt to construct an industrial interest.
68
P. J. Grigg, Prejudice and Judgment (1948), p. 183, and see Moggridge, British Monetary
Policy, p. 160; Williamson, Financiers, pp. 10711; R. Middleton, The Treasury in the
1930s: political and administrative constraints to acceptance of the new economics,
Oxford Economic Papers 34 (1982), 5961, 634; Peden, Treasury, pp. 1312, 1501, 158,
1967.
against politicians of all parties; their complaints began under the Coali-
tion government, and continued under its Conservative successors.
69
In so far as the Bank and the Treasury succeeded, this was only
because the same political and economic logic was accepted ultimately
by senior government ministers themselves. As monetary and banking
issues threatened to become politically as well as economically signi-
cant, Chancellors of the Exchequer took more interest in them and were
particularly sensitive over increases in bank rate but only in private.
In public they upheld the Banks independence, just as they accepted
the gold standard. They did so because they agreed that the stability of
the currency and the banking system were too important to be exposed
to party competition; because there were obvious advantages in govern-
ments not being responsible for ostensibly unavoidable, yet now usually
unpopular, monetary decisions; and because the gold standard strength-
ened their own hands in imposing budget control. Although Churchill
tested his advisers resolve over the return to gold and later regretted
the decision, Keyness presentation of him as an economic innocent led
astray by the nancial authorities is misleading: in 1925 he was well versed
in, and pre-disposed towards, the orthodox economic doctrines.
70
When
he did seriously challenge a bank rate increase, in February 1929, the
Conservative Cabinet overruled him, formally resolving that the govern-
ment did not control the Bank of Englands policy. Labour party politics
had always been overwhelmingly focused on industrial and labour issues,
and little thought was given to monetary issues: like free trade, sound
money was assumed to be a necessary condition for decent living stan-
dards among the poor and for the security of the skilled workers savings
and trade unions funds. While the Labour Chancellor in 1929, Snowden,
had doubts about the availability of industrial investment hence his
appointment of the Macmillan Committee he too accepted the distinc-
tion between technical and political spheres, and publicly insisted that
the Bank had to be free from political interference.
71
Nevertheless, in
practice the Banks policies were inhibited by political pressures, while
the Conservative government was hardly more prepared than the Labour
government to limit social expenditure and taxation to the levels favoured
by the Bank and the wider City. Senior politicians of both major parties
had imprisoned themselves within incompatible policies, adopting the
69
E.g. Kynaston, City of London, III, pp. 61, 112, 1289; cf. Ingham, Capitalism Divided,
p. 173.
70
See P. Clarke, Churchills economic ideas 19001930, in R. Blake and W. R. Louis
(eds.), Churchill (Oxford, 1993), pp. 7995.
71
Moggridge, British Monetary Policy, pp. 1614; Kynaston, The Bank of England and
the government, pp. 278.
gold standard yet persisting with social reforms, unemployment payments
and (notwithstanding the coal and general strikes) industrial conciliation
to an extent which precluded the degree of deation now required to
maintain it.
Even after the 1931 departure from gold, the traditional rationale for
insulating monetary issues from political pressures remained strong. Past
and present Chancellors of the Exchequer in the National government
secured a Cabinet decision that government control of the Banks pol-
icy was undesirable. By this was meant control by politicians, so the
effect was to leave the nal direction of monetary policy with Treasury
ofcials.
72
This was not enough for the Labour party which, having
persuaded itself that it had been the victim of a bankers ramp, now
extended socialism to embrace nationalisation of the Bank of England
and the clearing banks, and creation of a National Investment Board.
73
Nor was it enough for other progressive-minded politicians: in the after-
math of the depression of 192932, proposals for government direction
of investment were widely canvassed, even by some Conservatives.
That such radical changes in the banking system were not introduced
was essentially a consequence of the politicians acceptance of a new
political economy during the 1940s. At rst the 1945 Labour govern-
ment thought that Bank of England nationalisation and continuation of
wartime physical controls over nance made further banking nationalisa-
tions and a National Investment Board unnecessary. These seemed still
less necessary after it switched towards Keynesian-style demand man-
agement, which turned attention away from monetary issues towards
scal policy.
74
This had a double effect for the Bank of England and the
nancial City. Because monetary issues had been relatively marginalised,
the Bank, tacitly supported by Treasury ofcials, was able to exploit
the customary assumptions
75
and re-establish elements of its indepen-
dence from government. Nevertheless within government the Banks
and Citys concerns had become just one element in a wider regime
of macroeconomic management, and ministers now not only accepted
72
Williamson, National Crisis, pp. 497501. In similar style, tariffs and new arrangements
for unemployment doles were neutralised by being placed in the hands of non-political
agencies.
73
S. Pollard, The nationalisation of the banks: the chequered history of a socialist pro-
posal, in D. E. Martin and D. Rubinstein (eds.), Ideology and the Labour Movement
(1990), pp. 17380; E. Durbin, New Jerusalems. The Labour Party and the Economics of
Democratic Socialism (1985), pp. 734, 1628, 20418; and S. Howson, British Monetary
Policy 194551 (Oxford, 1993), pp. 6573.
74
J. Tomlinson, Attlees inheritance and the nancial system: whatever happened to the
National Investment Board?, Financial History Review 1 (1994), 13955.
75
The useful term in Moran, Politics of Banking, pp. 9, 22, 24.
responsibility for monetary policy but also had alternative sources of
advice on these issues, from the recruitment of professional economists
into government service.
76
Although the politicians had, largely by inad-
vertence, allowed the Bank to retain the ability to argue its case and act
as a buffer between government and the banks, the larger reality was its
subordination to the priorities of full employment and the welfare state.
This became evident during the Robot episode in 1952. It is signicant
that the Bank and some Treasury ofcials seized upon the change from a
Labour to a Conservative government to propose what was, in essence,
an attempt to impose a new form of the earlier automatic monetary
and nancial disciplines on government. But it is much more signicant
that the scheme was rejected by a group of ministers determined to avoid
the political risks not just of allowing unemployment to rise, but also of
appearing to succumb to City pressure to what they feared would be
presented as Montagu Normanism or a bankers ramp.
77
From the mid 1950s to the mid 1970s new pressures balance of
payments decits, the effort to accelerate growth, persistent ination
increasingly persuaded Chancellors of the Exchequer that for effective
demand management scal measures were not nearly enough. Trea-
sury involvement in monetary and banking grew, slowly but inexorably.
Despite various spells of resistance, the Bank could not prevent erosion of
its operational independence and its ability to deect government interest
in nancial institutions.
78
Thereafter, from the mid 1970s, the perceived
failure of Keynesian management and abandonment of full employment
as the primary policy objective produced a complex and paradoxical sit-
uation for government relations with the Bank and the City. The new
Conservative governments encouragement of free markets helped stim-
ulate a boom in the nancial sector, but also ended the Citys restrictive
practices and forced rapid changes in the ownership of many rms. The
governments monetarist doctrines reasserted the centrality of monet-
ary policy, but with the effect of further tightening Treasury control over
the Banks conduct of policy.
79
Yet in the new conditions of volatile inter-
national nancial markets, such close political control over monetary
76
Cairncross, Bank of England, pp. 4951; Collins and Baker, Bank of England auton-
omy, pp. 1617; and for economic advice, Peden, Treasury, pp. 24, 3724, 4379.
77
J. Bulpitt and P. Burnham, Operation Robot and British political economy in the early
1950s: the politics of market strategies, Contemporary British History 13/1 (1999), 13,
19, 213, 267; S. Kelly, Ministers matter. Gaitskell and Butler at odds over convertibil-
ity, 195052, Contemporary British History 14/4 (2000), 3142, 456, and see Newtons
chapter below, pp. 26972.
78
Ringe and Rollings, Domesticating the market animal , pp. 1237; Moran, Monetary
policy, 506; Stones, Governmentnance relations, 428.
79
Kynaston, The Bank of England and the government, pp. 312.
policy weakened condence in the governments ultimate ability to resist
ination. The effect was that its other policies were exposed to disrup-
tions caused by problems with sterling. In these circumstances, accep-
tance of the Bank of Englands independence in monetary policy once
again became an attractive political strategy for senior members of both
the Conservative and Labour parties. Matters had not really come full
circle conditions had changed too much since the early part of the cen-
tury to be comparable but again the motive was less subservience to the
City than a determination to restore government credibility and regain
greater freedom to pursue other policy objectives.
2 The City of London and the British
government: the changing relationship
Ranald Michie
An unchanging relationship between unchanging partners: this is how
the relationship between the City of London and the British government
has tended to be painted. Although this simplication aids interpretation
of a long time period, it also distorts understanding. There was nothing
constant about either the government or the City during the twentieth
century, and so it would be remarkable if the relationship between the two
did not change. Government was transformed during the century, emerg-
ing as the dominant force within British economic and social life. The
City of London was also transformed as it shed its commercial and impe-
rial past to focus on nance and Europe. Under these circumstances the
relationship between the City and government could not remain static.
At the same time both existed within, and had to adapt to, a global econ-
omy that forced changes as a result of two world wars, a world depression
and the rise and fall of managed national economies. This chapter seeks
to trace and understand the Citygovernment relationship over the past
three centuries, focusing particularly on its intensity, and on the direction
and limits of inuence.
The origins of the relationship, 17001914
The City of Londons leading institutions owed their very existence to
the nancial needs of the British government. The Bank of England was
established in 1694 in response to the governments borrowing predica-
ment, while the founding of the London Stock Exchange in 1802 was an
attempt to create an organised market for the National Debt at a time
of international conict. The government relied on the City to provide
the money required to nance its expenditure, while the City relied on
the government for the business it generated. Such a mutually dependent
relationship, with a high degree of self-interest onboth sides, underpinned
Britains success as a military-scal state until the early nineteenth cen-
tury. The bankers, brokers and merchants of the City of London our-
ished not only through supplying the government with the money and
31
32 Ranald Michie
material required for successive wars, but also by obtaining from the gov-
ernment the security necessary for the successful conduct of business,
especially protection from the activities of foreign rivals through a strong
navy. However, in other respects eighteenth-century governments were
not especially helpful in furthering the Citys interests. Attempts to con-
trol the promotion of joint-stock companies and to restrict the trading
of shares left the City trying either to circumvent state controls through
a system of self-regulation, as with the Stock Exchange, or to provide
its own remedies for gaps in the nancial and monetary system resulting
from government failure, as in the supply and use of money. From this
perspective the dominant partner in the relationship was the government.
During the nineteenth century the governmentCity relationship
became less intense, though more ambiguous. Following the re-
introduction of income tax in 1844, governments had a relatively secure
source of income that increased in amount as the nations prosperity grew.
As most governments ran balanced budgets, they had no need to borrow.
The national debt ceased to grow and the proportion of government rev-
enue required to service it fell from 54 per cent in 1830 to 11 per cent
by 1913. This freed whatever political party was in power from depen-
dence on the City. The government could even take the step in 1888
of reducing the interest paid on the national debt, even though this
would displease many in the City.
1
Nor is there much real evidence
that in the half century before the First World War any government
paid particular attention to the Citys wishes in framing domestic policy.
Taxes on both high-income earners and inherited wealth were hardly
City-inspired policies.
2
On the other hand, the City ourished under a
regime of benign neglect where nance and trade were little troubled
by intervention and controls either at home or abroad. With the end of
protection and abandonment of imperial preference, this was an era of
caveat emptor where the buyer and seller or investor and borrower were
left to take the consequences of their own actions, and where markets
and those who participated in them were self-regulated. There was no
dominant City view on issues such as protection or the gold standard,
3
1
R. Bonney (ed.), The Rise of the Fiscal State in Europe, c. 12001815 (Oxford, 1999), chs. by
Ormrod, OBrien and Hunt; D. Winch and P. K. OBrien (eds.), The Political Economy of
British Historical Experience, 16881914 (Oxford, 2002), chs. by OBrien, Hoppit, Capie,
Daunton, Peden.
2
M. Daunton, Trusting Leviathan: the Politics of Taxation in Britain, 17991914 (Cambridge,
2001), pp. 35, 123, 187, 207, 225, 370, 388.
3
A. C. Howe, Free Trade and Liberal England, 18461946 (Oxford, 1997), pp. 1316, 232,
236; A. Marrison, British Business and Protection, 19031932 (Oxford, 1996), pp. 1920,
58, 75, 112, 204, 42931. However, for a contrasting view on the inuence of City
nanciers on government currency policy, see T. Wilson, Battles for the Standard:
Bimetallismand the Spread of the Gold Standard in the Nineteenth Century (Aldershot, 2000),
pp. 20, 1756.
City and government: changing relationship 33
although due to the lack of an alternative source of economic exper-
tise, bankers, brokers and nancial journalists from the City pro-
vided expert individual opinion on nancial, commercial and monetary
matters.
The one aspect of government policy with which the City has been
positively identied is expansion of the Empire, and the additional oppor-
tunities this created for trade and, especially, investment. Those assumed
to have been driving this were the gentlemanly capitalists of the City,
a wealthy elite combining the twin pursuits of southern landowner and
London nancier who, divorced from the world of the northern industri-
alist, turned to the Empire as an outlet for their money and their talents.
4
However, it is difcult to discover much substance behind this interpre-
tation. Since the ending of imperial preference in 1860 the City focused
increasingly upon wider international trade and nance. Countries like
the United States, Argentina and Germany loomed large in the Citys
nancial and commercial activities, while much of the recently acquired
Empire was of little signicance, apart from gold in South Africa and
rubber in Malaya. The Empire was not an issue which produced con-
certed City pressure on government. In the early twentieth century the
most pressing City concern was the prospect of war with Germany. The
City nanced much of Germanys international trade, handled its capital
exports, employed its ships and insured its mercantile marine, to such a
degree that it was feared that a war would have disastrous consequences.
Had the City been able to exert real inuence over government policy
before the First World War, then either there would have been no war
with Germany, or else measures would have been taken to safeguard the
City from its consequences.
5
As neither was achieved, it is difcult to
make a case that government policy before 1914 was particularly respon-
sive to City inuence.
The disengagement between the government and the City in the nine-
teenth century was not just on the side of government, for the City became
less dependent on the government for business. Though the Bank of
England remained pre-eminent, playing a unique role as the bankers
bank, by the early twentieth century other banks came to rank alongside it
in size and importance, particularly the ve major joint-stock banks which
fromLondon head ofces dominated banking in Britain. Numerous other
smaller banks were also important in that they provided banking networks
around the world or were engaged in specialised services within the City
itself. The Stock Exchange no longer relied on the national debt as its
4
See P. J. Cain and A. G. Hopkins, British Imperialism, 2 vols. (1993).
5
D. French, British Economic and Strategic Planning, 19051915 (1992), pp. 68, 924;
P. Kennedy, Strategy and Diplomacy, 18701945 (1989), pp. 946.
34 Ranald Michie
main business. Instead, much of its activity was nowfocused on domestic
and foreign corporate securities, especially railways. Between 1853 and
1913 the national debt as a proportion of the value of securities quoted
on the Stock Exchange fell from 70 to 11 per cent. As a result, direct
government interests in the City were fairly low. The same was also true
regarding policy. Monetary policy was devolved to the Bank of England,
which operated under the requirements of the international gold stan-
dard, not at the behest of the Chancellor of the Exchequer. There were
no exchange controls and capital moved in and out of the country in
response to the forces of global supply and demand. There were no bar-
riers to either exports or imports, enabling the City to occupy a position
at the centre of international trade. To most in the City the actions and
policies of the government were irrelevant.
A relationship in ux, 19141939
The cost, duration and intensity of the First World War had profound
consequences for both government and the City, immediately revers-
ing the nineteenth-century trend and restoring their mutual dependence.
From the very outbreak of the war government intervention in the City
was required in order to prevent a nancial collapse caused by a rush
to withdraw savings, which would have resulted in a massive contraction
in credit and widespread business failures.
6
The government convened
a meeting of the banks, and declared a bank holiday to allow time for
emergency measures to be implemented and to inject extra liquidity into
the system. As hostilities dragged on the government was forced to con-
trol more and more of the economy in order to maximise resources for
the war effort, with government borrowing rising inexorably. Whereas the
quoted national debt of all kinds stood at 1 billion in 1913 the gure
had more than quintupled to 5.4 billion by 1920, and the governments
share of all quoted securities had risen to 32 per cent compared to the
prewar level of 9 per cent. In contrast the 2.5 billion of quoted securities
belonging to American railroads was almost entirely liquidated by British
investors or requisitioned and sold by the government. The governments
short-termborrowing through Treasury bills also dominated the London
money market both during the war itself and for long afterwards, in
6
For this episode see J. Peters, The British government and the Cityindustry divide:
the case of the 1914 nancial crisis, Twentieth Century British History 4 (1993), 12648;
T. Seabourne, The summer of 1914, in F. Capie and G. E. Wood (eds.), Financial Crises
and the World Banking System(1986), pp. 77116; also David Lloyd George, War Memoirs,
I (1933), ch. entitled How we saved the City.
contrast to the earlier importance of commercial bills nancing inter-
national trade.
7
However, the connection between the City and the government was
far wider than that between lender and borrower. Wartime requirements
created a close working relationship which extended beyond the Bank of
England to other nancial institutions. It was no coincidence that organ-
isations such as the Accepting Houses Association (1914) and the British
Bankers Association (1919) date from this period, as these were a means
of coordinating the views and actions of their members in dealing with
the government. Government pressures now dominated the City. The
relationship was particularly close between the Treasury and the Bank of
England as they had the joint responsibility of continually re-nancing
the national debt. In turn, that brought in the banks and the discount
houses, as the governments heavy borrowing had implications for the
London money market. It also extended to the Stock Exchange as new
issues there could interfere with the demand for government stock and
bills. Thus, simply on the nancial front the government nowhad a major
interest in inuencing what was happening in the City.
In addition, the government required the help of the City to achieve
other policy objectives. A return to the relative stability and prosperity of
the prewar years could not be achieved either quickly or without interven-
tion. The government could not aim for solvency and stability simply by
cutting its expenditure as it had done after the Napoleonic wars. Having
acquired wider social responsibilities before the First World War, such
as unemployment insurance and old age pensions, the government now
had to tackle the mass unemployment and economic dislocation following
the end of the short postwar boom, not least because of the political and
social consequences that would arise if it did not. The Citygovernment
relationship forged as a result of the First World War was not only much
more intense than in the past, but also more complicated.
During the 1920s the government made diverse and, at times, con-
icting demands on the City, reecting this more complex relationship.
For the rst time these demands extended from the purely nancial to
wider issues. Whether City banks continued to lend to rms in nan-
cial difculties could affect the employment prospects of thousands of
people and the prosperity of whole regions. Whether the City resumed
its international lending could affect the supply and cost of nance within
Britain, the demand for British exports, relations with overseas countries,
7
For the City and government during the war years see E. V. Morgan, Studies in British
Financial Policy 19141925 (1952), and A. W. Kirkcaldy (ed.), British Finance during and
after the War, 191421 (1921).
36 Ranald Michie
and the international value of the pound. These issues were considered
too important to be left to the City itself.
8
Hence government inquiries
relating to the City now focused much less on market abuses, as in the
past, than on the problems of currency, foreign exchange, industry and
trade.
9
In contrast, the priority among most in the City was simply to
see a return to the prewar position. A return to the gold standard in par-
ticular was regarded as having the twin benets of stabilising the world
economy and restoring external demand for Britains export trade, and
of forcing down domestic prices and wages and making industries com-
petitive. Return was also essential if the City were to maintain its position
as a global nancial centre and re-capture what had been lost to New
York, as it would restore exchange-rate stability. The restoration of the
gold standard in 1925, at the prewar parity to the pound, has therefore
been seen as evidence of a victory for the City and a defeat for manufac-
turing industry and its need for a lower exchange rate in order to remain
competitive. Similarly, the abandonment in the 1920s of the temporary
measures taken to protect industry from foreign competition has also
been interpreted as a City victory, as it favoured those involved in the
organisation of international supply and demand rather than in the sale
or purchase of British manufactures.
10
However, neither the return to the gold standard nor the restoration of
free trade was a policy which the City collectively persuaded the govern-
ment to follow. Athriving foreign exchange market had developed quickly
in the early 1920s, which not only generated large prots for many in the
City but also provided a means of avoiding exchange risk on transactions.
At the same time there was a growing number of City bankers and bro-
kers geared towards domestic business, who could expect to prot from
protection. With hindsight it has become clear that neither the gold stan-
dard nor a xed exchange rate nor even sterling itself was essential for the
Citys successful functioning as a global nancial centre. However, such a
8
For the City and government between the wars see S. Howson, Domestic Monetary Man-
agement in Britain, 191938 (Cambridge 1975); D. E. Moggridge, British Monetary Policy,
19241931. The Norman Conquest of $4.86 (Cambridge, 1972); T. Balogh, Studies in
Financial Organization (1947); J. M. Atkin, British Overseas Investment, 19181931 (New
York, 1977); G. C. Peden, The Treasury and Public Policy, 19061959 (Oxford, 2000),
chs. 46.
9
(Cunliffe) Committee on Currency and Foreign Exchange after the War, Interim Report
(1918), Final Report (1919); (Balfour) Committee on Trade and Industry, Final Report
(1929); (Macmillan) Committee on Finance and Industry, Report (1931).
10
There is a huge literature on this subject but see B. Eichengreen, International mone-
tary instability between the wars: structural aws or misguided policies?, in Y. Suzuki,
J. Miyake and M. Okabe (eds.), The Evolution of the International Monetary System(Tokyo,
1990), p. 105; F. H. Capie and G. E. Wood, Policy makers in crisis: a study of two deval-
uations, in D. R. Hodgman and G. E. Wood (eds.), Monetary and Exchange Rate Policy
(1987), p. 169.
verdict was not clear to anyone in the 1920s, whether in the City, govern-
ment or elsewhere. Consequently, restoration of the gold standard was
considered inevitable, with only the timing to be decided upon. Similarly,
a return to free trade was thought inevitable, as those who had opposed
it had lost the debate before the war and those who supported it saw
no alternative, especially for the export industries. Preserving a domestic
market for manufacturing industries like cotton textiles and shipbuilding,
extractive industries like coal, or services like shipping, was of little value
when so much of their output was for foreign customers. As such it is
very difcult to see either the gold standard or free trade as specically
City-inspired policies in the 1920s. Instead, they should be viewed as part
of the attempt to restore the pre-1914 conditions which the majority of
people simply assumed would re-appear in the near future.
Therefore, whatever the immediate consequences the First World War
had for Citygovernment relations, it appears clear that the longer-term
intention was to pursue a policy of separation between the two, as in
the prewar period. Most City experts expected London to resume its
key role in international short- and long-term lending, though there was
a recognition of the enhanced role of New York. Throughout the City
there were attempts either to revive prewar global activities, such as the
nance of international trade, or to replace what had been lost with other
overseas activities, such as lending to central Europe. At the very least
there was always imperial lending to fall back upon, with Australia in
particular re-emerging as a major borrower. There was certainly no sign
in the 1920s that the City had resigned itself to a domestic role or even
an imperial one. The creation of the most important foreign-exchange
market in the world after 1922 was evidence of the Citys continuing
global ambitions and its capacity to achieve them.
The Citys inuence has also been detected in the decision to leave the
gold standard in 1931. There is the viewthat the 192931 Labour govern-
ment was brought down by its attempts to reconcile maintenance of the
gold standard, at the behest of the City, with the requisite cuts in public
expenditure which it was unwilling to make at a time of high unemploy-
ment. In contrast, the National government that replaced it abandoned
the link to gold without the disastrous consequences for the country that
had been predicted in the City. In retrospect it appears clear that no gov-
ernment between the wars, whether Labour or Conservative, was willing
to take the domestic measures necessary to maintain the international
value of sterling.
11
The collapse of the gold standard in 1931 was not
11
S. V. O. Clarke, Central Bank Co-operation, 192431 (New York, 1967), p. 201. For the
political and policy aspects, see P. Williamson, National Crisis and National Government.
British Politics, the Economy and Empire, 19261932 (Cambridge, 1992), chs. 811.
38 Ranald Michie
engineered by the City but was forced on the government by the inter-
national economic situation and a self-fullling collapse of condence
in sterling. With the pound long regarded as overvalued and evidence
appearing that the Bank of England lacked the resources to defend it, it
was only a matter of time before Britain abandoned the gold standard
and the xed rates of exchange this required.
It is impossible to see the sterling crisis of 1931 as anything another
than a defeat for the City, or at least for the internationally orientated
element of it that had been so prominent before the First World War. It
resulted in an even closer relationship between the government and the
City. Through protection, imperial preference, and currency interven-
tion the government was now in a strong position to inuence the Citys
international connections, while the size and character of the national
debt continued to give it a powerful voice in domestic nancial markets.
However, the government did not take on responsibility for the man-
agement of the economy, government borrowing remained low, budgets
were balanced, and the management of the exchange rate was given to a
quasi-autonomous department in a still independent Bank of England.
Consequently, the government was neither in a position to direct the
Citys banks and markets nor did it want to do so. What had changed was
the relationship with the Bank of England, which increasingly became an
arm of the state rather than the representative of the City. The Governor
of the Bank had become a permanent ofcial, rather than a senior person
seconded from the City for two years, while the Deputy Governor was
now drawn from among the staff of the Bank.
12
Apart from the Bank of England, and those areas of the City closely
involved in government nance such as the discount market, much of
the rest of the City did not come under the control of the state. At the
same time City rms adjusted their business to the new conditions. A
growing number of merchants, banks and brokers now serviced areas of
the domestic economy that beneted from protection or imperial pref-
erence.
13
Though a focus on traditional industries like textiles and ship-
building has suggested a fundamental Cityindustry divide in terms of
nance, evidence for such a structural problem is largely absent in the
1930s. Understandable caution was exercised by banks that had lost
money through poorly performing loans to industrial companies in the
1920s, although they had little choice but to continue lending to such cus-
tomers as there were few alternative borrowers. At the same time invest-
ment banks and stock-broking rms were eager to make money by issuing
12
P. Arnold, The Bankers of London (1938), pp. 1415.
13
Howe, Free Trade, pp. 2868; Marrison, British Business and Protection, p. 403.
shares for businesses in expanding areas. Nevertheless, the 1930s were a
difcult period for the City, with the decline of international trade, nance
and services only partly compensated for by lending to such sectors as
domestic house-building, retailing and consumer electrical goods or the
growth of new activities like motor insurance and instalment credit.
14
Generally for the 1930s there is a lack of evidence suggesting much direct
inuence of the City over government policy, whether foreign or domes-
tic, while the apparent immunity of the City to economic conditions was
but an illusion.
The era of government ascendancy, 19391979
The real transformation of Citygovernment relations came in the after-
math of the Second World War, when it mattered not only what policies
the government followed, as these nowhad profound implications for eco-
nomic and social life, but also whether the Conservatives or Labour were
in power, as each pursued a different agenda and were inuenced by dif-
ferent pressure groups. The Second World War itself had much the same
immediate implications for Citygovernment relations as the First. As the
government sought to mobilise and monopolise all resources for its own
ends, so the markets of the City were either closed or marginalized, banks
were converted into collecting agencies for government funds, and City
personnel either volunteered for or were directed into war work. With the
direction of labour, rationing of essential food and clothing, compulsory
savings, state control of production, rigid supervision of international
transactions through ministries, boards and other government bodies,
the planned economy came into being. The City was largely superseded.
The government was now responsible for national distribution and sav-
ings and external commercial and nancial relations. Whereas previously
the government had acted through the City to obtain what it wanted,
during the Second World War it set up its own systems, though draw-
ing upon City expertise and contacts in the process. A crude measure
of this transformation is the fact that the share of public expenditure in
total national expenditure doubled during the war, rising from 28 to 56
per cent.
15
When the war ended in 1945 the wartime apparatus of state was not
immediately dismantled. Unlike the period after the First World War
14
For the City at this time see R. Roberts, The City of London as a nancial centre in the
era of the Depression, the Second World War and post-war ofcial controls, in A. Gorst,
L. Johnman and W. S. Lucas (eds.), Contemporary British History, 193161 (1991).
15
R. Middleton, Government versus the Market. The Growth of the Public Sector, Economic
Management and British Economic Performance, c. 18901979 (Cheltenham, 1996), p. 418.
40 Ranald Michie
there was no prewar era of stability and prosperity to try to revive. A
repeat of the mass unemployment and international tension of the 1930s
was highly unattractive. What appealed to most was the planning that
had brought success in the war and could now be applied to a peacetime
economy. A rational economic underpinning of such a philosophy lay in
the writings of Keynes, who argued that a greater degree of government
control over the economy produced a better outcome for all than if it was
left entirely to the market. There was also the social programme outlined
by Beveridge, promising to deliver a better future to the victorious British
people. The Labour partys own agenda included a large extension of
public ownership and state direction of the economy. This was a potent
mixture, and with the election of a Labour government in 1945 a majority
of the British public expressed its support for the package of measures
on offer. Nevertheless, a complete takeover by the state of all private
enterprise and private wealth was not proposed. There remained a role
for the City of London.
In implementing its programme, the postwar Labour government
relied increasingly on the advice of professional economists rather than
the practising bankers and brokers of the City.
16
Wartime controls such
as rationing were retained, and the power of the state was progressively
extended through nationalisation. The Bank of England became an arm
of government in 1946 while the railways, coal mining, gas, electricity,
water and, eventually, iron and steel were all nationalised, giving the gov-
ernment a direct voice in nancial and monetary matters. Taken with the
wholesale disposal of foreign securities during and shortly after the war,
much of what the London capital market had formerly been engaged in
was now lost, leaving little beyond the issue of and trading in the national
debt in all its forms. A similar situation prevailed in the money market
where meeting the short-term needs of government through the issue of
Treasury bills was nowtotally dominant. In the late 1940s the government
consolidated its wartime power to take full control over the economy. In
terms of its external relations there was the maintenance of exchange and
trade controls, imperial preference, the sterling area and intergovernment
nancial ows. In terms of the domestic economy the government now
ownedlarge parts of it andwas ina positionto direct the rest. The City had
little alternative but to accept the position and work within it, conscious
that the government could easily extend its nationalisation programme
to the major banks and insurance companies or even take direct control
of institutions like the Stock Exchange.
17
Nevertheless, some parts of the
16
See A. Cairncross, Economic Ideas and Government Policy. Contributions to Economic His-
tory (1996), ch. 2.
17
For a contemporary assessment see D. Sachs, Survey of the nancial institutions of
the City of London, in Institute of Bankers, Current Financial Problems and the City of
City still prospered, such as City accountants and solicitors involved in
the nationalisation programme, or the Lloyds insurance market, which
retained an international business.
With the election of the Conservatives in 1951 the relationship between
the City and the government again became more complex. The Con-
servatives abandoned many of the controls introduced by the preced-
ing Labour government, as with the ending of rationing in 1954. This
coincided with a growing liberalisation in global trade and nance that
gradually restored a role to markets in the pricing and movement of
goods and money. The result was a City revival on both the domestic
and international fronts. Moreover, the greatly increased involvement of
the government in economic and nancial matters during the 1940s had
inevitably worked in favour of nancial institutions and businesses located
in London, and against those in previously important nancial and com-
mercial centres like Liverpool and Glasgow. Many provincially based
businesses had become large nationalised industries run from London
and tapping Londons nancial and commercial markets and services.
They were followed by the private sector where large public companies
absorbed numerous local concerns through mergers and acquisitions,
leading them to switch their fund-raising activities to the City. The con-
sequence was that in the 1950s the City of London acquired a prominence
within the British economy that it had never previously possessed, largely
courtesy of the government. There is no evidence that this outcome was
intended by either party. It was simply an accidental by-product of gov-
ernment action which encouraged the centralisation of so much economic
decision-making in London.
In addition the City still remained a nancial centre of major impor-
tance within the world economy, though now eclipsed by New York. The
continuedexistence of both the British empire andthe sterling area helped
to direct commercial and nancial ows to London. Potential rival cen-
tres in Europe, such as Paris, Berlin and Amsterdam, had all been badly
damaged during the war or, in the case of Zurich, had not yet developed
sufciently really to challenge London. British governments were there-
fore faced with an internationally powerful nancial centre and one that
was in a strong position within the domestic economy.
Such a situation was of signicance for the government because, despite
the change of political party in power, it was still committed to man-
aging the economy. The Conservatives did not dismantle the appara-
tus of state ownership and control established by Labour in the postwar
London (1949). See also J. Fforde, The Bank of England and Public Policy, 19411958
(Cambridge, 1992); it is no accident that Ffordes title includes the words and public
policy.
42 Ranald Michie
years. With a few exceptions like steel, those industries nationalised by
Labour remained so under successive Conservative governments from
1951 to 1964. Similarly, the Conservatives kept monetary and scal con-
trols inherited from Labour. Public expenditure as a share of national
expenditure, which stood at 37.5 per cent when Labour lost power in
1951, was 38.9 per cent in 1964, the year Labour returned to power.
18
The Conservative government maintained exchange and import controls,
which protected British manufacturing and agriculture fromforeign com-
petition, but which also restricted British investors and British banks to
placing their funds with domestic borrowers like the government itself
or the growing number of companies tapping the London capital mar-
ket. Large swathes of the economy remained under state ownership, the
Bank of England could tighten or ease credit whenever the government
required, and the freedom of the capital market to operate globally was
circumscribed by exchange controls.
19
Under these circumstances City nanciers began to map out a new
future designed to meet the nancial needs of the British government and
British business within the limits set by government. The London clearing
banks co-operated in controlling the supply of credit and in return gained
ofcial support for their interest-rate cartel. The discount houses enjoyed
a stable business as intermediaries in the market for short- and long-
term government debt. The Stock Exchange became the quasi-ofcial
regulator of the securities market and its members were able to charge
xed commissions with impunity. During the 1950s a signicant part of
the City therefore became dependent upon either government business
or protection for its livelihood.
20
The government decided what was in
the national interest and expected the City to adhere to its agenda. As a
result, relations between the Conservative government and the City were
not always amicable. In 1960 the Prime Minister, Macmillan, lamented
the very unsatisfactory relations between the Treasury, the Bank, and
what is roughly called the City, especially the Clearing Banks.
21
Nevertheless, in the 1950s there appears to have been a high degree
of co-operation, an almost unwritten pact, between the City and the
government. The City delivered the control over the money and capi-
tal markets required by the government, and received in return general
stability and a guarantee of income not normally existing under volatile
or competitive trading conditions. Such a pact was the product not of
18
Middleton, Government versus the Market, p. 91.
19
For this era see Roberts, City of London.
20
M. Moran, The Politics of Banking. The Strange Case of Competition and Credit Control
(1984), pp. 1623.
21
Quoted in Kynaston, City of London, IV, p. 251.
City inuence over a Conservative government but rather of mutual self-
interest.
22
However, domestically, this governmentCity pact extended
only as far as the major banks and discount houses, marshalled by the
Bank of England, and the major brokers and dealers of the securities mar-
ket, controlled by the Stock Exchange. Other individuals and businesses
who were not subjected to controls or not members of any cartel were
eager to gain at their expense. The provincially based building societies
are the classic example, as they were able to offer more competitive rates
than the banks and so attracted a growing share of deposits.
23
The mech-
anisms of control that had worked during and immediately after a world
war were increasingly ineffective when what was needed was the ability to
respond to a rapidly changing market place, requiring not a centralised
bureaucracy but a devolved customer-focused strategy.
24
This was also true internationally. To succeed in managing the econ-
omy the government had to ensure that Britain remained relatively iso-
lated fromthe rest of the world, otherwise the markets both for goods and
services and for money and capital would be responsive not to the wishes
of the British government but to global supply and demand. The moves
towards liberalisation in world trade and nance which took place in the
1950s jeopardised the effectiveness of the governments own controls,
requiring it to become more interventionist in order to achieve its objec-
tives. Government restrictions onthe use of sterling inthe nance of world
trade, as well as in the issuing of foreign loans in London, imposed to pro-
tect an internationally weak currency, hampered the Citys re-emergence
as a global nancial centre. The need to intervene in the domestic nan-
cial markets, in order to support the external value of sterling, hampered
business in the City. There is a historical belief that the future of the
City as a nancial centre was tied to the value of sterling and that it
was therefore the City above all that opposed devaluation, which could
have improved the international competitiveness of British manufactur-
ing industry.
25
However, if any particular group in the City had inuence
over government policy in the 1950s it was those leading commercial
bankers, merchant bankers and stockbrokers whose interests were largely
focused on domestic business. In contrast the international bankers in the
22
For a contemporary overview of the City in the 1950s see P. Bareau, The nancial
institutions of the City of London, in Institute of Bankers, The City of London as a Centre
of International Trade and Finance (1961).
23
For this and other aspects of money and banking see the authoritative account, M.
Collins, Money and Banking in the United Kingdom: a History (1988).
24
See G. Morgan and A. Sturdy, Beyond Organizational Change: Structure, Discourse and
Power in UK Financial Services (2000), pp. 802.
25
See S. Pollard, The Wasting of the British Economy. British Economic Policy 1945 to the
Present (1982), pp. 35, 713, 856, 185.
44 Ranald Michie
City possessed little inuence, even being excluded from membership
of the British Bankers Association until 1972.
26
Detailed examination
of the policy-making process leading to the Conservative governments
commitment to maintain the external value of sterling between 1951 and
1964 has recently revealed how marginal was City inuence as compared
to that of politicians and civil servants. The policy was tied up not only
with the maintenance of the sterling area, but also with relations with
the Commonwealth, Britains international position, prestige among the
world community and numerous other disparate beliefs and interests. To
see the commitment to sterling as driven solely by City interests can no
longer be sustained in the face of the mounting evidence otherwise.
27
Consequently, by the early 1960s many in the City saw limited ben-
ets in abiding by the controls imposed through the Bank of England
or the Stock Exchange. Inevitably, this produced tensions with the gov-
ernment, and the unwritten pact began to break down even before the
Labour election victory of 1964. Changes in the composition of the City
also weakened government ability to make its policies effective. From
1960 onwards, restrictions imposed by the government of the United
States on its banks and nancial markets in order to protect the exter-
nal value of the dollar drove international business abroad, with London
becoming the preferred location of most because of ties of language, law
and convenience. Increasingly the City was populated by foreign banks
and brokerage houses over which neither the Bank of England nor the
Stock Exchange had any authority. The Bank saw no problem with this
development as its focus was on the domestic nancial system and on
sterling, and these rms, though based in the City, conducted their busi-
ness in US dollars on behalf of non-British clients. The government even
saw benets in terms of jobs and taxes.
28
Hence it was underlying changes within the City itself that led to its dif-
cult relationship with the new Labour government, rather than simple
opposition to a socialist government or a traditional antagonism between
a right-leaning City and a left-leaning government.
29
Until the 1966 gen-
eral election the Labour party did not possess a sufcient majority in
26
V. Sandelson, The condence trick, in H. Thomas, The Establishment (1959),
pp. 11718, 1268, 131, 1346; A. Gleeson, London Enriched: the Development of the
Foreign Banking Community in the City over Five Decades (1997), pp. 29, 48, 82, 108,
116.
27
G. Krozewski, Money and the End of Empire: British International Economic Policy and
the Colonies, 194758 (Basingstoke, 2001), pp. 1605; Kynaston, City of London, IV,
pp. 3001.
28
For these years see S. Battilosssi and Y. Cassis (eds.), European Banks and the American
Challenge: European Banking under Bretton Woods (Oxford 2002).
29
E.g. A. Sampson, The Anatomy of Britain Today (1965), p. 395, for the Citys mood
having degenerated into a selsh and destructive sulk.
Parliament to follow any different policy regarding the City. Even with a
large majority thereafter, little changed. There was no wholesale policy of
nationalisation. The relatively modest devaluation of sterling in 1967 did
not represent any major shift in the governmentCity relationship akin to
the departure from the gold standard in 1931. Rather, in the 1960s there
increasingly existed two Cities. A new City was developing in response
to the growing international Eurodollar and Eurobond markets located
in London because of the restrictions placed on New York. It was heavily
dominated by foreign banks, with those from the United States rapidly
joined by others from Japan and continental Europe. Some British rms
were involved, such as the Midland Bank and Warburgs, but business was
largely driven by those fromabroad. This part of the City was closely inte-
grated into the international nancial systemand was concerned with the
domestic situation in Britain only in a tangential way, through the con-
sequences of government policy for Britains standing in international
markets and on exchange and interest rates.
30
To this part of the City the whole issue of sterling or Britains balance
of payments crises was a sideshow. It was little interested in British gov-
ernment policy as long as business was not harmed. In contrast the older
City remained more directly concerned with British government policy
for management of the economy and with the consequences for ination,
corporate prots, interest rates, and taxation of income and capital. The
liquidation of foreign investments combined with restrictions on over-
seas business by post-1945 governments had forced many in the City to
orientate their entire business towards the issue of securities on behalf
of British companies, organising mergers between these companies, and
trading and investing in their stocks and shares. However, little evidence
has been produced to suggest that this part of the City either tried to inu-
ence policy-making or was successful in doing so. Despite the continuing
fear, especially with a Labour government in power, that resistance would
be followed by even more intrusive measures, even nationalisation, the
Bank of England and the City managed to preserve their self-regulatory,
autonomous, status. As nancial business of all kinds ourished, the City
had little reason to oppose the government or seriously resist its policies
in the 1960s.
By the beginning of the 1970s a new City of London had therefore
emerged. The externally orientated, foreign-owned component was well
established and ourished as long it was left alone by the authorities. Its
currency was increasingly the US dollar rather than the British pound.
30
For this see C. R. Schenk, The origins of the Eurodollar market in London, 19551963,
Explorations in Economic History 35 (1998), 22138; R. Fry (ed.), A Bankers World: the
Revival of the City, 19571970 (1970).
46 Ranald Michie
No longer did the fate of sterling as an international currency and that
of the City of London as an international nancial centre appear to be
inextricably linked. The City had little reason to try and inuence the
government in favour of maintaining the external value of sterling, long
before the attempt was nally abandoned in the 1970s.
31
The Labour gov-
ernment chose not to intervene in the City, not through any City pressure
but because events on the international nancial front appeared to have
little relevance to the domestic situation. For example, the Eurodollar
market emerged out of a non-regulatory vacuum in the City.
32
In the
1970s, both Labour and Conservative governments recognised that it was
not the City itself that determined the external value of sterling but the
reaction of global markets to British balance-of-payments crises, budget
decits, industrial unrest or political instability. Intervention was ineffec-
tual andunnecessary. The Bank of Englandwas left to supervise andmon-
itor these new developments without regard to a political agenda.
33
The
arms-length supervisory system proved a major advantage for Britain at
a time when bankers and brokers from across the world were trying to
escape the clutches of national authorities and to relocate where the rules
of orderly market behaviour would be both respected and enforced.
The evolved City of London was thus ideally placed to prot from
the international nancial instability of the 1970s. It was able to provide
the money and capital markets required after the collapse of coordinated
central bank control. As a nancial centre with extensive international
connections and well-established nancial systems it was able to respond
to such global nancial problems as the need to recycle surplus funds from
oil-rich countries to those with large decits. For the City to emerge as the
premier international nancial centre it was necessary only for the British
government not to impose new controls and restrictions that would drive
potential business elsewhere. Even had the Government been inclined to
take such action, its freedom to do so internationally was circumscribed
by past agreements on the liberalisation of global trade and nance and
then by accession to the European Economic Community in 1973.
34
Nevertheless, this did not mean that the GovernmentCity relation-
ship had become merely regulatory, conducted through the mediation
of the Bank of England. Both Labour and Conservative governments in
31
Kynaston, City of London, IV, pp. 361, 3956.
32
G. Burn, The state, the City and the Euromarkets, Review of International Political
Economy 6 (1999), 236.
33
R. Shaw, London as a nancial centre, repr. in R. C. Michie (ed.), The Development of
London as a Financial Centre, 4 vols. (2000), IV, pp. 1312.
34
For this period see S. F. Frowen (ed.), A Framework of International Banking (1979);
also R. Roberts and D. Kynaston, City State. How the Markets Came to Rule Our World
(2001).
the 1970s remained committed to managing the British economy, to a
lesser or greater degree, and that meant exercising control over the City.
In turn those in the City undertaking domestic business had a vested
interest in trying to inuence government policy. In 1970 the new Con-
servative government was keen to introduce more effective controls over
the banking system to contain the growth of fringe banks, hire-purchase
companies and alternative money markets. At the same time the restric-
tive practices operated by the major banks, especially on interest rates, had
attracted the scrutiny of such bodies as the National Board for Prices and
Incomes and the Monopolies Commission. The competition and credit
control policy introduced in 1971 aimed simultaneously to encourage
competition among all types of banks and to control the availability and
cost of credit. In retrospect this appears an impossible task, particularly
in a period of growing ination and industrial unrest in Britain and of
international nancial instability related especially to the weakness of the
dollar and the price of oil. The result was a rapid monetary expansion
in Britain culminating in a nancial crisis in 1974. The Bank of England
had to intervene in order to prevent a massive nancial collapse, forcing
the major banks to support the rescue of a large number of fringe banks,
who had been their competitors. By March 1975 a total of 1.2 billion
had been provided. Credit controls were re-imposed and the Bank took a
more interventionist attitude towards banking supervision, as it could no
longer rely upon a close relationship with the major banks to restrict the
availability of credit. The Banking Act of 1979 established more formal
supervision of the entire banking sector, including for the rst time the
numerous foreign banks located in London. Illustrating the complexity
of the task the Bank of England faced was the fact that 538 rms applied
to become either recognised banks or licensed deposit takers in contrast
to previous recognition of merely the ve major British retail banks.
35
The primary concern of both the government and the City in the 1970s
was the state of the public nances. As government borrowing escalated
in the mid 1970s, as a result of worsening domestic economic problems
and ballooning ination, the Labour government of 19749 faced real
difculties in obtaining sufcient funds to nance its budget decits. A
budget surplus in 1970 equivalent to 3.4 per cent of GNP had become a
decit of 3 per cent of GNP in 1973. That decit then rose to a peak of
5.4 per cent of GNPin 1976 and, though it fell thereafter, the government
never managed to balance its nances for rest of the decade. Almost for
the rst time, there appeared to be a lack of condence among potential
35
For this episode see Moran, Politics of Banking. The gure of 1.2 billion comes from
Morgan and Sturdy, Beyond Organizational Change, p. 84.
48 Ranald Michie
lenders in the British governments ability to service its debts. Although
the government was always able to raise the required funds, it had to
pay higher rates of interest than previously and tailor its borrowing more
to the needs of potential lenders and investors.
36
During the 1970s the
quoted National Debt rose by 53 billion in nominal terms although the
rise in the market value was only 45 billion, indicating the suspicion of
institutional investors at home and abroad. In 1976 the Labour govern-
ment had to seek assistance from the International Monetary Fund and
accept the conditions attached, so perilous was its nancial position.
37
In many ways these years represented a watershed in the post-Second
World War governmentCity relationship. Prior to the mid 1970s a
working relationship had existed from which, on the whole, both sides
gained. Despite some unhappiness with the direction of policy and level
of taxation, many in the City worked with successive governments, help-
ing them to achieve their policy ambitions. However, in the 1974 Labour
government they faced an antagonistic administration unable to deliver
either stable nances or a steady growth in prosperity. Long-standing
frustrations with government policy, whether Labour or Conservative,
came to the fore particularly in that part of the City which relied almost
entirely upon the British economy for its business and was suffering as
a result of unstable economic, nancial and monetary conditions.
38
In
the nancial crisis of 1974 many in the City not only experienced falling
incomes but also lost their livelihood. There was a contraction of over
4000, or 31 per cent, in the number of staff employed by London-based
members of the Stock Exchange during that year. In contrast, that part of
the City that largely conducted its business abroad faced little in the way
of controls and prospered in the volatile international conditions of the
time.
39
The number of foreign banks with London branches expanded
rapidly as did turnover in a wide range of nancial markets. The very
difculties experienced by British industry and the resurgence of activity
in the City of London were connected, but not to each other. Rather, they
were both consequences of the collapse of the golden age of the world
economy.
40
36
C. Goodhart, Monetary policy and debt management in the United Kingdom: some
historical viewpoints, in K. A. Chrystal (ed.), Government Debt Structure and Monetary
Conditions (Bank of England 1999), pp. 601 and Annex 2.
37
Kynaston, City of London, IV, ch. 17; R. C. Michie, The London Stock Exchange. AHistory
(Oxford, 1999), ch. 11.
38
For a notably outspoken attack on government interference and lack of direction, see
London Stock Exchange, Council Minutes, July 1975.
39
Gleeson, London Enriched, pp. 8291.
40
See R. Pringle, Financial markets versus governments, in T. Banuli and J. S. Schor
(eds.), Financial Openness and National Autonomy: Opportunities and Constraints (Oxford,
1992), pp. 89101.
The government still expected the Bank of England both to regulate
and control British banks, and the Stock Exchange to do the same for the
securities market, although it could not guarantee the privileges expected
in return, such as a monopoly of the domestic market. This was pre-
vented by the increasingly competitive nature of the nancial markets
and by attacks on restrictive practices and price-xing cartels from the
governments own creations the Monopolies Commission, the Ofce
of Fair Trading and the Restrictive Practices Court. In the 1970s, these
bodies had already forced changes in the way banks operated, creating
a much more competitive environment. Now their attention, and that
of a hostile press, switched increasingly to the restrictive practices of the
Stock Exchange. Even in the City the Stock Exchange was under pres-
sure because many institutional investors regarded the charges levied by
its members as excessive, while the Bank of England feared that lack
of change in the Stock Exchange would hamper Londons competitive
position as an international nancial centre.
41
Consequently, the bene-
ts to the City from any relationship with the government appeared to be
fading during the 1970s. Many blamed the City for Britains economic
difculties, identifying it with the international money and capital mar-
kets. Consequently in 1977 the Labour government appointed a com-
mittee to examine the working of the whole British nancial system, to
be conducted by the ex-Labour Prime Minister, Harold Wilson, who was
known for his anti-City views.
42
It was with relief that the City saw the
defeat of Labour in the general election of 1979, and its replacement with
a Conservative government under Margaret Thatcher.
The end of the affair: City and government since 1979
One of the rst acts of the new Conservative government was to abandon
exchange controls. This was unexpected and does not appear to have been
a result of any City pressure. There was now no division between domes-
tic and international business as long as it was sufciently large to attract
an international provider. Lending and borrowing, buying and selling,
merging and acquiring could be undertaken not only by a foreign bank
or broker located in London but also routed via a foreign nancial centre
like New York or Paris. City institutions which under the exchange con-
trols had been able to monopolise domestic business and impose charges
and uncompetitive practices now found themselves in the same posi-
tion as British industry, which had been progressively exposed to foreign
41
See Michie, London Stock Exchange, ch. 11.
42
Committee to Review the Functioning of Financial Institutions.
50 Ranald Michie
competition under successive rounds of GATT negotiations and then by
membership of the European Economic Community. Such a move was
a boon to that part of the City which serviced the world economy, but
in the domestic market British rms now had to compete on the same
terms as rival foreign banks and brokers located in London. This move
was a pragmatic response by government to the impossibility of policing
exchange control effectively, without any real appreciation of the conse-
quences for the City. It destroyed the separation that had existed since
the 1960s between that part of the City conducting an external business
and that which conducted an internal business.
43
As the banks and the money market had already been forced to
make adjustments in order to survive in this more competitive environ-
ment, it was the Stock Exchange which found itself most exposed as a
result. Whereas exchange controls had enabled the members of the Stock
Exchange to monopolise the business generated by British investors buy-
ing and selling the domestic securities issued by British companies, they
could not do so in international securities, even if issued by British com-
panies. Instead, that market developed separately fromthe London Stock
Exchange and had by the late 1970s become extremely active, with no
xed charges or controls on participation. In addition to these newly
unleashed competitive pressures was the unresolved issue of the case
against the Stock Exchange by the Restrictive Practices Court, which
had been in progress since the early 1970s. Despite expectations that
the Thatcher government would drop the case, this did not happen. The
Conservatives proved equally unwilling to grant the Stock Exchange the
immunity from prosecution necessary to safeguard its restrictive prac-
tices. The case therefore dragged on until after the Conservative victory
in the 1983 election, when the government and the Stock Exchange even-
tually reached agreement that restrictive practices would be abandoned.
The only concession that the Council of the Stock Exchange gained was
the time to prepare for this more competitive future. It was given until
1986, and the event known as Big Bang.
44
Big Bang indicates two central aspects of governmentCity relations at
the time. The rst is that the Conservative government gave a higher pri-
ority to making the economy, including the nancial services sector, more
competitive than it did to bolstering restrictive practices, even though
these were integral to the way that government itself exerted control over
43
For the City in the 1980s see Bank of England, London as an international nancial
centre, Bank of England Quarterly Review 29 (1989).
44
By this, the Stock Exchange lost its power to x the charges levied by its members, to
regulate the way they conducted their business, and to exclude the participation of both
British banks and foreign rms.
the City. In future, that control would be exercised through legislation
and statutory bodies. The cosy relationship forged in the heat of war and
reconstruction in the 1940s was now at an end. The second aspect is the
attitude of those in the City to the government of the day, irrespective
of whether it was Conservative or Labour. Despite disappointment with
government policy among many members of the Stock Exchange, they
were mindedto accept the 1983 deal rather thancontinue lobbying or take
their chances with the Restrictive Practices Court.
45
Such was the com-
plexity and speed of nancial markets that the worst possible outcome for
the City was one where politicians could interfere in their daily operation.
Preventing this was the absolute priority of virtually all in the City, and
it overrode any other consideration or divisions between them. Some in
the City saw Big Bang as an act of betrayal by the Conservative govern-
ment because it led to the takeover of British-owned nancial rms by
foreign banks, running counter to the once legitimate expectation that the
British government would favour national over foreign rms in the City
of London.
46
The Citys development as an international nancial centre
from the 1960s meant that towards the end of the century around one
third of City employment was in branches of the foreign banks and other
nancial rms located there, while much of the activity in British rms
was also externally focused, whether through City lawyers and accoun-
tants or banks, brokers and fund managers. Under these circumstances
a policy of discrimination by the government would have resulted sim-
ply in the migration of foreign rms to other locations, if the situation
became intolerable, resulting in the loss of employment and income for
the British economy. Such a scenario was increasingly recognised by the
government.
47
Instead, what the British government could do was to provide the reg-
ulatory framework within which the City operated. The Bank of England
had long been developing closer working relationships with the foreign
banks located in the City. As early as 1947 the Bank was involved in the
creation of a Foreign Bankers Association in London, which acted as a
conduit for its dealings with these banks. The Banking Act of 1979 gave
the Bank of England the statutory power to authorise, or not, foreign
banks wanting to establish a London branch. In 1981, in response to
demands to be treated the same as domestic banks in all respects, for-
eign banks were given the same re-discounting facilities at the Bank of
45
London Stock Exchange, Council Minutes, 2122 July 1983. See also Michie, London
Stock Exchange, ch. 12.
46
See, for example, the merchant banker P. Augar, The Death of Gentlemanly Capitalism.
The Rise and Fall of Londons Investment Banks (2000), p. 312.
47
N. Buck (ed.), Working Capital: Life and Labour in Contemporary London (2002), p. 112.
52 Ranald Michie
England.
48
What changed more radically in the 1980s was the extension
of statutory regulation to other aspects of the City. Accompanying Big
Bang, for example, was a replacement of the Stock Exchange as the regu-
latory authority for the securities market by the Securities and Investment
Board. This recognised that the nancial activities taking place in the City
now extended far beyond banking, supervised by the Bank of England,
and investment, over which the Stock Exchange had authority. Trad-
ing in securities now encompassed the growing Eurobond market over
which the Stock Exchange had no control. Thus in the 1980s the City
government relationship became a technical one between a regulator and
the regulated. As the government had no need to borrowat this time, with
tax income boosted by privatisation receipts, and interest and exchange
rates largely left to market forces, there was much less need for it to try and
control the City. Conversely, the City was so much more international in
terms of ownership and business that what the British government did
was largely irrelevant, unless it had a direct impact through high personal
taxes or excessive regulation. Moreover, institutions were more vulner-
able to the demands of their shareholders than to those of government,
making it increasingly unlikely that they would readily co-operate.
49
Recognition that the City and government were operating in a very
different nancial world was underlined when the Labour party returned
to power in 1997. As one of its rst acts the Blair government gave inde-
pendence to the Bank of England in setting interest rates, a move con-
sidered but not implemented by the Conservatives. Henceforth the set-
ting of interest rates and the control of ination were determined by an
independent monetary policy committee rather than by the political or
economic judgement of the Chancellor of the Exchequer. This move by
the Labour government, undertaken not because of City pressure but for
political reasons, represented a further transformation in the balance of
power between the City and the government. As long as the government
retained the power to set interest rates it could exert a direct inuence
over the money and capital markets, which made its actions important to
the City, and thus encouraged it to try and exert political inuence. Once
that power was given away, the governments direct inuence evaporated.
Instead, its power over the City nowrested with the regulatory framework
under which the City operated. With the creation of the Financial Services
Authority, which became the single regulator for the whole nancial ser-
vices sector in December 2001, the Labour government entrusted that
power to a statutory body operating independently from government.
48
Gleeson, London Enriched, pp. 379, 8891, 116, 122.
49
Morgan and Sturdy, Beyond Organizational Change, p. 102.
Though the City might complain about the costs and complexities of
regulation, it could be condent that regulation was being conducted
impartially and provided an orderly and stable environment.
50
Though
the government was still able to affect the City of London through legisla-
tion and taxes, it no longer possessed the power to determine the lending
policies of banks or the conduct of the Stock Exchange. All that the gov-
ernment retained for itself was an emergency power to intervene in the
City, including the ability to run banks and markets, in the event of a
national crisis such as might result from a terrorist attack. This reected
prudence rather than a desire for control. By then all recognised that
the City of London was too valuable a resource to lose, for whatever
cause.
51
That is not to say that the relationship between the City and the gov-
ernment was now simply a technical one, focusing on regulation and
tax. Questions continued to be raised about the extent and direction of
inuence. The unexpected re-nationalisation of Railtrack without consul-
tation or compensation in October 2001 could be seen as a defeat for City
interests, suggesting that they possessed little real power.
52
Conversely,
the extraction of 78 billion in compensation from the government in
March 2003, after prolonged private and public lobbying by institutional
investors, suggested that the anonymous fund managers in the City were
not without power.
53
Given that the governments costs of borrowing in
nancial markets had risen because of the Railtrack episode, as state guar-
antees were now in doubt, the government had little alternative but to
negotiate a settlement and reduce the perceived risk if it wanted to borrow
more cheaply in the future. Either way the City coped with the situation
it found itself in.
54
In the case of Railtrack the City was able to force
the government to change its policy by exerting inuence through the
market, and with the government needing to borrow or sell state assets it
could not ignore this pressure. Conversely, in areas where the City could
not exert any such inuence the government was able to ignore City pres-
sure. Such was the case with the annual City campaign to have the stamp
duty on share dealings reduced or abolished. As such a step was likely
to cost the government around 34 billion in tax revenues, and there
was no obvious or immediate gain, apart from that to the international
competitiveness of the Stock Exchange, City pressure proved fruitless.
55
50
Financial Times, 30 Nov. 2001.
51
Ibid., 26 Feb. 2003.
52
Ibid., passim for Oct. 2001.
53
Ibid., 25 March 2002. For the background see ibid., 26 March 2002.
54
Ibid., 7 March 2002.
55
Ibid., 22 Oct. 2001, 8 Feb. 2003. See also Michie, London Stock Exchange.
54 Ranald Michie
On wider economic and political issues it is difcult to identify either
a City view or any concerted City pressure to achieve a particular end.
This can be seen most clearly on the important question of whether or
not Britain should join the single European currency, even though, by
any measure or calculation, replacing sterling with the euro appears to be
in the interests of the City. Though the creation of the euro has had no
discernible impact on the City of London as a nancial centre, the threat
existed that if Britain did not join the single European currency, nancial
activity within Europe would gravitate elsewhere, such as Frankfurt or
Paris, and non-European business would then follow. However, neither
the Labour government since 1997, nor the Conservative opposition,
has expressed any commitment to take Britain into the euro. The inter-
ests of the City were clearly peripheral to both parties, as compared to
the wider political and economic considerations which determined the
decisions taken by government. Conversely, within the City, such was
the global nature of business and the importance of the dollar in so
many transactions, that the debate on the euro was of rather marginal
signicance. What mattered in the City was the freedom to operate in
any currency and in any market in the ways that best suited the partici-
pants. The City was becoming less concerned with the actions of the
British government and more with those of foreign governments on deci-
sions regarding such matters as banking solvency and market regulations.
Under these circumstances the British government emerged as a defender
of the interests of the City of London in competition with other nancial
centres, each supported by the interests of their own governments. This
was not the product of City inuence over government policy, but was
driven by simple national self-interest.
56
Whereas for much of the twen-
tieth century governments interpreted self-interest as meaning using the
institutions and markets of the City to manage the economy and support
manufacturing, by the end of the century there was a general recognition
that the City was a major industry in its own right, and needed protection
against unfair foreign competition.
Conclusion
By the end of the twentieth century governments of all political per-
suasions had come to recognise the difculty, even impossibility, of
controlling international nancial markets.
57
In some ways, this situa-
tion was reminiscent of that at the beginning of the century, with the
56
Financial Times, 3 May, 10 June, 25 June 2003.
57
Kynaston, City of London, IV, p. 791.
interests of national governments circumscribed through the power of
global markets, as represented by the City of London. The history of
governmentCity relations in the twentieth century suggests that in the
debate over whether markets or governments served the interests of
people best the matter is far too complicated to be reduced to a simple
answer in favour of one or the other. At times it was absolutely essen-
tial for the government to intervene in the City, as with the outbreak of
the First World War and during the 1940s. There were also times when
greater intervention was necessary, as in the aftermath of the First World
War and the world economic collapse of 192932. Conversely, there were
other times when government intervention did not prove helpful, distort-
ing the economy and producing a sub-optimal solution. This was true
in the return to the gold standard in 1925 and the controls over the
nancial system in place between 1950 and 1979. Though British politi-
cians may have succeeded in persuading their public that responsibility
for the countrys economic failure rested with the City of London, the
slow unravelling of the historical record produces a somewhat different
conclusion, and one that is not particularly favourable to government.
Only when all the evidence is to hand on how the government reached its
decisions, and why, is it possible to distribute responsibility. Even then it
is vital to understand the concerns of both the government and the City,
recognising that neither was wholly united in their aims and that these
aims changed enormously over time.
Part II
Markets and society
3 Markets and governments
Forrest Capie
There is a danger that the title of this chapter will be read as markets
versus governments. There is also a risk that any hint that the writer
favours markets will result in his being placed rmly in one camp, while
any hint to the contrary will place him equally rmly in the interven-
tionist camp. But there is certainly at least one reasonable intermediate
position, that which allows regulation to play a positive part in promoting
the market, and governments to play an essential role in providing the
setting within which markets can work most effectively. While for some
this role might be limited to an effective legal system, others would extend
it further, and some much further. The problem then becomes where to
stop. How much regulation should there be, and how much freedom?
There is the story of the Soviet military parade with weapons of increas-
ing potential for mass destruction processing past the leaders. Finally,
there came a small van with a few men in suits. Who are they? asked a
guest. Economists was the reply. Why? You should see the havoc and
destruction they can cause. In our discussion we can substitute regula-
tors or free-marketeers, according to taste.
This essay sets out some perspectives and summary statements on mar-
kets, governments, and the City during the twentieth century. It outlines
briey the economic case for and against the market in general, and for
the City in particular. The economic case for markets may not have been
the one that dominated in political decision-making, but it is nevertheless
useful to hold it in view. Indeed, the fact that there appears to be a fashion
in these matters, one that is international, suggests that neither economics
nor politics plays the proximate part inchange. Rather, their effect is diffu-
sed over a period and difcult to trace. Some illustration of the ebb and
ow of intervention in City affairs follows, before some conclusions are
drawn.
Perspective on the twentieth century
The case for markets came to be much more widely, though certainly not
universally, accepted in the closing decades of the twentieth century. This
59
60 Forrest Capie
was not always the case. In the 1960s the opposite view was reected in
most writing on the subject, conventional wisdom being that the market
was imperfect and could be left to itself under very few circumstances.
Governments were necessary to ensure its proper working. Only a few
argued for the merits of the market. Anyone arguing this case was in
danger of being regarded as a crank at best, and certainly someone who
did not appreciate the complexities of modern capitalism. Indeed there
was a danger that holding such ideas was inappropriate in academic life.
Some early suggestions for privatisation (which later came about) were
dismissed at the time as lunatic.
The wildest excesses of unbridled capitalism were seen as having come
to an end or been tamed in the closing years of the nineteenth century.
Other moves came in the First World War when the state, of necessity,
entered the economy on a large scale. After the war, although there were
many calls for a return to business as usual that is to the pre-1914
world it was recognised that something remarkable had been achieved
in the war, much of it under the direction of government. Many saw the
future in the central planning of the newly formed Soviet Union. Calls
for economic management by the state began to be heard. During and
after the depression of the 1930s the worst features of capitalism were
identied and chief among these was its inherent instability. Something
had to be done to correct this. Clearly, the state needed to be involved
on a much larger scale.
There were many admirers of the Soviet Union as a model. In the
1930s, Sidney and Beatrice Webb entitled their eulogy of the state Soviet
Communism: a New Civilization? In the second edition their condence
was such that they removed the question mark. After the Second World
War central planning took hold as an idea and even in most of the West,
planning agencies were set up. French planning was much admired, as
was the particular interventionist approach of the Japanese. Industrial
strategies were widely believed to be necessary.
The evidence in support of all this can readily be seen in the huge
increase in the share of governments in total output. Before 1914 the
typical share in western European countries was around 5 or 6 per cent
of GDP. By the middle of the twentieth century, that share had soared
to closer to 50 per cent. The numbers of people directly employed by
government also rose dramatically. For example, in Britain the numbers
employed in the 1970s were roughly 7.5 million, though after the privati-
sations of the 1980s and in the 1990s they fell to under 6 million.
The performance of centrally planned economies or those with
heavy interventionist approaches sometimes appeared superior to other
economies. There may have been some truth in this, but planning itself
was not necessarily the cause. In many cases the economic statistics lied.
Markets and governments 61
Most people seemed to believe the extravagant gures put out by the
United Nations and other agencies that showed, for example, that the
Soviet Union was richer than Britain by the early 1960s. Lovett gives
gures (based on the UN and OECD statistics) that show GNP per head
in the Soviet Union still higher than Britain in 1970.
1
Even in the late
1980s, British academic historians were presenting gures which showed
that East Germany compared favorably with Britain in terms of income
per head.
2
For those intent on believing these gures the conclusions
could be silly: Britain will [by c. 2012] have to settle down to being
the poorest country in Europe, with the possible exception of Albania.
3
Much of this was false, and the claims bogus. Not only were some east
European countries in dire economic straits, they also suffered from all
kinds of other problems such as greater pollution and corruption, quite
apart from the lack of personal freedom. With the great collapse of the
planned economies at the end of the 1980s the case for the market econ-
omy began to be heard more condently again.
But one need not present the picture as a stark contrast between unfet-
tered markets and central planning. An acceptance that markets are
superior and should be dominant still leaves the question of how much
intervention should there be, and where should it take place. What should
the relationship be between governments and markets?
There used to be common acceptance of the viewthat the British econ-
omy had declined relentlessly from the late nineteenth century onwards,
and that the research task was to identify the culprit. There were many
candidates but the City and the banks were usually among the top few.
What is worth bearing in mind, however, is that while Britain had lost
an empire and its international role, in economic terms it had done well
over the long term. At the present time Britain is on a par in per capita
income terms with the rest of the rich countries of western Europe. That
being the case, there is surely much less need to nd a culprit. And given
the huge growth of government whatever fault needed to be found might
just as easily be found there.
The case for markets
The argument for free markets was spelled out with great clarity in the
eighteenth century by Adam Smith. To reduce it to its barest bones,
when individuals were left to their own devices, to pursue their own
1
W. Lovett, World Trade Rivalry. Trade Equity and Competing Industrial Policies (Lexington,
Mass., 1987), p. xix, table P2.
2
V. R. Berghahn, Modern Germany: Society, Economy, and Politics in the Twentieth Century
(Cambridge, 1987), p. 232.
3
S. Pollard, The Wasting of the British Economy (1982), p. 6.
62 Forrest Capie
interests even if these were selsh the best aggregate results were pro-
duced. When producers were left to respond to the effective demands of
the consumer, the most efcient allocation of resources was achieved.
Not only did such an untrammelled market place deliver the most
efcient economic outcome; it was also morally superior and allowed
the individual the greatest personal freedom. Smith was seen as a
reformer at the time, advocating the overthrow of restrictive legislation
and institutions.
Many attacks have been made on this case, the most important of
which will be discussed below. But even those who are sympathetic to the
basic case sometimes argue that the market cannot do everything on its
own. It requires other elements. For example, some argue that the mar-
ket depends on the presence of virtues such as trust and forgiveness, and
that these virtues are generated outside the market often in the Judaeo-
Christian culture within which the market prospered in the eighteenth
and nineteenth centuries.
4
In other words, the market is parasitic on that
culture, and therefore religion played a substantial part in the explana-
tion of properly functioning markets. It might be argued that Smith was
writing with this implicit assumption in mind.
However, a response to this line of argument is that the market is
capable of generating these elements on its own. With the development
of game theory in the middle of the twentieth century the rst results
suggested that oligopolistic structures produced sub-optimal outcomes.
But with the advance of computer games in the 1980s in particular a
game such as Tit for Tat the results that emerged strongly suggested
that virtues such as forgiveness were learned after a large number of
experiences.
Other institutions have also been regarded as essential prerequisites for
the working of the market. For example, the work of North and others has
emphasised that the optimising assumption of classical economics must
be supported by well-dened and enforceable property rights.
5
This has
given rise to a huge amount of research on the nature and extent of such
rights and their relationship to economic performance, leading others to
examine more closely the case for the rule of law. Different legal systems
have been found to be more-or-less conducive to economic growth, stim-
ulating studies measuring the impact of freedom and democracy on eco-
nomic performance. Countries that have the greatest freedoms are said
4
J. Sacks, Morals and Markets (Institute of Economic Affairs occasional paper 108, 1999).
5
E.g. D. North and R. P. Thomas, The Rise of the Western World (Cambridge, 1977);
D. North and B. Weingast, Constitutions and commitment; the evolution of institutions
governing public choice in seventeenth-century England, Journal of Economic History 4
(1984), 80332.
to perform better than others. Olson recently argued that democracies
are more conducive to wealth creation than non-democratic systems,
although he had previously shown that where coalitions were allowed
to ourish in democracies these could become damaging to growth.
6
Sen points out that there has been no substantial famine in a democratic
country no matter how poor.
7
This debate was quiescent for much of the
twentieth century, because there was at least one great power emerg-
ing the Soviet Union that was centrally planned and controlled,
and was reportedly making huge economic leaps forward. States such
as Yugoslavia followed slightly different models but nevertheless were
planned economies. Others elsewhere continued to emphasise govern-
ment intervention. The role of the state in OECD countries was long
debated. Even in the eld of banking in western Europe, Gerschenkron,
whose liberal credentials were generally impeccable, sawa big role for the
state in promoting activity in countries catching up.
8
Great claims are currently made for freedom and democracy. The
Heritage Foundation publishes an annual index of freedom and anal-
yses the relationship between this measure of freedom and the level of
economic performance. The index covers ten factors, including trade
policy, government intervention, property rights and regulation. Corre-
lations are far from ideal on numbers arrived at subjectively, but there is
nevertheless a strong case to be made for this position, which in the last
decade or so has been taken up by leading economists such as Barro.
9
The idea is not exactly new. It lay behind Smiths Wealth of Nations,
and was also part of Arnold Toynbees explanation for British success
in the eighteenth century, as given in his 1883 Lectures: On the moral
side, our political institutions, being favorable to liberty, have devel-
oped individual energy and industry in a degree unknown in any other
country.
10
More explicit and intensive investigations have been carried out
recently. Some try to measure democracy, and then establish the nature
of the relationship with economic performance. The direction of cau-
sation is not clear, as perhaps most historians could have suggested in
advance. Is it prosperity that promotes democracy, or does the reverse?
6
M. Olson, Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (New
York, 2000).
7
A. Sen, Development as Freedom (1993).
8
A. Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, Mass.,
1962).
9
R. Barro, Rule of law, democracy and economic performance, in G. P. ODriscoll,
K. R. Holmes and M. Kirkpatrick (eds.), 2000 Index of Economic Freedom (Heritage
Foundation and Wall Street Journal, 2000).
10
A. Toynbee, Lectures on the Industrial Revolution in England (1884; 1969 edn), p. 121.
64 Forrest Capie
Does it matter what the extent of democracy and the level of development
are? Interestingly, Barro concludes his study with the viewthat the extent
of democracy has little relation to subsequent economic performance.
11
It might seem at rst glance a slightly awkward fact for the freedom/
democracy school that the industrial revolution took place when there was
little political representation or democracy in Britain and that what there
was, was declining over the course of the eighteenth century. The prevail-
ing philosophy was mercantilism, which encouraged what was primarily
a protectionist or regulatory climate with its focus on the supremacy
and centralisation of the state. However, mercantilism existed in differ-
ent forms and had different effects in different territories. It was a rela-
tive matter, and England suffered less from regulation than did others.
Further, regulation was frequently ignored, leading some to remark that
Smiths views were in this sense out of date at the time of publication. But
in any case Smith railed against the protectionist policies mercantilism
encouraged, and this argument found a ready response in the country, one
which was already opening up the economy to competition. The nature
of protection and regulation varies hugely across capitalist and mixed
economies. Clearly, there are still large differences among the economies
of the West.
The focus of the present collection of essays is on the twentieth cen-
tury. Much of the period was the age of neo-mercantilism (that ran from
roughly the 1870s to the 1970s), a clear return to intervention in many
areas of the economy. This particular statism came from Liberals and
Conservatives rst. It was within this period, in 1893, that the rst social-
ist party (the Independent Labour Party) was founded. Labour-party
hostility to the market was clear in the 1930s; socialist legislation began
to be passed after 1945. All of this then provided the climate within
which policy was made and regulation imposed. Here it is worth con-
sidering further the argument that prosperity stimulates tolerance and
concern and widens democracy, and that in part this period reects all
that. Ben Friedman argues that there is a systematic impact of economic
growth on the moral character of society. The direction of social change
reects either improvement or stagnation in living standards. This is not
a business-cycle phenomenon but something longer he has in mind
periods of ten or twelve years and presents social change as a conse-
quence of economic performance. Reasonable periods of prosperity gen-
erate a growing concern over social conditions and an increasing desire
to alleviate social hardship. Tolerance increases. Social reform follows,
bringing increased regulation which attempts to improve working and
11
Barro, Rule of law, democracy and economic performance, p. 47.
other conditions. Against this, periods of stagnation lead to reversals in
social policy and less tolerance for minorities and the deprived, and de-
regulation of the systemin attempts to improve economic performance.
12
There are problems withFriedmans thesis, not least the fact that it does
not t either the great depression in the United States or many episodes
in the British experience. However, there is at least some semblance of
it in the British experience from the late nineteenth-century Fabianism
onwards. For example, some have seen the 1930s as the real beginning
of the Labour Partys ideological commitment to planning and hostility
to the market. Fabian hostility to the market was rooted in what they
considered to be the waste created by competition. The central challenge
was Smiths invisible hand. One way around this problemwas that offered
by Tawney, the economic historian and political writer, inuential in the
Labour party: that the doctrine was outdated, because the joint-stock
company divorced ownership from control.
13
But this did not really hold
up in Britain in the interwar years when the bulk of economic activity was
still carried out by closely held rms.
Market failure in general
Be all that as it may, the issue largely comes down to that of how markets
fail, and to what is meant by market failure. In the middle decades of the
twentieth century market failure of many kinds was found. To some extent
this was the fault of economics itself. The ideal in economics is perfect
competition. This delivers the most efcient allocation of resources at the
lowest price to the consumer. Such circumstances seldomprevail, and the
danger then is of regarding any deviation from the perfectly competitive
ideal as failure. On that view there would be widespread failure. How-
ever, on the more restricted view of failing to achieve a Pareto optimum,
there are three principal kinds of market failure: externalities, monopoly
and public goods.
An externality is a cost or benet that results from some particular
activity but falls on parties who were not part of the activity. The most
commonly cited example is that of the chemical factory that spills waste
into the adjoining river. The company imposes part of its costs on others,
which means that the social-marginal cost exceeds the private-marginal
cost of the producer. There is no denying that such externalities exist:
the question is, what to do about them? One view is that they result
12
B. M. Friedman, Democracy and Economic Performance (forthcoming).
13
J. Tomlinson, The limits of Tawneys ethical socialism. A historical perspective on the
Labour party and the market, Contemporary British History 16/4 (2002), 116.
66 Forrest Capie
from inadequately dened and allocated property rights, to which the
answer would be to correct for such inadequacies and thereafter leave
government out of the solution. However, it is not always easy, or without
signicant costs, to achieve the appropriate allocation. The two princi-
pal alternative means of dealing with the externality are either by tax or
subsidy policy, or by regulation. The relative respective merits of these
depend in part on the nature of the externality.
The second main area of concern is monopoly. It is sometimes asserted
that monopoly is evidence, or at least another instance, of market fail-
ure. The competitive outcome is the ideal (most efcient) allocation of
resources, and monopoly deviates from this ideal. But it is not immedi-
ately clear why monopoly should always be regarded in this way. If the
cost curves of a rm are such as to allow for only one rm in the market
the result of economies of scale then in relation to demand a natural
monopoly may be created. Whether or not this constitutes a problem
depends on a number of factors, not least on the extent of international
competition. The likelihood is that if there is free trade such a rm is still
exposed to competition. But in any case these monopolies were much
rarer than was sometimes supposed.
Schumpeter argued this many years ago: pure cases of long-term
monopoly must be of the rarest occurrence and . . . even tolerable approx-
imations to the requirements of the concept must be still rarer than are
cases of perfect competition. The power to exploit at pleasure a given pat-
tern of demand . . . can under the conditions of intact capitalism hardly
persist for a period long enough to matter for the analysis of total output,
unless buttressed by public authority, for instance, in the case of scal
monopolies.
14
Even if at any one point a monopoly was identied, it is
unlikely that it would last very long if left exposed to changing technology
and other conditions.
If there is failure of this kind monopoly then again the question
is, what action should be taken? One solution is for the government to
replace the market and carry out the activity itself. However, that may not
be optimal. Just because the market has been found to have a fault does
not mean that the answer is to replace it with government. In fact, as has
been the experience of the postwar world, government intervention has
frequently produced a worse situation.
15
Nationalisation proved a failure
in almost every sphere in which it was tried. Yet it took some countries
a long time to accept this, as shown for example by the French return
14
J. A. Schumpeter, Capitalism, Socialism, and Democracy (1943; New York, 1987 edn),
p. 99; and see S. C. Littlechild, Privatisation, Competition, and Regulation (Institute of
Economic Affairs, 2000).
15
H. Demsetz, Information and efciency: another viewpoint, Journal of Law and
Economics 12 (1969), 122.
to nationalisation of the banks in the 1980s. The British had a long list
of nationalised industries extending far beyond what were thought of as
monopolies, usually in the utilities, railways, airways, communications,
cars, and so on.
The principal ways of coping with monopoly were to regulate, or to tax
or subsidize the activity. Regulation was beset with all kinds of problems,
not least those associated with the strong desire of producers to regulate
as a means of restricting entry regulatory capture. But even where
there was a natural monopoly and something closer to a competitive
price was deemed to be desirable, it has not proved easy to specify how
this might be achieved. All manner of means of estimating costs work to
obfuscate the issue. In some countries governments were led into setting
up a competing rm; in New Zealand, for example, these appeared in
insurance, banking, mortgage provision, etc.
The third area of market failure is said to lie in public goods. A
public good is one whose consumption can be enjoyed by everyone
without any individuals consumption being damaged by any other.
An example commonly given is that of street lighting as compared,
say, with an ice cream. But how many public goods are there? An
instance that used to be given in textbooks was that of the light-
house. Yet even here, as Coase demonstrated in a famous article, light-
houses were formerly privately owned and operated successfully. There
were doubtless free-riders but the private lighthouses were nevertheless
successful.
16
Even supposing there were market failures of the kinds described, the
question is: what should be done about them? The usual immediate solu-
tion has been to substitute government for the market. But is this an
improvement? After all, governments fail too. How serious are such gov-
ernment failures? Are they greater or less than the market failures they
replace? The implicit assumption has often been of perfect government:
in other words, as Demsetz put it, the market is being compared unfairly
with nirvana.
17
Market failure in the nancial sector
Finance usually features when questions of market failure are discussed.
Finance used to be dismissed by many as essentially parasitic on the rest
of the economy, but the importance of nancial intermediation is now
widely accepted as being of key importance in the process of economic
16
R. H. Coase, The lighthouse in economics, Journal of Law and Economics 17 (1974),
35776.
17
Demsetz, Information and efciency, p. 21.
68 Forrest Capie
growth. In fact this notion that nance has a role in economic devel-
opment goes back a long way. Most writers point to Schumpeter as the
modern source. He argued that scarcity of nance was a serious obstacle,
and that the banking system was one of two key agents of growth, the
contribution coming essentially from deposit creation. A long list of con-
tributions to this literature followed. Hicks set out the view clearly when
discussing the mercantile economy: The basic need, on which the whole
of this nancial development is based, is the need for widening the circle
of credit-worthy borrowers.
18
He went on to argue that it was the appear-
ance of banking, which he maintained came before the Reformation, that
allowed capitalism to develop.
Recent contributions to this discussion have indicated that the ini-
tial degree of nancial depth signicantly predicted subsequent growth.
Wachtel and Rousseau on the USA, Canada, and Britain from 1871
onwards concluded that it was nancial development that caused
growth.
19
It does seem to be the case that the nancial system devel-
ops early and matures in the early stages of economic development,
and thereafter remains stable. So while there was once a debate about
whether nance followed growth or perhaps accompanied it, with only
a few economists and historians making a case for it preceding growth,
the consensus has now moved in favour of the latter. It is accepted that
nancial intermediation raises welfare, and allows the rm or individ-
ual to choose between present and future consumption according to
differential prices (interest rates) prevailing between the rm and the
market.
There is no doubt that nance is important so important, some would
have it, that it cannot be allowed to operate on its own without the guiding
hand of the state. For it is prone to failure. There are two main sources
of market failure said to be threatening in the area of nance. One is
an externality, and the other, a more recent addition to the attack, is
asymmetric information.
The externality is a potentially serious problem. In a commercial bank-
ing fractional-reserve system there exists the possibility of a loss of con-
dence and concomitant run on the banks. This can happen even in the
best-behaved systems. It does not require reckless lending. The exter-
nality is that if this does happen, there is a threat to the money stock;
and in modern economies with sticky wages that would produce a fall in
18
J. Hicks, A Theory of Economic Growth (Oxford, 1969), p. 77.
19
P. Wachtel and P. Rousseau, Financial intermediation and economic growth: a historical
comparison of the United States, United Kingdom, and Canada, in M. Bordo and
R. Sylla (eds.), Anglo-American Financial Systems. Institutions and Markets in the Twentieth
Century (Burr Ridge, Illinois, 1995).
output a depression. There is no room here to develop the argument
over the likely superiority of a completely free, unregulated banking sys-
tem such as was once in place in Scotland. It is sufcient to state that
there is evidence to suggest that perfectly competitive banking systems
could produce the necessary stability without any external interference.
But in any case with our current institutions there is a ready solution
to this particular case of externality. Indeed, institutions evolved to cope
with the problem. The solution is for the central bank or other comparable
agency to act as a lender of last resort: to provide the market with all the
liquidity required. Where this is done properly it escapes the problems
often cited problems of moral hazard, the difculty of distinguishing
between insolvency and illiquidity, the problem of too big to fail and so
on. It is better if the nancial system has learned prudence and been
allowed to evolve to a well-diversied structure.
The other problemarea for nance is said to lie in asymmetric informa-
tion. In all the models of competition used by economists, information
is assumed to be free. But there are costs, sometimes quite large costs, in
acquiring information. Asymmetric information is everywhere. When I
go to my local wine shop there is asymmetric information at least I hope
there is! However, I am happy that with sufcient wine shops available,
the competition will ensure that the seller does not take advantage of me
but rather demonstrates his expertise and persuades me to stay with him
as a customer.
Yet the issue of asymmetric information is said to be of more impor-
tance in nancial markets than in others. In nancial markets asset prices
do more than balance supply and demand. They provide signals to many
other differently informed market participants. If sellers have better infor-
mation than buyers about quality, there is the possibility that the sellers of
high-quality assets will subsidise other sellers leading to lemons being
traded. The issuers of new claims to raise funds generally have informa-
tional advantages over the providers of funds. The lenders might therefore
be over cautious, and so some worthwhile ventures may not get funds or
get them at higher rates than they should. The same answer still holds.
Competition will encourage fuller ow of information (and this could be
supplemented with requirements for fuller information). Furthermore,
search will continue until the marginal benet of the information is equal
to the marginal cost of acquisition.
Illustrations
Two areas of activity that are at the heart of the City of Londons
business illustrate some of the tensions that have featured in the
70 Forrest Capie
twentieth-century governmentmarket relationship. These are central
banking, and nancial intermediation as carried out in the commercial
banking sector.
The central bank need not be located in a states capital city, but is likely
to be in the nancial centre. Every central banks operations impinge
directly on the nancial markets, and it has obligations and responsibil-
ities to these markets. In turn, its every action is scrutinised by the markets
and interpreted by all the leading nancial institutions. Its freedom of
action is therefore important. How free of political interference is it?
The economy requires both monetary and nancial stability to allow it
to achieve the optimum outcome. It is generally regarded as the central
banks task to produce monetary stability and contribute to nancial sta-
bility. And yet the history of most of the twentieth century was of greater
monetary instability (and consequent price and nancial instability) than
had been the case in the preceding century. What had gone wrong? The
most commonly accepted answer is government intervention. Take rst
the part played by the central bank. What matters is its freedomto pursue
policies that will deliver monetary and hence price stability. It may oper-
ate within a rule such as the gold standard (decided on by government),
or be left to nd its own way. The extent of interference from govern-
ment is never easy to pin down. For example, in the nineteenth century
there was all the appearance of independence with the Bank of England,
a privately owned joint-stock company. It has been argued that such was
the social milieu that the idea of independence was less than it seemed,
and pressure on the Bank was easily brought to bear.
20
But this was less
important when the gold standard was the rule under which the Bank
operated. Even in 1914 when government had to take control of mone-
tary policy and the gold standard was effectively abandoned (though not
formally so until 1919), the Bank was allowed to retain the appearance of
at least a modicum of independence. After the First World War there was
a belief that the ination generated across many countries was a direct
consequence of the abandonment of the gold standard and the free print-
ing of money by governments seeking greater power over resources. The
mood at that time was therefore to restore the previous independence of
central banks and to resort to sound money.
However, the upheavals of the following decade culminating in the
great depression of 192933 were widely diagnosed as being a failure of
banking, and particularly of central banking. It is in the 1930s therefore
that the real beginnings of the loss of central bank independence can be
20
F. Fetter, The Development of British Monetary Orthodoxy, 17971875 (1965; Faireld,
New Jesey, 1978 edn).
found. That threat increased with the Second World War, and after that
war the capture of central banks by governments was common. Govern-
ments believed that central banks could be used to promote economic
growth and there was a failure of economic thinking involved in this.
The experience of ination that followed the nal break with gold was a
direct consequence of the lack of any anchor in the system by the end of
the 1960s. Ination worsened rose to higher and higher levels, and at
the same time became more variable until a point was reached when it
was recognised that a restoration of sound money was essential.
There had been one or two exceptions to the general case, such as that
of the Deutsche Bundesbank. Where there was acceptance of and desire
for sound money, greater central bank independence tended to prevail
and nations experienced superior price performance. Thus it was that
the best results were achieved by giving central banks the single task of
delivering a specied ination rate.
In Britain there may have been less independence than appeared to
be the case in the nineteenth century and even into the interwar years.
In the late 1930s Montagu Norman, Governor of the Bank of England,
said I am an instrument of the Treasury. However, the extent of Bank
independence went the other way too. For example, when the Bank was
nationalised in 1946, this was a less dramatic change than has often been
asserted. That said, there is no doubt that government dictated, and
monetary policy was completely politicised. It was also misguidedly used
for purposes for which it was not appropriate. What, of course, should
also be borne in mind is that almost coincident with nationalisation of
the Bank came the Bretton Woods monetary arrangements. These meant
that Britain largely lost control of monetary policy for the period from
around 1950 to the late 1960s. But for the twenty years after the col-
lapse of Bretton Woods in the early 1970s and the restoration of an inde-
pendent but government-controlled monetary policy, monetary stability
was poor.
Interestingly, in the late 1990s it was a Labour government that granted
a certain freedom of action again to the Bank of England operational
independence. To some extent this relative freedom was damaged by
transferring the Banks supervisory and regulatory roles to the new insti-
tution, the Financial Services Authority. Nevertheless, the move was seen
as a bold and unanticipated one. Labours constituency was not seen as
particularly inclined to non-inationary policies, whereas the Conserva-
tives might have been. The move looks rather to have been the triumph
of ideas rather than of interest groups. There was no lobbying. There
was, though, a need for New Labour to gain credibility in these markets.
And there had been at least a decade of discussion in policy circles on
72 Forrest Capie
the issue of independence. It seems to have been a combination of these
elements.
21
For most of the second half of the twentieth century the government
attempted to control monetary policy. How then was nancial interme-
diation affected? Financial intermediation is important to the efcient
functioning of the whole economy. Banks are central in the process, and
for most of the twentieth century have been by far the largest intermedi-
ary. Their efcient working is therefore important, and the question is:
how can that best be achieved? Is it best left to competition, as suggested
by conventional economic theory? Or are there reasons in the case of
banking for regulation to keep it from deviating to a dangerous path?
English banking was in its earliest phase relatively lightly regulated, and
then slowly regulated even less; and it moved from being prone to crisis
in the eighteenth century to being extremely stable in the late nineteenth
and twentieth centuries. Although the nancial system grew rapidly and
prospered through the eighteenth century, it was nevertheless dogged
by repeated nancial distress. The constraints placed on the banks pre-
vented them from taking many of the courses they otherwise would, and
contributed to this instability.
In the course of the nineteenth century English and British banking
(the two effectively came together with the Bank Charter Act of 1844
and the Joint Stock Banking Act) followed a path of lessening regulation.
First there was the allowance of joint-stock banking initially outside
London but then slightly later within London then the relaxation and
removal of the usury laws, a clearer denition of the gold standard, the
coming of limited liability, and easier access of the discount houses to the
Bank of England. This story should not be overdone, but that was cer-
tainly the general direction. One important move occurred in the opposite
direction. In 1844 the Bank of England was given the sole right of note
issue. But this was phased in. No new bank could issue its own notes,
and where a bank was acquired by another bank, as was increasingly the
case, it lost the right of issue. By the 1870s the extent of private issue was
tiny in relation to the total note issue.
Also, whereas in the eighteenth century English banking was made up
of a large number of small units in about 1800 there were approximately
800 as these were allowed the freedom to grow during the nineteenth
century they became increasingly large. Mergers of all kinds took place:
between two private banks; between two joint-stock banks; the acquisi-
tion of a private bank by a joint-stock bank; on occasion the acquisition of
21
M. King, The new Lady of Threadneedle Street: the triumph of ideas over interests?,
Central Banking 12 (2002).
a joint-stock bank by a private bank. The main point is that this increas-
ingly concentrated system was thoroughly diversied and brought great
stability. It has been accused of being overly conservative and denying
funds to certain parts of the economy; in other words there was said to
have been an efciency/stability trade-off. This is possible, though the
available evidence was never convincing and the argument has recently
been drifting in the other direction.
22
But it is difcult to put a value on
the stability to which their behaviour in large measure contributed.
The British nancial system from the 1870s was generally one of self-
regulation. Retail banking was distinct and separate fromwholesale bank-
ing and from the discount market. Thus the Accepting Houses Commit-
tee attended to the affairs of the wholesale banking sector, the merchant
banks. The London Discount Market Association looked after that part
of the market; and the Committee of the London and Scottish Clearing
Bankers took responsibility for retail banking. These were in effect clubs.
Clubs generally worked to control all the affairs of their members, from
entry into the business itself to the everyday behaviour of the member.
To an extent they limited competition, and by so doing the public paid a
higher price for the product than they otherwise would.
In banking there was no formal restriction of entry into the system, and
many banks were formed and some closed with every year that passed. But
without access to the clearing house it was impossible for a new entrant
to provide the same service at the same price as did existing banks. The
conclusion most commonly reached is that while the banks maintained
good behaviour and orderly business, the sector may not have been as
dynamic as was desirable.
Within this institutional context the Bank became a true lender of last
resort. It was able to act quickly and decisively as the accepted arrange-
ment with government was established a letter suspending the 1844
Act was always available, and indeed was offered to and rejected by the
Bank in 1878 and 1890. In the century after 1870 there is ample demon-
stration that the British nancial, and particularly banking, system was
enormously stable. That stability was due in some part to the operations
of the Bank of England; in part to structure; and in part to self-regulation.
The value of the currency was maintained, apart from wartime experi-
ence, for most of that period. More signicantly, there were no nancial
crises, that is no threat to the payments system. There were individual
failures among nancial institutions and exchange-rate difculties, but
no nancial crises properly dened.
22
F. Capie and M. Collins, Have The Banks Failed British Industry? (Institute of Economic
Affairs, Hobart paper 119, 1992).
74 Forrest Capie
Although banking around the world has generally been more highly
regulated than other parts of the economy, the difference between the
two was perhaps less in evidence in Britain, at least until the latter part
of the twentieth century. It may be attributable to the early start and the
long learning process that produced a stable systemby the late nineteenth
century.
However, in line with moves elsewhere after the Second World War a
growing number of controls was introduced. These ranged from instruc-
tions on to whom to lend, through the imposition of cash and liquidity
ratios, to ceilings on lending. These characterise the 1950s and 1960s.
The likelihood is that it was regulation that brought the difculties expe-
rienced by banking in the 1970s. But as ever these difculties gave rise to
new regulation, and since that time regulation has increased in a period
when there was more generally increasing liberalisation of economies.
And where the system was once enormously stable it clearly became less
so. In the closing years of the century the regulation of nance was grow-
ing rapidly and becoming extremely onerous.
Conclusion
The basic task of the City is the transmission of funds from savers to
borrowers. In the institutional structure inherited from the nineteenth
century it is the job of government to provide monetary stability either
through a rule such as the gold standard, or by some other means
so that nancial intermediation can proceed in its most efcient way.
This requires in the rst instance nancial stability. This in turn requires
prudent institutions backed by a lender of last resort. In Britain all of this
was learned in the nineteenth century, and in the twentieth century the
system did what it was supposed to do.
However, from early in the century government intervention began
to increase. This started not unnaturally in the First World War, grew
in the 1930s with exchange controls, and was extended further, again
not surprisingly, in the Second World War. But after that, instead of
government retreating, it advanced. An array of measures including direct
controls on banking, a preoccupation with the defence of sterling and a
general desire for control characterised the period.
As we have noted, the economy did remarkably well in spite of all the
supposed faults. The City of London has been accused of conservatism
and relying on personal contact and trust. That is of course a very efcient
framework within which to work. With trust there is no need for contracts,
and codes of law and so costs are reduced.
In terms of the themes and questions of this book, it is interesting
to note that there was little in the way of lobbying on any issue in the
City across the century (unless it can be detected at some very subtle
level). Even in the late twentieth century on the issue of central bank
independence which could have been seen to benet nancial institutions
of all kinds, there was no evidence of such pressure. This relative scarcity
of lobbying in Britain led Friedman to make the suggestion that Britain
had institutions that produced a largely incorruptible civil service, with
limited scope for action, but with great powers of decision within those
limits. It also produced a law-obedient citizenry that was responsive to
the elected ofcials operating in turn under the inuence of the civil
service.
23
He went on to contrast this with the absence of such a tradition
in the United States. He believed that it was nineteenth-century laissez-
faire policies that produced these institutions. This could help explain
the lack of capture in the regulatory process in Britain for most of the
twentieth century.
There will always be attacks on the market. Currently, the line of attack
is that corporations have responsibilities other than to their owners, to a
range of stakeholders employees, customers, and so on. But surely it
should be obvious that rms should treat their employees well in order to
get the best fromthemover the long run. Equally, it shouldbe obvious that
the way to maximise prots is to respond to customer needs. Yet these two
categories have now been labelled stakeholders and are said to deserve
some other kind of consideration. Furthermore, the corporation is now
said to have social and environmental responsibilities. A recent book has
addressed all these questions, but this will not prevent the arguments
rolling on.
24
23
M. Friedman, John Maynard Keynes, Federal Reserve Bank of Richmond Quarterly
Review 83 (1996), 22.
24
D. Henderson, Misguided Virtue. False Notions of Corporate Social Responsibility
(Wellington, New Zealand, 2001).
4 Financial elites revisited
Youssef Cassis
Throughout the twentieth century the issue of nancial elites has been
present in the debates over the relationship between the British govern-
ment and the City of London, from J. A. Hobsons Imperialism (1902) to
Will Huttons The State Were In (1995). Admittedly these two works, and
others in the intervening period, are more generally concerned with nan-
cial power, with the Citys pervasive inuence at the economic, social and
political levels, and with its ability to promote its own interests. Yet this
power has been embodied by a group of people the merchants, bankers,
nanciers, stockbrokers and other business people in charge of the major
nancial institutions operating in the Square Mile, in other words the
nancial elites. Assessing these two aspects involves a difference in genre.
It is one thing to analyse the political inuence of the City of London,
even as expressed by its leading protagonists. It is another to conduct a
social analysis of the main characteristics displayed by this group, in terms
of background, education, network of relationships, business interests,
political leanings, and cultural values.
1
Both approaches have been com-
bined to a greater or lesser extent in a number of studies. Nevertheless,
social analysis of an elite group does not automatically translate into an
explanation of its power to inuence. This discrepancy must be borne in
mind, given both the general questions raised in this volume and the fact
that nancial elites will be considered in this essay from a social point
of view. In the rst two parts, I will review the major landmarks in the
discussion of nancial elites during the twentieth century, highlighting in
particular the thematic standpoints and methodological approaches. In
the third part, I will discuss the major changes in the composition and
social status of the nancial elites that took place in the course of the
twentieth century. The fourth part will consider the peculiarities of the
British nancial elites in a European comparative perspective. Finally, I
will conclude by returning to the question of the political inuence of
nancial elites.
1
One could also talk of a sociological or a prosopographical analysis, the latter having been
undertaken mainly for earlier, pre-1914 periods.
76
Financial elites revisited 77
The origins of intercorporate analysis
To the extent that nancial elites have had the power to inuence govern-
ment policy, this power has rested on a specic combination of economic,
social and political assets. The position deriving fromsuch a combination
has primarily been approached in terms of interpersonal and intercorpo-
rate relationships. In the last two or three decades, this has become a
major eld of research in the social sciences, developed mostly by soci-
ologists and political scientists, who have given it various labels such as
social network analysis or the structural analysis of business.
2
This type
of socio-political study of the business world is based mainly on the anal-
ysis of interlocking directorships. Britain has featured fairly strongly in
such studies, as a result both of the increased concentration of the British
economy and of the development of this specic eld of inquiry as an
academic sub-discipline, especially in the United States. To what extent
are these analyses rooted in earlier studies published in the rst half of
the twentieth century? There have been some great inspirational studies,
such as Hobsons Imperialism, or Hilferdings Finanzkapital.
3
Some lesser
works have been either acknowledged or simply ignored in academic
publications; others have understandably been forgotten. According to
John Scott, the rst analysis of interlocks to be carried out in Britain
was Hobsons analysis of overlapping interests between City nanciers
and South African mining enterprises in his Evolution of Modern Capital-
ism (1906).
4
This, however, consisted of just two pages and one table.
Only one other reference to a pre-Second World War work appears in
the modern academic literature on the subject: Simon Haxeys Tory M.P.
(1939). This book traces a number of family and business connections
of Conservative MPs, but is not concerned primarily with the City elites,
and remains largely impressionistic despite its wide use of tables and
diagrams.
So far as I am aware, the very rst analysis of the interpersonal and
intercorporate relationships of the City banking elite was undertaken by
Percy Arnold in a little book published in 1938, The Bankers of London.
5
One would expect to see this routinely quoted in subsequent publica-
tions on the subject, yet it seems to have passed totally unnoticed. Given
its position in the development of this particular literary and academic
2
See for example M. S. Mizruchi and M. Schwartz (eds.), Intercorporate Relations. The
Structural Analysis of Business (Cambridge, 1987).
3
R. Hilferding, Das Finanzkapital (1910; Frankfurt, 1968); English translation: Finance
Capital. A Study of the Latest Phase of Capitalist Development (1981).
4
J. Scott, Corporate Business and Capitalist Classes (Oxford, 1997), p. 116.
5
P. Arnold, The Bankers of London (1938).
78 Youssef Cassis
genre, this work and its author deserve some attention. Percy Arnold was
a journalist, though of the academic type, having taken a degree in eco-
nomics, as an evening student, at the London School of Economics in
1932.
6
He joined London General Press after a commercial apprentice-
ship and at the time of writing the book was assistant editor of Branch
Banking: the Practical Journal of Branch Bankers Throughout the World. He
was also a member of the New Fabian Research Bureau, a think tank, to
use the modern terminology, formed in 1931 by G. D. H. Cole,
7
and was
involved in the Bureaus working party on banking. Arnold was therefore
not an isolated or marginal gure. He was at the heart of Labour think-
ing on banking and monetary matters. His publisher, the Hogarth Press,
established by Leonard and Virginia Woolf in 1917, was prestigious and
inuential.
8
Leonard Woolf personally gave his assent to the publication
of The Bankers of London, after taking Counsels opinion regarding the
possibility of libel.
9
Arnolds purpose was ambitious: in the letter sub-
mitting his manuscript he claimed, borrowing Woolfs words, that his
book was a study of the matrix of the City of London.
10
By todays standards, Arnolds method appears fairly elementary. It
consists mainly of establishing lists of the directors of the ve sets of
banking institutions considered in the book
11
who simultaneously held
directorships of other nancial institutions. Arnolds focus of attention is
on the individuals holding multiple directorships, whose names are always
given, rather than on the links between institutions established through
these people, as has become more common in recent academic studies.
In that respect, Arnold does not attempt to draw any form of diagram
of interconnectedness between City institutions. His conclusions might
also appear simplistic, for example that many bankers were directors of
more than one bank and not a fewof insurance companies; or that acting
through the mechanismof banks and nance houses those who direct the
policy of the different institutions are very often the same men. But they
are based on the rst systematic analysis of interlocking directorships
12
ever undertaken in Britain. From this perspective, Arnold was primarily
6
London School of Economics register, 18951932.
7
G. D. H. Cole, one of the major intellectuals of the Labour movement, had been head
of the Fabian Research Department, but had grown impatient at the Fabian Societys
failure to offer concrete solutions to the depression.
8
J. H. Willis, Leonard and Virginia Woolf as Publishers: the Hogarth Press 19171941
(Charlottesville, 1992).
9
Woolf to Arnold, 15 July 1938, Hogarth press archives 5, University of Reading Library.
10
Ibid., Arnold to Woolf, 4 May 1938.
11
The Bank of England, the merchant banks, the largest private bank (Glyn, Mills & Co.),
the discount houses, and the Big Five commercial banks.
12
Arnold actually uses the word interlock in the book, p. 108.
interested in the concentration of nancial power rather than in the rela-
tionships between City and industry. Other variables usually considered
in sociological analyses of business leaders, such as education or family
connections, are dealt with in an impressionistic rather than a systematic
way.
The Bankers of London has obviously had a very limited impact. There
are several reasons for this. In the rst place, this slimbook (108 pages) fell
somewhat short of its objectives. Whatever its insights about the questions
raised by modern socio-political analysis (what we would today call the
structure of interests and the governance of City institutions), it remained
more descriptive than analytical, with no real conclusions being drawn
fromthe data. Secondly, and more importantly, it fell between two stools,
being neither a political pamphlet (despite an implicit political agenda)
nor a proper academic study (despite an attempted conceptual frame-
work). Arnold himself worked between the world of banking (as editor of
a banking journal) and the world of politics (through his Fabian connec-
tions). Thirdly, the political climate in the interwar years was not really
propitious for the reception of this type of analysis, despite the controver-
sies about the return to the gold standard in 1925, the denunciation of
a bankers ramp in 1931, and the debates about the nationalisation of
the Bank of England in the late 1930s. This was the opposite of what was
happening in France where the conspiracy theory of the 200 families
enjoyed great popular success, even though the countrys ruling class was
far less homogenous than its British counterpart. For future students of
intercorporate relationships, The Bankers of London could stand neither as
a book of polemical politics nor as a pioneering work of structural analysis.
Yet for all its shortcomings, it should be included in any historiographical
study of the subject.
The analysis of interpersonal and intercorporate relationships, whether
in popular, political or academic form, did not really start before the
mid 1950s. In 1955, Sam Aaronovitch published Monopoly. A Study of
British Monopoly Capitalism, an analysis of British big business from a
MarxistLeninist point of view relying partly on interlocking director-
ships. Aaronovitch continued his analysis in subsequent works, including
his best-known book, The Ruling Class (1961), but his work was not pri-
marily concerned with the specic role of banking and nance in British
capitalism.
The rst socio-political analysis of the City of London is usually con-
sidered to be the article published in 1959 in The Manchester School by
two sociologists, Tom Lupton and C. Shirley Wilson, entitled The social
background and connections of top decision makers. Signicantly, this
academic inquiry was related to a political debate, the so-called Bank
80 Youssef Cassis
Rate Tribunal of 1957, which investigated whether there was any truth
in the allegations that information about the raising of the Bank Rate was
improperly disclosed. The aimof the authors was to enquire whether the
persons whose names appeared in the Tribunal evidence were linked to
each other by relationships of friendship, kinship, afnity, common mem-
bership of associations, and so on. Their method consisted in the by now
well-tested exercise of gathering and processing data on the education
(both school and university), club membership, and kinship connections
of six categories of top decision makers: cabinet ministers, senior civil
servants, directors of the Bank of England, directors of the Big Five,
directors of City rms (i.e. mainly merchant banks), and directors of
insurance companies. Unlike previous studies, that of Lupton and Wilson
is not based on interlocking directorships; indeed, this line of inquiry is
not even included in the analysis. On the other hand, they provide the
rst systematic analysis of the social and educational background of the
City elite, which was to be developed in later studies. The Bank Tribunal
and Lupton and Wilsons ndings were echoed in popular books, such
as Paul Ferriss The City (1961), and Anthony Sampsons more famous
Anatomy of Britain (1962). However, in terms of paternity, the articles
by Lupton and Wilson and by Arnold form the two bases social back-
ground and connections, and interlocking directorships on which have
rested the modern sociological and historical studies of nancial elites.
Several academic investigations followed from the late 1960s onwards,
as the structural analysis of business established itself as an academic
discipline, with more emphasis being put on intercorporate than on inter-
personal relationships. An epistemological discussion of the development
of this eld is far beyond the scope of this chapter, the more so as it
has covered the entire business spectrum rather than the nancial world
per se. However, some studies deserve a special mention. One is Richard
Whitleys contribution on the City and industry to Philip Stanworth and
Anthony Giddenss inuential volume on Elites and Power in British Society
(1974).
13
Whitley questioned whether the traditional opposition between
City and industry had disappeared with the rise of giant companies, con-
cluding (through an analysis of educational background, social relation-
ships, kinship links, and interlocking directorships) that the City and
Industry were in fact very close. This view tended to be dominant in
the 1960s and 1970s, with giant industrial companies facing a still more
inward- than outward-looking City of London. In the same volume, Stan-
worth and Giddens provided a demographic prole (including social ori-
gins, educational background, career patterns, and political and judicial
13
R. Whitley, The City and industry: the directors of large companies, their characteristics
and connections, in P. Stanworth and A. Giddens (eds.), Elites and Power in British Society
(Cambridge, 1974), pp. 6580.
posts) of company chairmen, an elite within the elite, within which
the banking sector remained ahead of most other groups.
14
The issue of
business and politics was tackled more directly by Michael Useem who
argued a decade later that a politicized leading edge of the leadership of
a number of major corporations has come to play a major role in den-
ing and promoting the shared needs of large corporations in two of the
industrial democracies, the United States and the United Kingdom . . .
This politically active group of directors and top managers gives coher-
ence and direction to the politics of business.
15
His analysis is mostly,
though not exclusively, based on interlocking directorships, with no par-
ticular emphasis on the role of nancial elites. The most prolic British
writer on the subject, however, has undoubtedly been the sociologist John
Scott, perhaps best known for his Corporations, Classes and Capitalism, a
discussion of ownership and control of the large corporations in the indus-
trialised world, rst published in 1979 and re-issued several times since.
16
Scott also carried out empirical research on interlocking directorships in
British industry and contributed to the methodological development of
the so-called social network analysis. It should be noted that all these
socio-political studies, conducted by social scientists rather than histori-
ans, have tended to be cautious in their conclusions regarding the power
to inuence of the City elites, though with probably more emphasis on
its relative strength in more recent works.
The historical approach
Historical studies have been less numerous and followed rather than run
parallel to those of social scientists. When historians started being inter-
ested in the City of London about a quarter of a century ago, one main
concern dominated the agenda: the City and industry. This was a broad
and multifaceted theme, which should not be reduced to the much-
debated question of the provision of funds to manufacturing industry.
It included the equally debated issue of Britains economic policy during
much of the twentieth century, in particular the alleged priority given to
nancial interests over industrial interests. In the early 1980s, this ques-
tioning appeared especially relevant in view of the respective fortunes of
the two sectors: a booming City which had recovered its position as one
of the worlds leading nancial centres sharply contrasted with a desolate
14
P. Stanworth and A. Giddens, An economic elite: a demographic prole of company
chairmen, in Stanworth and Giddens (eds.), Elites and Power, pp. 81101.
15
M. Useem, The Inner Circle. Large Corporations and the Rise of Business Political Activity
in the US and the UK (Oxford, 1984), p. 3.
16
The latest edition was published under the title Corporate Business and Capitalist Classes
(Oxford, 1997).
82 Youssef Cassis
industrial sector epitomising the countrys long-term relative economic
decline. All this meant, however, that unlike social and political scientists
before them, historians have been little concerned with issues such as
monopoly capitalism and nance capital.
One area of research was to ascertain to what extent bankers, nanciers
and other City men had formed a distinct economic elite and what had
been their links with other elite groups, in particular the political elite.
Another area of investigation concerned the factors which could explain
such a strong nancial performance, and the fact that this sector had
apparently been immune to the type of entrepreneurial failure observ-
able elsewhere. So far as socio-historical analyses of elites are concerned,
such works as WilliamRubinsteins analysis of the very wealthy in Britain,
Michael Lisle-Williamss study of merchant banking dynasties, or my
own work on City bankers, addressed these issues, albeit in very differ-
ent ways.
17
Rubinsteins work cannot be considered a socio-historical
analysis of specically nancial elites. However, by emphasising the high
proportion of bankers and nanciers among the very wealthy, he con-
tributed decisively to the launch of the debate on the role of the City
in the British economy and the position of these elites in the structure
of the English middle and upper classes in the nineteenth and twentieth
centuries. Lisle-Williamss questioning is more characteristic of the soci-
ologists than of the historians approach, in particular his use of social
theory to account for the social status of merchant bankers and the sur-
vival of their rms under family ownership well until the 1960s. My own
study of bankers in the golden age of the City of London was a global
study of this socio-professional group, encompassing its economic, social,
political and cultural aspects, though it only covered the twenty-ve years
preceding the First World War.
Few historical studies have provided a social radiography of other
segments of the nancial world in the last two centuries.
18
However, the
concept of gentlemanly capitalism, coined by Peter Cain and Anthony
Hopkins in the mid 1980s, provides a useful synthesis of the research
17
W. D. Rubinstein, Men of Property. The Very Wealthy in Britain since the Industrial Revolution
(1981); M. Lisle-Williams, Beyond the market: the survival of family capitalism in the
English merchant banks, and Merchant banking dynasties in the English class structure:
ownership, solidarity and kinship in the City of London, 18501960, British Journal of
Sociology 35 (1984), 24171, 35362; Y. Cassis, City Bankers, 18901914 (Cambridge,
1994; French edn 1984).
18
The more signicant contributions include J. Harris and P. Thane, British and Euro-
pean bankers, 18801914: an aristocratic bourgeoisie?, in P. Thane, G. Crossick
and R. Floud (eds.), The Power of the Past: Essays for Eric Hobsbawm (Cambridge, 1984),
pp. 21534; andA. Howe, Fromoldcorruption to newprobity: the Bank of England
and its directors in the age of reform, Financial History Review 1 (1994), 2341.
undertaken in the eld in the previous two decades.
19
Cain and Hopkins
were primarily concerned with explaining British imperial expansion, but
in order to do so they brought together a vast array of works emanating
from all historical specialisms, as well as other social sciences, which had
emphasised the decisive importance in the British past of the nancial sec-
tor, and more generally of the service industries, based in the south east.
The concept of gentlemanly capitalism can be used at several analytical
levels. As far as nancial elites are concerned, it encapsulates most of the
characteristics of this particular group, whether in social terms (close-
ness to landed interests, understood in the broad sense of the word) or
in professional terms (wealth and status); it makes it possible to identify
the group and to distinguish it from other economic elites both in Britain
and in other industrialised countries. It is thus a highly operative concept
for the purpose of social analysis.
This is not to say that there has been a unanimous view of the mat-
ter. The composition of the nancial elites (and more generally of the
gentlemanly capitalists), their degree of openness to a new meritocracy,
their links with the old aristocracy, the distance which has separated them
from the industrial elite, both in terms of wealth and social status all
these issues have given rise to lively controversies, and warnings against
the emergence of a new orthodoxy.
20
Once again, a distinction should be
made between analysing the social structure of a socio-professional group
on the one hand, and its political inuence on the other. The question of
the political inuence of nancial elites has remained fairly contentious;
but disagreements about the social characteristics of nancial elites have
mostly been a matter of emphasis, and a broad consensus has emerged
about their particular place in British economy and society, a consen-
sus reected in many respects in David Kynastons impressionistic but
powerful portrait of the group.
21
This is not the place to rehearse these
19
P. J. Cain and A. G. Hopkins, British Imperialism: Innovation and Expansion 16881914
and British Imperialism: Crisis and Deconstruction 19141990 (both 1993). The concept of
gentlemanly capitalism rst appeared in Cain and Hopkinss two articles: Gentlemanly
capitalismand British expansion overseas, I. The old colonial system, 16881850, EcHR
39 (1986), 50125 and Gentlemanly capitalismand British expansion overseas, II. New
imperialism, 18501945, EcHR 40 (1987), 126.
20
Among the numerous publications on these issues, see S. D. Chapman, Aristocracy
and meritocracy in merchant banking, British Journal of Sociology 37 (1986), 18093;
Y. Cassis, Merchant bankers and City aristocracy, and S. D. Chapman, Reply to
Youssef Cassis, British Journal of Sociology 39 (1988), 11420, 1216; M. J. Daunton,
Gentlemanly capitalism and British industry, 18201914, Past and Present 122
(1989), 11958; W. D. Rubinstein and M. J. Daunton, Debate: Gentlemanly capital-
ism and British industry, Past and Present 132 (1991), 15070, 17087; R. E. Dumett
(ed.), Gentlemanly Capitalism and British Imperialism: the New Debate on Empire (1999).
21
Kynaston, City of London.
84 Youssef Cassis
well-known debates but rather to wonder whether they could be the likely
starting point of historical research undertaken in the early years of the
twenty-rst century. Revisiting nancial elites, it is not surprising to nd
that the climate of debate has changed in the last twenty to thirty years.
In the rst place, the controversies surrounding the division between
City and industry have, if not entirely disappeared, certainly lost much of
their intensity. There are many reasons for this. Some have to do with the
progress of historical research, which has dispelled a number of myths,
for example the lack of adequate provision of funds to industrial com-
panies.
22
More importantly, the very nature of industry and its role in
advanced societies has profoundly altered in the age of the third indus-
trial revolution. Whether one takes the view that industry hardly matters
any more, or that the frontiers between manufacturing and services have
become increasingly blurred, the fact is that the terms of the old debate
have become markedly less relevant to current concerns.
Secondly, the very success of British nance can today be questioned
in a way that would not have been thinkable some twenty years ago.
The City might be enjoying a position reminiscent of its pre-1914 glory
days,
23
but what about the performance of British nancial institutions
within this context? One of the objectives of the Big Bang in 1986 was to
allow the emergence of a few British global players in the eld of invest-
ment banking; and during the run-up to Big Bang several clearing banks
(especially Barclays and Natwest) and merchant banks (in the rst place
Warburg, Kleinwort and Morgan Grenfell) clearly showed that this was
their intention. So far, the result is far from having met the expectations.
The clearing banks have retreated from investment banking, and two of
them (Midland and Natwest) lost their independence in the 1990s. The
fate of the merchant banks, once the ower of the City, has been ever more
dramatic, with virtually all the leading houses being taken over by foreign
banks. Again, this is not the place to discuss the long-term consequences
of the so-called Wimbledonisation of the City of London, but it cannot
be denied that the retrenchment or loss of independence of British nan-
cial institutions has been a mark of entrepreneurial or managerial failure
rather than success.
24
To what extent this might lead to reconsideration
of nancial elites in a different light remains to be ascertained.
22
There is a huge literature on the subject. For a survey of the most recent contributions
to the debate, see Y. Cassis, Banque et industrie en Angleterre, 18701950: mythes et
r ealit e, in P. Marguerat, L. Tissot and Y. Froidevaux (eds.), Banques et entreprises indus-
trielles en Europe de lOuest, XIXeXXe si` ecles: aspects nationaux et r egionaux (Neuch atel,
2000), pp. 1728.
23
For a recent account, see R. Roberts and D. Kynaston, City State. How the Markets Came
to Rule Our World (2001).
24
See P. Augar, The Death of Gentlemanly Capitalism. The Rise and Fall of Londons Investment
Banks (2000).
Thirdly, there have been changes in the historiographical context. After
decades of neglect by social historians whose paramount interest lay with
labour history, the history of elites gathered momentum in the 1970s,
reached a peak in the late 1980s and has since then been losing some
ground. This relative decline can be attributed partly to our greatly
improved knowledge of the subject. With many gaps having been lled,
research interests have tended to move to other areas.
25
The same can
be said about methodology: the prosopographical approach in particu-
lar, though still a powerful instrument, has produced results which do
not need to be repeated indenitely. This has coincided with the rise
of cultural history, which in many respects has encroached on what
has traditionally been the preserve of social history. Even though the
two specialisms should in no way be seen as antagonistic or mutually
exclusive, the study of representations has tended to overshadow the
collective biography approach, based on the statistical analysis of social
indicators. At the other end of the spectrum, business history, as an aca-
demic specialism, has grown closer to the eld of management studies,
including business leaders in its approach.
These are not entirely new developments nor do they contradict or
invalidate the social history of nancial elites. There remain huge gaps in
our knowledge of the City nancial elites. Yet few attempts at lling them
have been made in recent years, whether by sociologists or historians.
The latest studies have been more interested in representations than in
social structure, as witnessed for example by the City Lives project,
consisting of a series of interviews conducted by Cathy Courtney and
Paul Thompson,
26
which tried to capture how the nancial City works,
its everyday culture, and the background and attitudes of the people who
run it.
27
On a grander scale and spanning a far longer historical period
(and thus requiring the use of personal papers as well as interviews),
this has also been one of the hallmarks of David Kynastons historical
approach. Future studies of nancial elites, from both the business and
cultural sides, will have to address these trends.
The changing nature of nancial elites
Ahistory of Britains nancial elites in the twentieth century thus remains
to be written. What can be attempted in the current state of historical
25
This has, for example, been the case in Germany with the long-standing debate about
the role of the bourgeoisie in German historical development.
26
C. Courtney and P. Thompson, City Lives (1996).
27
P. Thompson, The pyrrhic victory of gentlemanly capitalism: the nancial elite of
the City of London, 194590 (two parts), Journal of Contemporary History 33 (1997),
283304, 42740.
86 Youssef Cassis
research is a discussion of the composition of these elites and in particu-
lar of the changing nature of their social characteristics. If the power to
inuence derives in any way from a specic set of social attributes, then
this should surely be the precondition of any reection on the matter.
Financial elites have been made up of three main groups: the partners
of the private banks, and the directors and the senior managers of the
joint-stock banks. The respective position of each group has of course
altered since the beginning of the nineteenth century, though not as rad-
ically as could be expected given the economic and social changes which
have taken place in the last 150 years. Three main turning points can be
detected. The rst took place in the 1880s and 1890s, with the advent
of the corporate economy; the second in the 1960s, with the profes-
sionalisation of the nancial elites; and the third in the 1990s, with the
internationalisation of the City of London.
Until the last quarter of the nineteenth century, the dominant group
was undoubtedly the private bankers, principally the partners in private
deposit banks. As Walter Bagehot wrote: the name London banker
had especially a charmed value. He was supposed to represent, and often
did represent, a certain union of pecuniary sagacity and educated rene-
ment which was scarcely to be found in any other part of society.
28
The
amalgamation movement in English banking, which gathered pace from
the 1880s, sounded the death knell of private banks. Nearly all of them
were taken over by the joint-stock banks and by 1914 only one (Glyn,
Mills, Currie & Co.) was still a member of the London Clearing House.
Yet this did not fundamentally alter the characteristic of the nancial
elites, where the private element remained dominant. This was due to
two main reasons. The rst was the rise of a new elite of private bankers
the merchant bankers. Afewof them(especially Rothschilds and Barings)
had been rich and powerful since the early nineteenth century. But as a
group, they enjoyed a real golden age between 1870 and 1914, as London
became the undisputed nancial centre of the world. Both their number
and the volume of their operations increased during this period, and
they became an integral part of the English banking system as the inland
bill of exchange was replaced by the international bill of exchange. In
particular, merchant bankers were able to maintain their hold on two
nancial activities, which were at the very heart of Londons role as the
worlds nancial centre: the acceptance business and the issuing business.
They survived the First World War and the world economic depression,
turned their attention to domestic nance in the 1930s, and re-emerged
28
W. Bagehot, Lombard Street. A Description of the Money Market (1873; 2nd edn 1910),
p. 270.
after the Second World War in control of another central activity of the
City: corporate nance.
The second reason was the persistence of private interests within the
joint-stock banks well into the 1950s. On the one hand, several dynasties
of private (deposit) bankers were able to survive the disappearance of
the private banks. Barclays Bank is of course the ultimate example of a
leading joint-stock bank remaining inprivate hands; but members of other
families, such as the Smiths, adapted to the new banking structures and
emerged at the head of joint-stock banks while retaining outside interests.
On the other hand, the boards of directors of the London-based joint-
stock banks were mostly made up of partners of merchant houses and
merchant banks, as well as former private bankers. There was thus a great
deal of overlap between two of the groups making up the City nancial
elites, the directors of the joint-stock banks and the partners of private
rms. Together, these private interests, where merchant bankers had
clearly become the dominant force, maintained an overall control over the
nancial side of the City. In particular, they were massively represented
on the boards of directors of the major nancial institutions (clearing
banks, overseas banks, insurance companies, investment trusts and other
nance companies) as well as on the Court of directors of the Bank of
England.
Paradoxically, the advent of the corporate economy did not coincide
with the rise of a new managerial elite within the world of British nance.
Throughout this period, senior managers remained, as a group, in the
shadowof the two other components of the nancial elites, especially fur-
ther down the hierarchical ladder. This raises the question of the degree of
seniority required for consideration as a member of the elite. The answer
can only be empirical or even intuitive. Taking status and power as the
main attributes of an elite position, this would reduce those eligible either
to a single general manager or, as the banks expanded in size, to a team
of three or four people bearing the title of general manager, chief general
manager or managing director. Senior managers were not automatically
members of the board of directors so there was little overlap between
these two groups. All this seems to conrm the well-known separation
between gentlemen and players within British business. However, the
leading gures in the clearing banks tended to be professional bankers
who were appointed executive chairmen of their bank, such as Holden at
the Midland before 1914 or Goodenough at Barclays Bank in the interwar
years.
This structure, which was put in place around the turn of the century,
only began to alter in the 1960s, with the professionalisation of the nan-
cial elites. The main change was the gradual weakening of the private
88 Youssef Cassis
element within these elites. On the one hand, the merchant banks lost
their private banking character. Most of them had converted into limited
companies after the war and recruited a growing number of their direc-
tors fromoutside the founding families as their business expanded and the
number of their directors increased signicantly. At Schroders, for exam-
ple, the number of directors rose from twenty to thirty-three between
1962 and 1973.
29
On the other hand, the representation of private inter-
ests on the board of the major nancial institutions decreased substan-
tially. The number of merchant bankers amongst the directors of the
Bank of England fell from thirteen to seven (out of twenty-ve) between
1920 and 1940 and then to four (out of eighteen) in 1960 and 1980.
The board of directors of the clearing banks included a greater number
of representatives of leading British companies (for example BAC, Red-
land, British Steel, ICI, Hawker Siddeley, W. H. Smith, Fisons, and BAT
at Lloyds in 1972). At the same time, a greater proportion of senior man-
agers had seats on the board (for example two former chief executives,
the current chief executive and his deputy, as well as the general managers
for domestic banking, management service, and personnel at Natwest in
1972). These two groups made up the bulk of the boards of directors of
the clearing banks, with only a handful of seats left for merchant bankers
whose representation tended to become akin to that of any other nancial
company. There was thus a homogenisation of the nancial elites, a con-
vergence of its various components towards a single group: the directors
of leading nancial institutions. Yet differences lingered. The distinction
between gentlemen and players had not entirely disappeared and was
compounded by the cultural differences between merchant banking and
commercial banking, in particular as far as working patterns, risk taking
and remuneration were concerned. There is no doubt that a private even
an individualistic tradition lived on in the City, not only through mer-
chant banking but also through other groups which could be considered
as being on the fringes of the nancial elites, above all stockbrokers.
The last turning point, which occurred during the 1990s with the ever-
increasing internationalisation of the City of London, is still difcult to
appreciate from a historical perspective. However, three points can be
clearly established. The rst is the acceleration of the trend described
earlier towards the homogenisation of the nancial elites, especially as
competition intensied after the Big Bang in 1986. The second point
is the growing presence of foreign banks in London and, in the last few
years, the virtual disappearance of a domestically ownedinvestment bank-
ing industry whose leaders formed a specic component of the British
29
R. Roberts, Schroders. Merchants and Bankers (1992), p. 426.
nancial elite. The obvious question that arises is to what extent the
leaders of foreign-owned institutions can be considered as part of this
elite. The attitude of the Bank of England is worth noting. During the sec-
ondBaring crisis, inFebruary 1995, discussions were heldinthe City as to
whether Barings should be saved. As David Kynaston rightly points out:
Signicantly the City still meant, in the eyes of the Bank of England,
which convened the emergency meetings, only the British banks, with
the American, European and Japanese banks all excluded.
30
The third
point concerns the remuneration awarded to a section of the City, with
an estimated 1,000 millionaires working in the Square Mile in the late
1990s.
31
However, not all of them held a position which would qualify
them as members of the nancial elites, i.e. director of a major nancial
institution. This raises the question of the boundaries of the nancial
elites (should lower ranks, such as associate director or director of sub-
sidiary companies be included?) and that of the relationships between
wealth and status.
Has the social status of nancial elites changed accordingly? The con-
clusions I reached regarding City bankers in the Edwardian age were
threefold. Firstly, an aristocracy of the City made up of the leading
merchants, merchant bankers and former private bankers can be clearly
identied. Secondly, this City aristocracy merged on equal terms with
the landed aristocracy to form a renewed elite which added the nan-
cial power of the City of London to the prestige of the old aristocracy.
And thirdly, this elite did not, on the whole, include industrialists from
the north of the country. This City aristocracy broadly corresponds to
the private interests referred to above, and its unique social status was
clearly related to the status enjoyed by the landed aristocracy in English
society until the First World War.
A turning point took place in the 1920s. It was partly the result of the
decline of the landed aristocracy, which accelerated after the war. More
importantly, the 1920s witnessed the gradual integration of top industri-
alists into the social elite. British business became more centralised, with
several large companies moving their head ofce to London or, especially
in the new industries, settling from the start in the capital. Such major
companies as BP, Courtaulds, GEC, GKN, ICI, Shell, Unilever, and
Vickers all had their head ofce in London. Top industrialists were now
much closer to the countrys social and political heart, including a resi-
dence in London or the Home Counties and membership of a London
club. Education remains a useful indicator of social status: the percentage
30
Kynaston, City of London, IV, p. 762.
31
D. Hobson, The National Wealth. Who Gets What in Britain (1999), p. 536.
90 Youssef Cassis
of public-school educated heads of industrial companies rose from18 per
cent in 1907 to 37 per cent in 1929, and stabilised thereafter.
32
There
is no doubt that the nancial elites remained more solidly entrenched in
the Establishment, as witnessed by percentages of attendance at major
public schools, membership of London clubs, and other social indicators,
including kinship. However, the main social cleavage within the business
world was no longer between nance and industry, but rather between
the leading City institutions (especially the big ve and the top merchant
banks) and a group of London-based major industrial companies on the
one hand, and provincial industry together with the lower echelons of
commerce and nance on the other.
Within the nancial elites, a social divide continued to separate the
representatives of the private interests from the salaried managers, with
the directors of the joint-stock banks in between, though much closer to
the former. Here, a turning point took place in the 1960s and coincided
with the professionalisation of the nancial elites discussed earlier. How-
ever, social distinctions persisted despite the greater homogeneity created
at professional level by the increase in the number of executive directors.
Merchant bankers, even when recruited from outside the founding fam-
ilies, still came from a different world (middle- to upper-middle-class
background, public-school education often followed by Oxbridge) than
the chief executives of the clearing banks (lower-middle to middle class,
grammar school, beginning at the bank at eighteen). However, the degree
of convergence that inevitably takes place at the top remains to be prop-
erly ascertained. In addition, the old merchant-banking families who kept
control of their rm retained a social exclusiveness denied to other mem-
bers of the upper echelons of the City, though the signicance of this
social cachet in the closing decades of the twentieth century should not
be overestimated. The homogenisation process seems to have continued
in the 1990s, with the demise of the old merchant banking dynasties and
the higher formal qualications of the clearing banks chief executives.
33
Nevertheless, with the recruitment policy of the leading investment banks
(high-iers from top universities), the sky-high remuneration packages,
and the importance of personal connections within the world of high
nance, there is little sign of the nancial elites losing their privileged
social position within the British class system.
32
Y. Cassis, Big Business. The European Experience in the Twentieth Century (Oxford, 1997),
p. 217.
33
Derek Wanless, director and chief executive of Natwest between 1992 and 1999, was
educated at Cambridge and Martin Taylor, his counterpart at Barclays between 1994
and 1998, at Eton and Oxford.
Financial elites in European comparative perspective
An important aspect of the debate surrounding the City elites is con-
cerned with their peculiarity. Have they really enjoyed a unique position
in terms of economic power, social prestige and political inuence? And
if so, has this position contributed to the long-term success of the City as
an international nancial centre? Or has it been responsible for the divide
between nance and industry and the triumph of the Citys ethos? Argu-
ments about both views are usually developed within a national context,
in particular by considering the links between nanciers and other elite
groups. International comparisons should help put the matter in perspec-
tive, to distinguish more clearly what has been particular to the British
nancial elites. Yet such comparisons are not entirely unbiased. There is
always a temptation either to lump or to split, depending on the point
of view one wishes to defend. Even though the comparative method has
often been used to destroy myths about a countrys peculiarities, it could
be argued that, in several important respects, the British nancial elites
differed from their European counterparts, in particular in France and
Germany.
Differences were not so important as far as education and training,
and more generally professionalism, are concerned. English bankers were
not more or less competent than their continental counterparts. Figures
available for the pre-1914 years suggest that they had a higher level of
education than their German counterparts (37.6 per cent were univer-
sity educated, as against 29.2 per cent in Germany).
34
The percentage
was probably higher in France, in line with the high level of education of
the French business elites as a whole, though only by a narrow margin
in the case of banking.
35
It is true that for most of the twentieth century
virtually all senior managers of the British clearing banks started their
careers between the ages of sixteen and eighteen and were trained on the
job. However, the apprenticeship tradition remained strong in banking,
especially in Germany, where some of the biggest names in the profes-
sion, including Hermann Abs, the legendary leader of the Deutsche Bank
34
Cassis, City Bankers; M. Reitmayer, Bankers im Kaiserreich. Sozialprol un Habitus der
deutschen Hochnanz (G ottingen, 1999), p. 126.
35
According to Chantal Belot-Ronzon, Banquiers de la Belle epoque. Les dirigeants des
trois grands etablissements de cr edit en France au tournant du XX` eme si` ecle (unpubl.
doctoral dissertation, University of Paris X-Nanterre, 2000), p. 271, 56 per cent of
the directors and senior managers of the French large commercial banks were university
educated. However, this percentage only takes into account those whose details of educa-
tion are known. The same calculation would raise the percentage of university-educated
English bankers to almost exactly the same level, i.e. 55.8 per cent.
92 Youssef Cassis
in the 1950s and 1960s, followed such a route.
36
It is also true that an
elite of professional bankers emerged earlier in Germany and to a lesser
extent in France than in Britain.
37
Nevertheless, there can be no ques-
tion about the professionalism of English bank managers whatever the
distance separating them from the board members.
It was the long-lasting prominence of private bankers, the main char-
acteristic of the English nancial elites, which set them apart from their
counterparts incontinental Europe. Until the 1880s, private bankers were
everywhere in a privileged position in terms of wealth and status. Stendhal
called themthe aristocracy of the bourgeoisie and, more recently, the con-
cept of aristocratic bourgeoisie has been used to analyse their social posi-
tion in Europe in the late nineteenth century.
38
Thereafter, their position
differed markedly. Briey stated, there was no equivalent to the banking
aristocracy to the private interests who dominated the City between
the 1880s and 1960s elsewhere in Europe, with the possible excep-
tion, on a miniature scale, of the canton of Geneva. With the rise of
the big banks, the Parisian haute banque as well as the leading private
banks in Berlin, Frankfurt, Hamburg and Cologne became increasingly
marginalised within the French and German banking systems.
In Paris, many private bankers remained highly inuential, but their
rms had to surrender their control over international nancial operations
to the large etablissements de cr edit and especially the banques daffaires, led
by the Banque de Paris et des Pays Bas. From the turn of the century,
they conned most of their activities to private portfolio management.
Members of the Parisian haute banque were strongly represented on the
boards of the major railway companies, insurance companies and invest-
ment banks, as well as the Banque de France.
39
However, this fell short of
the type of collective control exerted by the private interests in the City
of London, and it ended with the reform of the statutes of the Banque
de France in 1936 and the nationalisation of the deposit banks in 1945.
German private bankers, for their part, faced competition from the new
universal banks in all elds of banking activity, fromthe provision of credit
to industrial customers and the nancing of foreign trade to the issue of
securities on behalf of foreign companies and governments. They were
able to exploit a niche, by offering a more personalised service, highly
36
L. Gall, Hermann Josef Abs and the Third Reich: A man for all seasons?, Financial
History Review 6 (1999), 147202, at 152.
37
Y. Cassis, Financial elites in three European centres: London, Paris, Berlin, 1880s
1930s, Business History, 33/3 (1991), 5371.
38
Harris and Thane, British and European bankers.
39
E. Kaufmann, La banque en France (Paris, 1914); A. Plessis, Bankers in French society,
1880s1960s, in Y. Cassis (ed.), Finance and Financiers in European History (Cambridge,
1992), pp. 14760.
valued by industrial companies, and retained a high degree of inuence,
visible through their presence on the supervisory boards of the countrys
largest industrial companies.
40
In the 1930s, the leading German private
banks were victims of the Aryanisation policy of the Nazi regime and
did not re-emerge after the Second World War.
Everywhere in Europe, private bankers enjoyed great wealth and an
undeniable social cachet. However, unlike in Britain, they were not at
the very heart of a new unied single upper class, or ruling class, to use
Raymond Arons terminology,
41
even in the United States, where private
investment banks remained powerful well into the twentieth century. How
should the success of the private banking element within British econ-
omy and society be explained? At the economic level, merchant bankers
beneted from the extreme specialisation of the English banking system,
which enabled them to remain in control of vital parts of the mecha-
nism of the City. More generally, the survival of the City aristocracy was
dependent on the division of labour within the British nancial sector,
with the international operations of the private rms being as it were
fuelled by the nancial resources of the large nancial institutions. This
division of labour was reected, at the socio-professional level, by the
distinction between gentlemen and players.
42
The links between City
aristocracy and landed aristocracy had deep historical roots. The closer
integration which took place in the second half of the nineteenth century
can partly be explained by the fact that the City aristocracy was not pri-
marily composed of members of religious minorities, unlike the Parisian
haute banque (which was predominantly though not entirely Protestant
and Jewish) and the leading German private bankers (who were virtually
all Jewish).
43
Socio-political structure and political inuence
What does this tell us about the relationship between nancial elites and
political power? If one looks for visible, formal channels of political inu-
ence, such as the representation of nancial interests in Parliament or the
40
H. Wixforth and D. Ziegler, The niche in the universal banking system: the role and
signicance of private bankers within German industry, 19001933, Financial History
Review 1 (1994), 99120.
41
R. Aron, Social class, political class, ruling class, European Journal of Sociology 1 (1960),
130.
42
Y. Cassis, Management and strategy in the English joint stock banks, 18901914,
Business History 27/3 (1985), 30115.
43
Y. Cassis, Financial elites in three European centres and Aspects of the Jewish busi-
ness elite in Britain and Germany, in M. Brenner, R. Liedtke and D. Rechter (eds.),
Two Nations. British and German Jews in Comparative Perspective (T ubingen, 1999),
pp. 27989.
94 Youssef Cassis
recruitment of bank directors from the higher ranks of the civil service,
then the evidence does not appear particularly strong. For the period
18901914, for example, 9 per cent of the directors of the leading joint-
stock banks were politicians and former civil servants.
44
This is not a
particularly high percentage. We lack gures for other sectors and other
periods, but it is unlikely that there was much difference between compa-
nies of similar size. Such structural links between nancial elites and state
elites to use Christophe Charles terminology which includes both politi-
cians and civil servants
45
have been much stronger in France, where the
top executives of the big banks have been systematically recruited among
senior civil servants, especially the inspecteurs des nances. Such passages
from the public to the private sector have of course occurred in England,
with some very high prole cases such as McKenna at the Midland Bank
in the interwar years, but they remained the exception rather than the
rule.
In addition, there are, of course, the informal links, of both a pro-
fessional and a social nature. There is ample evidence of bankers act-
ing as advisers to ministers, notably Chancellors of the Exchequer and
senior Treasury ofcials. The role of leading private bankers (Rothschild,
Revelstoke, Cassel) was particularly prominent in the pre-1914 years,
and continued in the 1920s as a result of the complexity of the eco-
nomic and monetary problems inherited from the war and early postwar
years, and the club-like atmosphere and emphasis on personal relation-
ships favoured by Norman, the Governor of the Bank of England.
46
The
political connections of nancial elites also derived from the position of
certain individuals at the heart of the establishment: club membership,
old boys networks, personal friendships and so on. The networks of fam-
ily relationships between bankers and politicians have been highlighted
by a number of studies, including my own. How much did they matter?
The answer is not straightforward. Firstly, such links have weakened in
the course of the twentieth century and are clearly characteristic of the
period when private interests were dominant in the City. Secondly, it
would be naive to assume that they were not part of the power to inu-
ence of the City of London. And thirdly, this part can only be properly
44
Cassis, City Bankers, p. 53.
45
C. Charle, Les elites etatiques en France aux XIXe et XXe si` ecles, in B. Th eret (ed.),
LEtat, la nance et le social. Souverainet e nationale et construction europ eenne (Paris, 1995),
pp. 10625.
46
Cassis, City Bankers, pp. 2906; H. Clay, Lord Norman (1957); P. L. Cottrell, Norman,
Strakosch and the development of central banking: from conception to practice, 1919
1924, in P. L. Cottrell (ed.), Rebuilding the Financial Systemin Central and Eastern Europe,
19181994 (Aldershot, 1997), pp. 2973.
assessed on a case-by-case basis, and from a political rather than from a
social and economic history perspective.
In the end, the contribution of the socio-economic analysis of nancial
elites to the debate about the relationship between the British government
and the City of London revolves around the question of how exceptional
were the City and the British nancial elites in the twentieth century.
The position of the City as the nancial centre of the world was indeed
exceptional in the years 18701914, when compared to other nancial
centres. But this position, and its continuation in the interwar years, was
not extraordinary given Britains role in the world economy. During these
years, the dominant force was the City aristocracy, a combination of vari-
ous private nancial interests enjoying a position at the heart of the British
Establishment which was exceptional in comparison to other economic
elites in Britain and nancial elites elsewhere in the world. But again
this must be understood in the context of Britains world predominance
and is well expressed in the concept of gentlemanly capitalism. After a
short eclipse, the position of the City since the 1960s has again become
exceptional, this time both in comparison to other nancial centres, espe-
cially in Europe, and with respect to Britains economic status. Financial
elites, on the other hand, have become more ordinary, resembling in many
respects both their counterparts in other industrialised countries and the
other components of the British business elites. It would be surprising
if these developments were not reected, in one way or another, in the
interactions between the British government and the City of London.
5 The City and democratic capitalism
19501970
Richard Whiting
The City and democracy make an unlikely combination, but in this essay
they are at the heart of efforts to make post-1945 capitalismmore popular
and better understood. That is what is meant by democratic capitalism:
an economic systemwhich distributes its benets widely, and whose logic
is understood by the people. The mechanism for achieving a popular
capitalism was to be wider share ownership. Both the Conservative and
Labour parties at various times supported the idea of encouraging more
people to buy shares. Although there was some success in the Thatcher
period, the idea failed to take root. Most people participate indirectly in
the stock market through pension funds and insurance companies. Given
the volatility of the stock market, and the fact that few low- to middle-
income people have the resources to live with these uctuations, such an
arms length connection would seem the most practicable relationship
with the City. However, even if this essay deals with a project that failed,
it explores some key themes: the value of the City for government and
its role in the wider society; the working-class economy and its priori-
ties; the nature of capitalism and sources of support for it. The broad
conclusion is twofold. First, the wider share ownership campaigns had
identied a real issue about popular support for capitalism; but second,
the features of capitalismthat the stock market revealed, namely dynamic
and volatile growth, were precisely those to which workers were already
exposed and from which they sought relief. Even if greater participation
in the stock market had been achieved, it might have merely underwrit-
ten rather than assuaged the suspicions about the unpredictability of the
economic system.
Popular capitalism
The premiss of this essay is to take seriously the view that capitalism,
though successful, has never been especially popular. Lawson, the out-
standing minister of the Thatcher governments, certainly felt, even in the
96
The City and democratic capitalism 19501970 97
1990s, that capitalisms success had not brought it the popular regard it
deserved:
There is nothing particularly surprising about the unrivalled practical success
of market capitalism . . . What is surprising is that, despite all this, and the
important events of the past decade, which have led even the British Labour
Party to reconsider its commitment to socialist egalitarianism and hostility to the
market economy, the atmosphere of hostility to capitalism which Schumpeter
remarked upon some 50 years ago is still so pervasive.
And the reason for this is clear. While its material success, and its demonstrable
superiority over all known alternative economic systems, is no longer open to
question, capitalism is still seen as morally suspect.
1
Examination of popular equity investment as a means of removing the
hostility to capitalism which Lawson commented upon has to be pref-
aced by some comments on consumption. Why has consumption failed
to legitimatise capitalism? Capitalism thrives on mass markets; indeed,
as Schumpeter pointed out, they are its essence: the capitalist engine is
rst and last an engine of mass production, which unavoidably means
also production for the masses.
2
The ability to spend money has also
been a powerful solvent of social distinctions. Indeed, particular signif-
icance has been attached to a burst of popular consumption from the
1950s through to the mid 1970s, for reviving conservatism and mar-
ket capitalism by offering a compelling alternative to planning and state
ownership for the mass of the population. This enthusiasm for consumer
goods was in sharp contrast to the lack of interest in share ownership.
But it would be wrong to exaggerate the signicance of consumption
for cementing the tie to capitalism; in fact, the reverse might be true.
Although the proponents of the consumption thesis argue for the quali-
tative development involved in the quantitative increase in consumption
the move from necessities to indulgences this can be pushed too far.
For social groups aggressively trying to improve their living standards, the
most that the afuent economy did was to increase the prizes on offer,
rather than satisfy aspirations and expectations.
3
It is not surprising that
industrial relations deteriorated rather than improved as the 1950s gave
way to the 1960s.
4
Indeed, Barry Supple has argued that, far from con-
sumption trends making the population more at ease with its economic
system, the preoccupation with national decline was driven by ever-rising
1
N. Lawson, Some reections on morality and capitalism, in S. Brittan and A. Hamlin
(eds.), Market Capitalism and Moral Values (Aldershot, 1995), p. 36.
2
J. A. Schumpeter, Capitalism, Socialism and Democracy (1943; 1994 edn), p. 67.
3
R. Currie, Industrial Politics (Oxford, 1979), p. 180.
4
B. C. Roberts, Industrial relations, in M. Ginsberg (ed.), Law and Opinion in England
in the Twentieth Century (1959), p. 369.
98 Richard Whiting
expectations and aspirations which outstripped the economys resources
to meet them.
5
Because consumers expectations were shaped by stan-
dards and visions supplied by other economies especially America
they were not rationally adjusted to what might reasonably have been
expected of the British economy. Indeed, the competing claims of con-
sumption and investment have provided one of the most fundamental
divisions of interest within the modern industrial economy. Capitalism
therefore requires the restraint of consumption as much as its fullment.
So while the aspirations and standards of the afuent society are a wor-
thy topic for investigation, the signicance of those trends for the stability
and acceptability of capitalism should not be misinterpreted. It might be
argued that afuence, instead of reinforcing the message about capital-
isms success, intensied the demands upon it. It produced an impatient
focus on the short term, rather than a realistic assessment of the great
improvements made in the longer term. And it made people less willing
to accept restraint today in the interests of growth tomorrow.
Wider share ownership was intended to address these problems by
developing the democratic potential of capitalism while replacing the
impatience of consumption with the recognition of the longer-term gains
that came from investment. While the value of afuence in dissolving
social distinctions was occasionally recognised, it left untouched inequal-
ities in capital ownership. Owning some form of property gave a certain
amount of security and freedom from dependence on earnings alone.
Share ownership for the ordinary person therefore fullled aspirations
to equality. It brought into reach far higher returns than were possible
from savings accounts in building societies or the post ofce. But there
was an additional dimension: to hold this property in the form of shares
would give a greater interest in the economic system that had produced
those earnings. As Nicholas Davenport, the left-leaning city editor of The
Spectator, suggested, what a change it would make to our own ignorant
society if the average worker was more interested in the futures of equity
shares than in the pools.
6
Conditions in the late 1950s and 1960s gave the plan for wider share
ownership a particular urgency. Two linked problems caused anxiety:
the rst was that afuence had done little to narrow the gap between
the working class and the rest of society in terms of wealth ownership
and style of life; the second was that this division caused poor industrial
relations and the sullen unwillingness of labour to embrace change.
5
B. Supple, Fear of failing: economic history and the decline of Britain, EcHR 47 (1994),
p. 456.
6
N. Davenport, The vogue of the equity share, The Spectator, 7 Nov. 1958.
This context generated a different relationship between the City and
industry to that conventionally understood. Often, the City and indus-
try have been seen as having different or opposed interests. In the 1950s
and 1960s maintaining the value of sterling seemed a constraint upon
industrial growth, while the key decisions affecting company perfor-
mance appeared to take place in the boardrooms rather than in the Stock
Exchange. The City therefore appeared to be less strategic than indus-
try for economic recovery. However, the wider share ownership move-
ment connected rather than separated both sectors, because the Stock
Exchange was to be employed as an instrument to support economic
modernisation by changing attitudes towards industry.
Share ownership and party politics
Share ownership drew support from both main parties. This cross-party
interest is initially surprising given the status of the City as a peculiarly
elitist institution within the capitalist framework. As such, it has been
linked much more closely with the Conservatives than with Labour. As
Keith Middlemas has commented, In determining Conservative val-
ues, merchant bankers, the Stock Exchange, and agriculture have usually
done best.
7
Property ownership had long been a part of an anti-socialist
strategy, and to apply this to industry made an appealing alternative
to Labours interest in nationalisation. But share purchase would do
something that home ownership could not achieve: as a party commit-
tee argued, it would widen understanding of free enterprise and estab-
lish a closer identity of interest between capital and labour.
8
Those, like
Edward du Cann, who were closely involved in developing unit trusts,
also saw value in share ownership spreading wealth and encouraging per-
sonal responsibility.
9
It was the growth of the unit trusts that allowed
Iain Macleod to stress the virtues of a capital-owning democracy at the
Conservative Party conference in 1965.
However, it is salutary to recognise that political parties respond essen-
tially to voters and not to interests, and therefore attitudes to the City were
7
K. Middlemas, Party, industry and the City, in A. Seldon and S. Ball (eds.), Conservative
Century. The Conservative Party since 1900 (Oxford, 1994), p. 496.
8
Report of committee on share ownership, Dec. 1958, Conservative Party Archives
[CPA], Bodleian Library, Oxford, ACP, 3, 12 (59), 67. For an American example,
see the comment by Charles Merrill, the founder of Merrill Lynch, in 1953, quoted
in Edwin J. Perkins, From Wall Street to Main Street. Charles Merrill and Middle Class
Investors (Cambridge, 1999), p. 221: I can think of nothing that would build a stronger
democratic capitalism, nothing which would provide a stronger defense against the threat
of communism, than the wider ownership of stocks in this country.
9
E. du Cann, Investing Simplied (1959), p. 11.
100 Richard Whiting
less clear-cut than the nature of party identities suggest they ought to have
been. The political agenda in Britain that by the later 1950s centred on
the revival of the economy and the modernisation of industry was given a
broad interpretation. An important theme was the way in which industry
had to be both fair and dynamic. The Conservatives and Labour thus
occupied the same terrain, involving tax measures to deal with inequal-
ities of income and wealth. Both governments also broke new ground
with the introduction of positive legal rights for workers over length of
notice and redundancy.
10
At a general level these were intended to re-
assure workers that inequalities in the wider society would be moderated
and that their own length of service in employment would be recognised
if their jobs came to an end. The intended outcome was that workers
would be more willing to accept change with fairer conditions in society
and at work. More specically, these devices were intended to gain trade
union support for pay restraint.
For the Conservatives, such policy imperatives qualied their rap-
port with the City. Conservatives were always concerned about how
far the City betrayed rather than enhanced the capitalist values it was
keen to propagate. Efforts to show that capitalism could treat workers
fairly were undermined by rumours of speculation and scandal that the
Stock Exchange occasionally fuelled. As its historian has commented, the
image of the stock exchange as either irrelevant or the centre of harmful
speculation continued to persist in the 1950s.
11
It is perhaps more of a surprise to nd support for share ownership
among some of the more powerful gures in the Labour Party. Labours
traditions were built upon a distrust of the moral quality of capitalism: it
was vulgar, wasteful, and failed to provide an outlet for mans true nature.
Moreover, the Stock Exchange was perhaps the worst of capitalisms
institutions; it did not actually produce anything tangible, and merely
traded on the work of others. The City itself was often cast as the sub-
verter of Labour governments, especially in 1931, or at least as a shackle
upon the Partys plans to socialise the economy. The City managed to
be both mysterious and also threatening in Labours own version of its
history.
However, Labour was inuenced by the same context that guided the
Conservatives. Any popular interest in share purchase was hard for the
party to ignore. Labour was very aware in the late 1950s that it was
10
P. Davies and M. Freedland, Labour Legislation and Public Policy. A Contemporary History
(Oxford, 1994) pp. 15261. The tax thinking of the Conservative and Labour parties
in this period is treated incisively in M. Daunton, Just Taxes. The Politics of Taxation in
Britain (Cambridge, 2002), chs. 9 and 10.
11
R. C. Michie, A History of the Stock Exchange (Oxford, 1998), p. 371.
losing votes of well-paid skilled workers to the Conservatives. If the City
succeeded in switching some of the afuent workers earnings into shares
then there was a danger that they would become even more Conservative-
minded. Once Conservatives had advertised their own interest in the late
1950s, electoral considerations suggested Labour ought to respond.
12
As
a defensive strategy, Labour therefore needed to come up with its own
scheme.
Some Labour MPs were in fact more positive than reactive. There had
always been those in the Labour party who rejected traditional clause
four solutions to the economy, but who did want to provide a better deal
for workers under capitalism. Douglas Jay, in his book Socialismin the New
Society (1962), had a chapter entitled A property-owning democracy,
in which he emphasised the benets of some form of property owner-
ship and savings in shares as a source of freedom and greater equality.
These would not only reduce the gap between rich and poor, but would
also allow greater independence from the state.
13
He went further in an
article in the Financial Times in 1968, where he saw share ownership as
softening the bitter conicts in industrial relations.
14
Harold Lever, the
Manchester MP, was another enthusiast. In 1965 he had become vice-
chairman of the Wider Share Ownership Society which had been founded
in 1958 by the Conservative Maurice Macmillan. Lever sawworking-class
investment in the stock market as completely consistent with the Labour
movement:
The aim of the Labour Movement is to raise the standard of life of the working
people and the poor people, and we should be proud to think that, largely through
their political pressure and achievement, working people in this country are able
and have the means to invest in all forms of investment in the same way as others
who are better off.
15
What convinced Labour people that wider share ownership was practi-
cable were the sums regularly spent on the main forms of working-class
gambling. Joel Barnett, a friend of Levers, recommended the transfer of
funds from bingo halls and betting shops to better forms of investment
in unit trusts, which would provide both a gain to the holders and a gain
for the country.
16
If some of these resources going to gambling could be
redirected, then workers would benet. Traditional labour distrust of the
City also had to be replaced by belief in its efciency and trustworthiness.
12
D. Jay, Equity shares and the small saver, Labour Party Archives [LPA], National
Museumof Labour History, Manchester, Finance and Economic Policy sub-committee,
Re. 480/Jan. 1959.
13
D. Jay, Socialism in the New Society (1962), pp. 2904.
14
Financial Times, 15 Oct. 1968.
15
HC Deb 713, c. 1293, 31 May 1965.
16
HC Deb 711, c. 1092, 4 May 1965, oral answers to parliamentary questions.
102 Richard Whiting
In Levers opinion there was no country in the world which has a com-
parable organisation of the austere integrity and reputation of the City
of London and its institutions.
17
Jay also thought it admirable that the
Citys highly efcient investment mechanisms be mobilised in the service
of a far wider section of the community.
18
Investment, saving and the working class
However positive the views towards the City, some intermediary was
needed in order to make share ownership remotely practicable for the
small investor. The Stock Exchange was a remote and mysterious insti-
tution in the 1950s. One of the consistent ndings of opinion surveys
was the almost complete ignorance of, and lack of interest in, its work-
ings.
19
The Stock Exchange was not attuned to giving advice to the small
investor.
20
If one explanation for this was the lack of incentive for the bro-
ker, there were also good reasons why his limited resources made it dif-
cult for the small investor to follow some obvious strategies. Meeting the
inevitable risks of investing in equities required spreading the investment
over a range of companies. Also, for the same reason, such investment
was normally only undertaken when the nancial requirements for day-
to-day living had been satised: No-one who is an investor should run
the risk of being placed in a position where he may be a forced seller of
his investment.
21
Unit trusts had seemed a step in the right direction for the small
investor. They removed the barriers of diversication and expertise that
had been a bar to the small investor operating directly in the Stock
Exchange. Unit trust prices have generally been more stable than those
of shares in individual companies. They allowed numbers of small sums
to be pooled and invested under expert direction. They offered a regular
means of saving, the higher risk being compensated for by the possi-
bility of higher returns than could be gained from either building soci-
ety or deposit accounts. It was also intended to link life assurance with
unit trusts, by using the latter as a home for premiums paid for the for-
mer, and by linking the benets paid to the value of the shares in which
17
HC Deb 713, c. 1297, 31 May 1965.
18
Financial Times, 15 Oct. 1968.
19
See the Gallup survey reported in Do you know how to set about buying some shares?,
News Chronicle, 4 May 1960, and also Wider Share Ownership Committee, Savings and
Attitudes to Share Owning (1962), p. 7.
20
The stock exchange has never catered for the small man (or woman), and still does not
do so; broker advice for the small investor is totally inadequate: P. N. Wise, The unit
trusts, The Spectator, 31 Jan. 1958.
21
Du Cann, Investing Simplied, p. 2.
the trust had invested. The key gure in this was the Conservative MP
for Taunton, Du Cann. He was initially depressed at the unenthusias-
tic response from bankers, but with help from Peter Walker, MP for
Worcester, launched the Unicorn Trust in 1957 and later the Falcon
Trust.
22
The growth of unit trusts was affected by longstanding concerns about
aggressive selling of shares to low-income individuals. The background
of a fear of fraud in connection with unit trusts had begun to frustrate
their managers by the time of the Jenkins committee on company law in
1960. As they pointed out in their evidence,
managers of unit trusts have ever since been particularly resentful of having to
operate under an Act with the discouraging title of the Prevention of Fraud
(Investments) Act [of 1939] . . . a movement which is designed to encourage
personal savings and which has been singularly free from fraud, is entitled to be
administered by an Act with a more helpful and appropriate name.
23
The anxiety about selling shares to people who, it was assumed, might be
more gullible than the average investor from the middle classes, showed
itself in the attitude of the Board of Trade to the selling of unit trust shares
and the charges which could be made by their managements.
Du Canns Unicorn Trust project wanted to sell units far more aggres-
sively than was the case with ordinary shares aimed at the conventional
investor, but the Board of Trade, which licensed unit trusts, used its con-
trol over the fees charged by trusts to try and head off the danger of shares
being pushed on to ignorant workers. The lower the fees unit trusts could
charge, the more this made active selling unprotable. So only allowing
low management charges limited the scope for active selling.
24
As Walker
put it, Board of Trade restrictions on commissions were so tight that you
lost money if you expanded.
25
Du Cann found this late 1950s period
frustrating:
22
Oliver Stutchbury, managing director of the Save and Prosper group, but also a contribu-
tor to Labour party policy discussions, recalled that in the 1950s The unit trust industry
was undergoing a transformation which had been sparked off by Edward Du Cann when
he launched his Unicorn Trust. The years 1959 to 1962 were years of unprecedented
growth: O. Stutchbury, Too Much Government? A Political Aeneid (1977), p. 28. See also
E. Du Cann, Two Lives: The Political and Business Careers of Edward du Cann (Malvern,
1995), pp. 613; P. Walker, Staying Power: An Autobiography (1991), pp. 602.
23
Memorandumof evidence fromthe Association of Unit Trust Managers to the Company
Law Committee (Jenkins), para. 30, led in TUCarchive, MSS. 292B/340.2/1, Modern
Records Centre, University of Warwick.
24
Prevention of fraud. Manager or trustee under an authorised unit trust scheme, note
by H. Osborne, 14 Aug. 1958, BT 298/72.
25
Walker, Staying Power, pp. 601, reporting a meeting with a depressed du Cann.
104 Richard Whiting
I went to see ofcials at the Board of Trade to argue the case for relaxation [of the
restrictions on charges]. I put to them and to Conservative ministers the need to
popularise share ownership and I argued as ercely as I could. There was neither
help nor encouragement from that quarter.
26
The Board was eventually persuaded to allow selling agents to charge an
additional fee. Du Cann set up his own agency, Dillon Walker, and so the
pressure of low charges was eased.
27
Du Canns trust was a success, as
was a later version, the Falcon Trust, in which Peter Walker was involved.
Of the opening offer to investors, Walker recalled:
We received more than seven million pounds. Not only did it break all records, it
created a sensation. It was also sensational to handle. I remember using a shovel
to put cheques into a bag to be taken around to a bank.
28
Although unit trusts had grown strongly from 1959 the number of
trusts doubled, the number of holdings more than doubled, but the aver-
age holding remained constant there were still problems with them
as a magnet for working-class investors. Even their enthusiasts had to
admit that there were few incentives for a trust to handle small deposits.
But those on the Labour side keen on wider share ownership had a
solution denied Conservatives, namely a government unit trust selling
units through the post ofce. The post ofce was familiar territory for
the working-class saver, and could provide an over-the-counter service,
rather than relying on advertising in the press. Brendon Sewill, a key
member of the Conservatives research department, had been impressed
with over-the-counter selling of shares in America, but commented
There is, however, in this country a great toffee-nosed tradition against the bucket
shop, but I am sure that if we want to get what Iain Macleod calls a capital-
owning democracy we must make share purchasing something less of a solemn
mystery understood only by top people.
29
This was the obstacle that a post-ofce-based plan was intended to over-
come. Unfortunately, although there was plenty of support for a govern-
ment unit trust the Wilson governments took the idea no further. Labour
gave two reasons why a government-run unit trust was a bad idea. If suc-
cessful, it would switch money out of National Savings which went to the
government into private industry. Further, if the scheme was launched
at a high point in the index, and there was a subsequent fall, then the
26
Du Cann, Two Lives, p. 67.
27
C. Raw, Slater Walker. An Investigation of a Financial Phenomenon (1977), pp. 2839.
28
Walker, Staying Power, p. 62.
29
Sewill to Maurice Macmillan, 23 Oct. 1968, Working party on savings, CPA, CRD
3/7/221.
government would get the blame.
30
According to The Statist, people are
not going to get any fonder of capitalism if they burn their ngers at the
rst attempt.
31
Because the scheme was never implemented, it is impos-
sible to tell whether or not the obstacle to working-class share ownership
was on the supply side or the demand side.
Certainly the post-ofce dimension was accepted as a vital method for
attracting the working-class investor. Moreover, while some of the opinion
surveys uncovered a good deal of ignorance about how to go about share
purchase and a straightforward lack of interest, there were some indi-
cations of encouragement in the attitudes which such surveys revealed.
Amongst the skilled manual workers, Labours problematic voting group,
there was strong support for saving for house purchase, childrens edu-
cation and retirement, alongside more obvious consumption items like
holidays. They were also as strongly of the opinion as mainstreamConser-
vative voters that ordinary people should invest in shares.
32
In addition,
the general virtues of owning shares and their value as a hedge against
ination were also accepted by those who did not own shares as strongly
as by those who did.
33
Could these aspirations have been tapped by solv-
ing the unfamiliarity of share purchase through a post-ofce-based unit
trust?
There were formidable obstacles against wider share ownership.
Labour supporters had seen the potential for it in the diversion of money
spent on pools or bingo into a more lucrative formof saving. In fact, it was
swapping one form of gambling for another. Over a third of the respon-
dents of the Gallup survey reported in the News Chronicle bought shares
to take a gamble.
34
However, others saw it in the same light as saving.
The Midlands car worker was one of the personications of the working-
class investor able to put aside perhaps 10 shillings a week in a unit trust
savings plan. He was described by Geoffrey Lloyd, Conservative MP and
president of the Midlands branch of the Wider Share Ownership Council
thus:
the prosperous car worker, earning 20 to 25 per week, or even more, a man who
in his own phrase is now topping up his investment, who probably has something
in the Post Ofce Savings Bank, or, if he is in Birmingham, in the Municipal
Bank, and who feels he would be better off with a type of industrial investment.
35
30
Government unit trust policy, report of working party, pp. 7ff, Treasury papers
T 326/471.
31
Shares through the supermarket, The Statist, 5 July 1963, pp. 1516.
32
Attitudes towards savings, Feb. 1969, CPA, CCO/180/9/9/1.
33
Wider Share Ownership Committee, Savings and attitudes to share owning, p. 28.
34
Do you know how to set about buying some shares?, News Chronicle, 4 May 1960.
35
HC Deb, 713, cc. 556, 24 May 1965.
106 Richard Whiting
Once the focus was on saving, rather than the money going on pools or
bingo, the outlook was less encouraging. Some existing level of savings
between perhaps 250 and 500 was regarded as essential before people
embarked on share ownership. Most opinion surveys discovered how few
respondents had such levels of savings. In fact, many were actively dip-
ping into what savings they had in order to maintain consumption.
36
By the mid 1960s those still outside the ambit of the rapidly expand-
ing commercial unit trusts probably had very small amounts of savings.
A further obstacle was the reluctance of the working-class investor to
accept risk, especially when shares were seen as an extension of saving.
In the attitude surveys, the non-shareholder broke company with the
shareowner over the reluctance to accept risk.
37
Many of the enquiries to
nance pages in the popular press showed an obsession with investments
guaranteeing security of capital. There was considerable doubt whether
uctuations in share values or unit prices would be readily tolerated as an
inevitable part of investment. The Daily Mirror recommended purchase
of units in a particular trust only for the value to fall almost immediately,
to a large volume of criticism.
38
People had invested money that they
had hoped to draw upon in the near future, which was not the way most
shareowners operated. Aparticularly telling nding fromthe opinion sur-
veys concerned the possible investment of windfalls or lump sums. The
surveys reported a disappointing percentage for those willing to consider
investing such monies in shares or unit trusts.
39
The difculty of saving
fromincome is well known. Much greater choice comes with the arrival of
unanticipated lump sums of cash. The fact that relatively fewwere willing
to consider shares as a home for such money was a sign of how slight was
the penetration of industrial investment. So while it was accepted that a
post ofce unit trust might reach more people, it was not necessarily the
case that they were the ones who ought to have been enticed into such a
scheme.
40
By the later 1960s interest in wider share ownership had given way
to pressure to raise the savings rate more generally. Consumption was
proving difcult to restrain, and some sort of savings strategy was seen
as a counterpart to incomes policy as a means of containing demand.
An idea for linking a contractual savings scheme with equity funds kept
the share ownership theme in play, but it was now admitted to be only a
36
Attitudes towards savings, Feb. 1969, CPA, CCO/180/9/9/1.
37
38
Reported in A. K. Rawlinson, Government unit trust, 18 Oct. 1968, T 326/1002.
39
40
David Maitland, of the Save and Prosper group, reported in Government Unit Trust,
18 Oct. 1968, T 326/1002.
possibility some way down the line when savings had revived. Moreover,
the change of emphasis also shifted the focus of equity investment from
capitalism to the state. Increased personal saving was now a remedy for
high levels of personal taxation. Easing the burdensome tax state, more
than understanding modern industry, was the larger purpose. As it was,
the Save as You Earn scheme introduced in Labours 1969 budget was not
wholly successful: the need to commit to contributions over a long period
before the terminal bonus was earned had little attraction as employment
was becoming more uncertain.
An alternative strategy to the unit trust route, but one also intended
to soften class conict, was that of encouraging workers to buy shares in
their own companies. The survey evidence, which had reported the lack
of interest in shares, had also found that when offered shares in their own
companies workers had been far readier to purchase. But while at rst
sight it might have seemed consistent to pursue different routes to the
same goal, the aim of persuading workers to buy shares in their own rm
embodied a very different approach from the unit trust philosophy. The
unit trust tried to diversify the commitment to capitalism; the employee
share schemes concentrated it. The worker who held shares in his own
company was putting all his eggs in one basket: the shares would sup-
plement the wage payment but their source would still be the particular
company. Critics also suggested that, in so far as such schemes did cre-
ate a closer interest between employer and workforce, they would do so
against the interests of the consumer. Another anticipated outcome was
that the worker would compare his puny holdings with the more gener-
ous allocations to directors and be impressed with the continuing class
difference rather than the reverse.
41
These two versions of worker share ownership the unit trust on the
one hand and the employee owner on the other represented contrast-
ing versions of industrial capitalism. That represented by the employee
investing in his own rm saw the industrial enterprise as an essentially
self-sufcient organisation generating substantial growth from the re-
investment of its own prots. These prots therefore beneted manage-
ment and workers without leaking out as dividends to shareholders.
Many in the Labour movement as well as in management thought that
reinvestment of prots was a far more legitimate process than paying them
out as dividends to non-producing shareholders. The second version
the unit trust one saw industry as constantly renewed by the input of
newrms dependent upon capital raised on the stock exchange, and hav-
ing to prove themselves through successful performance. The best use of
41
N. Davenport, Employee shareholding, The Spectator, 2 May 1958.
108 Richard Whiting
prots was not necessarily to be retained in the individual business but
to be released to shareholders who might then invest the money in new
businesses. The judge of performance and investment decisions was the
stock market and not the management of the particular business; com-
pany directors did not always know what to do best with their prots.
Those who supported the unit trust movement believed in the rights of
shareholders and were critical of the viewthat it was better for efciency if
companies retained rather than distributed their prots: The large num-
ber of dumb managerial ducks sitting on idle cash not knowing how to
invest it properly would surprise Mr Callaghan.
42
Economists could give
no clear viewabout which version plough back or distribution of prots
was better for industry.
43
Share ownership and the broader policy context
The campaign to increase share ownership, and the willingness to intro-
duce measures to achieve it, were inevitably affected by the direction
of policy elsewhere. By the 1960s an anti-shareholder perspective was
apparent in two key policy areas incomes policy and taxation. Incomes
policy focused on non-wage income as a way of legitimating restraint
on pay. Dividends came under scrutiny along with other forms of earn-
ings, and this diminished the status of the shareholder. The willingness of
company directors to accept dividend restraint was noted, but defenders
of shareholder interests suggested that such limitation was irrelevant to
the success of wage restraint.
44
However, it is difcult to avoid the view
that wider share ownership, especially through the Stock Exchange and
unit trusts, was being promoted at a time when the main preoccupation
was with class conict in industry. Strictly speaking, these were just the
conditions which worker share ownership was intended to ameliorate.
However, they encouraged the view that working-class shareholders were
irrelevant to the main struggles within industry. This was why David
Howell was disappointed in the early 1970s when he took the Conser-
vatives newly developed plans for capital ownership out into the wider
42
N. Davenport, Why the City is mad , The Spectator, 2 July 1965. The reference to
Callaghan concerned some of the tax measures in his 1965 budget which favoured the
retention rather than distribution of prots. For Levers critical views on the encourage-
ment of retained prots see HC Deb, 713, c. 1770, 31 May 1965.
43
The key article was I. Littles Higgledy-piggledy growth, Bulletin of the Oxford Institute
of Statistics 24 (1962), pp. 387412.
44
There is overwhelming evidence to show that workers are contemptuous of attempts
to justify dismissals and rejections of wage demands by cuts in shareholders wages:
A. Rubner, The Ensnared Shareholder. Directors and the Modern Corporation (1965),
p. 90. For an example of a discussion about dividend restraint and incomes policy see
Unearned income policy again, The Economist, 30 Nov. 1963.
world. When he visited the Federation of British Industries its director,
John Methven, warned him of the hostility towards any really widespread
worker share ownership; capital was for shareholders and wages were for
workers.
45
The private shareholder was seen as marginal to the central
struggle between worker and manager.
If problems with industrial relations coloured views about share own-
ership, so did the tax issues of the 1950s and 1960s. Taxes embody value
judgements about the legitimacy or otherwise of certain kinds of eco-
nomic activity. In fact, it was the legitimacy of the tax system itself which
was under scrutiny in the 1950s and which encouraged focus on stock-
market transactions. What concerned some observers was the way in
which income tax the spine of the revenue system seemed both to be
holding back economic performance because it weakened incentives to
improve production and earnings, yet was itself also being undermined by
avoidance. The point was that income as treated by the Inland Revenue
essentially wages and salaries was a more narrow denition than an
economists one of an annual addition to spending power. Ironically it
was Kaldor, Labours tax adviser, who came closest to giving expres-
sion to this truth in a tax instrument. His proposal in the 1950s for an
expenditure tax was in this respect consistent with the vision of those
who wanted wider share ownership, because both saw living standards as
owing desirably froma number of different sources and not just wages or
salaries.
46
Kaldors expenditure tax remained an intriguing but unfullled
idea. The irony was that the alternative route which Labour took under
Kaldors guidance the capital gains tax seemed to hit very squarely
stock-market dealings and both drew strength from, but also reinforced,
an anti-City rhetoric. Although it was possible for the income from trad-
ing in shares to fall under income tax, a good deal of capital appreciation
went untouched. A capital gains tax was essentially an anti-avoidance
device, despite its egalitarian name, and stock-market deals were one of
the targets Harold Wilson had in mind when he articulated its benets
in 1961:
Many schedule E pay-as-you-earn taxpayers at all levels of income feel that it is
essentially unfair that they have to pay tax, at a very high marginal rate, on every
penny they earn, when others can enjoy substantial accretions to their spending
power for very little effort by means of a speculative Stock Exchange utter or a
big property deal.
47
45
D. Howell, Blind Victory (1986), p. 119.
46
N. Kaldor, An Expenditure Tax (1955). For recognition of the congruence between its
logic and that of capital ownership, see Howell, Blind Victory, p. 109.
47
Capital gains must be taxed, The Statist, 1 Dec. 1961.
110 Richard Whiting
It was not only share speculation which the capital gains tax was aimed
at, but also some of the devices such as bond washing and dividend
stripping whereby brokers couldavoidtax or claimrelief for non-existent
losses. Trade unions too supported the idea of a capital gains tax, and
these pressures were signicant enough for the Conservatives to introduce
in 1962 a tax on capital gains made over a six-month period. Labour went
further when in ofce with a tax on all gains, whatever the period over
which they had been made.
Although the capital gains tax received support from across the politi-
cal spectrum, the wider share ownership group was against it. There were
a number of points to be made. At a general level, the anti-City rhetoric
that seemed so much in evidence in the arguments for a capital gains tax
also appeared to contradict Labours broad aim of increasing efciency
in a private economy. Thomas Balogh felt that the exercise in tax reform
had been carried out without due importance being attached to temper
the whole problem to the investment activity of the lambs to be shorn.
48
It was rash to embark on taxes directed at business when the economy
was so precariously balanced. More specically, a capital gains tax was
thought to be the wrong way to marry Labours egalitarian impulse to
capitalism. As Lever stressed in his opposition to it in the 1965 budget,
it was a tax on realisations, on investments sold, not on wealth.
49
It was
an encouragement to hold on to shares rather than to change invest-
ments in search of the best return. For Lever, and for others of a similar
persuasion who were happy to see people get rich, but not very rich, a
wealth tax was a better option. This would have taxed capital, but not the
search for its most efcient use. There was the possibility that a wealth
tax might have even encouraged the search for higher returns to offset its
impact.
These specic aspects of the tax regime, however, were only reective
of a wider viewpoint strongly held in the Labour movement that put
industry ahead of the City. As Kaldor put the point in a paper supporting
a long-term capital gains tax,
the very fact that we exempt capital gains fromtaxation gives a strong incentive to
concentrate on nancial activities as against activities which more directly serve
the productive system . . . It is well known that an unusual proportion of our
ablest young graduates seek jobs in the City in preference to industry.
50
48
Note of dissent fromreport on taxation and incomes policy, April 1964, LPA, RD.764.
Some of these issues are explored further in R. Whiting, The Labour Party and Taxation.
Party Purpose and Political Identity in Twentieth-Century Britain (Cambridge, 2001), esp.
chs. 34.
49
HC Deb, 713, c. 682, 26 May 1965.
50
Arguments for and against the long-term capital gains tax, 18 Dec. 1964, T 171/805.
This was the period when Labour introduced the Selective Employment
Tax (1966) in order to try and encourage workers to move from the
service sector into manufacturing. But it went deeper even than a calcu-
lation about what was in the best interests of the economy. Manufactur-
ing industry embodied labour, that is work on the material environment
in order to transform and improve it. The City dealt in paper titles to
wealth rather than transactions in real goods and this aroused suspi-
cion. As Nicholas Davenport found, this Labour government [196466]
does not like portfolio investment; it does not approve of making money
out of money.
51
Support for wider share ownership had come from both Conserva-
tive and Labour MPs, but in each party the majority had been opposed
to the idea. The Conservatives main efforts were directed at industry
and the trade union question; the City and nance was at best marginal
to this, and at worst a symbol of the greed and vulgarity which made
capitalism so disreputable and seemed to undermine its defence. When
Edward Heath coined his phrase in May 1973 about the unaccept-
able face of capitalism it was in reference to the Lonhro company in
which Du Cann, a publicist for the wider share ownership movement,
was prominent.
52
Labour was suspicious about capitalism as part of its
ethos; the City seemed both bafing and fraudulent. Although Lever
was a key gure in Labours circles, he was regarded uncomprehendingly
as a wizard in a world of money which most of his colleagues did not
understand.
53
The failure of the wider share ownership campaign was not surprising.
Doubts about the wisdom of encouraging low-saving workers to invest
in shares were echoed by politicians who thought the main way to win
the argument about capitalism was to present the City as a peripheral
rather than a central institution. Du Cann, one of the main gures in this
episode, certainly took the view that without political encouragement the
cause was unable to succeed:
Over the years, I have heard many politicians and others pay lip service to the
idea of a peoples capitalism. Iain Macleod used to speak about its advantages
with particular emphasis. Talk there has been in abundance, but though many
Chancellors of the Exchequer have had the chance to assist the process in a
practical way none did so except to a modest extent until Mrs Thatcher became
Prime Minister. In that year it is estimated there were some 3 million shareholders
in the UK. By 1990 the gure had risen to 11 million.
54
51
Davenport, Why the City is mad , The Spectator, 2 July 1965.
52
This is discussed in J. Campbell, Edward Heath. A Biography (1994), p. 528.
53
E. Dell, A Hard Pounding. Political and Economic Crisis, 197476 (Oxford, 1991), p. 28.
54
Du Cann, Two Lives, p. 68.
112 Richard Whiting
Most of the key elements were very different in the 1980s as compared to
the 1960s, with which this essay has been principally concerned. By the
end of the 1960s the Conservatives recognised that stimulation of share
purchase required some sort of dramatic gesture to capture the public
imagination, and it was suggested that selling off nationalised industries
might achieve this.
55
The truth of this observation was borne out by the
privatisations of the 1980s which were a major llip for share ownership.
Finance, too, acquired a more prominent place in the public discussion
of economic life. In the 1960s labour correspondents had been some
of the key journalists on their newspapers; in the 1980s their place was
taken by the City editors.
56
Even the increase in unemployment had
some benets: workers receiving redundancy payments had lump sums
often suitable as a basis for share purchase. The tremendous boost to
capitalism in the 1980s, culminating with the decline of communism,
was also in marked contrast to the uncertainties of the 1960s and early
1970s. The disappointing results of the campaigns of the 1960s were
therefore followed by a marked increase in individual share ownership
during the 1980s.
Conclusion
Which is the more instructive example, the 1960s when the campaign
stalled, or the 1980s when it had some success? Popular share owner-
ship was always seen as having two basic functions: the practical one, of
spreading more widely the higher returns from equities, at least in the
longer term; and the political aim, of easing class conict and increasing
awareness of what capitalism was about, or, in the more recent usage,
understanding the enterprise culture. There were signicant uncertain-
ties in both these aims. To take the practical side rst. Share ownership
tted in uncertainly between gambling on the one hand and saving on the
other. It was shown earlier how Labour enthusiasts for share ownership
saw it as a better alternative to bingo and the pools. Over the longer term,
they were right: shares did do better. In the short term, shares also had
the character of a gamble, because they could uctuate alarmingly and at
any one time an investor could be carrying a signicant paper loss. Those
who responded to opinion polls by saying that they thought of shares as
a chance to gamble after a level of savings had been achieved, were right.
55
Brian Reading memo, 3 Jan. 1969, Savings study group, CPA, CRD 3/7/22/2.
56
For an interesting discussion see G. Goodman, The role of industrial correspondents,
in J. McIlroy, A. Campbell, and N. Fishman (eds.), British Trade Unions and Industrial
Politics. The Post-War Compromise, 194564 (Aldershot, 1999), pp. 2336.
Most savers had a specic form of consumption in mind, such as a holi-
day, alongside the obvious rainy day possibilities. But share ownership
was an inappropriate way of saving for these, because of the uncertainty
about the timing of realising the investment. The Wider Share Owner-
ship group was itself divided about whether it should be pushing saving
in general, or focusing more specically upon equities. When the Wider
Share Ownership group met the Chancellor during the 1962 budget pro-
cess, a civil servant commented on the divergence of view among the
Group about their aims:
Mr Geoffrey Lloyd, Mr Nigel Birch and possibly Mr Cockeld were interested
in inducing the man earning between 600 and 1,000 to build up some capital.
So long as this capital was reasonably safe, they were not primarily concerned
that he should become an equity shareholder . . . Mr Macmillan and possibly Mr
du Cann seemed more interested in getting the small man interested in having
a stake in British industry, directly or through unit trusts. They wanted a wider
holding of equity shares.
57
Once shares were understood to be simply another form of capital hold-
ing, then their attractions over other forms of saving deteriorated. In fact,
the level of savings required prior to share ownership effectively ruled out
the majority of the working class, who were seen as the most important
target for such schemes. Despite the development of the unit trust, the
practical conditions necessary for share ownership emphasised the gulf
between the resources of the working class and those above them, rather
than the reverse.
There was, of course, the larger aim, summed up in a Treasury
document as to break down traditional barriers between management
and labour and to promote understanding of industrial change and co-
operation in economic policy.
58
Share ownership was meant to give a
unique involvement in industrial capitalism, at a time when there was
great interest in reducing restrictive practices and inducing workers to
accept greater change not only in working practices but also in patterns
of employment. What this focus on shares overlooked was just how much
workers already invested in capitalism. Their skills were invested in their
employment. Suggesting that workers buy shares in their own companies
the more popular form of equity holding was asking them to deepen
and intensify the risks they were taking. Although some of the wider share
ownership enthusiasts contrasted the unit trust method favourably with
workers buying shares in their own companies because trusts spread the
57
Taxation and savings, 7 June 1962, T 171/597.
58
Working party report, Unit trust policy, para. 31, 1965, T 326/471.
114 Richard Whiting
risks workers would still have been committed to broadly similar uc-
tuations in value. Home ownership, the other dimension of a property-
holding democracy, was far more popular, and probably squeezed out
shares, for two reasons. First, houses were lumpy, indivisible, investments
that probably absorbed most workers funds. Second, to add shares to
house ownership was to invest in a form of property with a broadly simi-
lar cyclical pattern to shares.
59
More fundamentally, perhaps, the lessons
which share owning taught were not necessarily ones that would have
developed a closer commitment to capitalism. Share ownership taught
that gains were unpredictable in the short term, and probably signicant
over the long term. Most workers would have known the latter feature
of capitalism already; they only had to compare their living standards
with their parents to learn this. Shares, in fact, reinforced a lesson about
short-term insecurity and instability, and this was what most workers
were trying to guard against. The views of wider share ownership cam-
paigns could be turned on their head. Precisely because shares were an
authentic reection of the capitalist system, most workers were better off
not owning them. The City appeared to be a mysterious and elitist insti-
tution to most people. Perhaps it was right that it had remained so.
59
See P. Grout, Wider share ownership: too many eggs, one portfolio, in report of a
Centre for Economic Policy Research meeting, at 5 Feb. 2001, http://www.cepr.org/
PUBS/Bulletin/MEETS/321.
Part III
Government and political parties
6 The Treasury and the City
G. C. Peden
Geoffrey Ingham, in an inuential sociological work, described the links
between the City, the Bank of England and the Treasury as the core insti-
tutional nexus of British society.
1
The idea of a CityBankTreasury
nexus has been taken up by Peter Cain and Anthony Hopkins, whose
concept of gentlemanly capitalism rests on a belief that metropolitan
nance dominated British politics, to the detriment of the interests of the
manufacturing industry. In particular, they argue that economic policy
was shaped by a belief that integration with the international economy was
a national, as well as a City, interest.
2
The belief that industry has suffered
fromthe Citys superior access to policy-making through the Treasury has
been shared by other economic historians, with the Treasurys support
for free trade and the gold standard before and after the First World War
being cited as prime examples.
3
Similarly, moves towards convertibility
of sterling in the 1950s have been seen as the product of an overrid-
ing concern with the international interests of the City.
4
On the other
hand, attempts to use archival material to study how the City could inu-
ence the Treasury have been rare. Robert Boyce and Ewen Green have
documented a shared ideology about Britains role in the international
economy and have shown how the City could act as an organised lobby.
5
Still less attention has been paid to the question of how the Treasury
could inuence the City. Yet Ranald Michie has shown that the London
Stock Exchange had come to regard itself as a national institution by the
1
G. Ingham, Capitalism Divided? The City and Industry in British Social Development
(Basingstoke, 1984), p. 9.
2
P. J. Cain and A. G. Hopkins, British Imperialism, I: Innovation and Expansion 16881914,
and II: Crisis and Deconstruction 19141990 (1993).
3
S. Newton and D. Porter, Modernization Frustrated. The Politics of Industrial Decline in
Britain since 1900 (1988), esp. pp. 10, 21, 434, 589; S. Pollard (ed.), The Gold Standard
and Employment Policies between the Wars (1970), pp. 210, 23.
4
B. W. E. Alford, Britain and the World Economy since 1880 (1996), pp. 23942.
5
R. Boyce, British Capitalism at the Crossroads 19191932. A Study in Politics, Economics and
International Relations (Cambridge, 1987); E. H. H. Green, The inuence of the City
over British economic policy, c. 18801960, in Y. Cassis (ed.), Finance and Financiers in
European History, 18801960 (Cambridge, 1992), pp. 193218.
117
118 G. C. Peden
1930s, and that it acted as an agent of the Bank of England and the Trea-
sury after the Second World War, in return for semi-independence and
self-regulation.
6
The concept of a CityBankTreasury nexus does not
in itself say anything about the direction in which inuence runs. Only
research based on case studies can do that.
Ingham accepts that the Treasury has interests that are independent of
its connection with the City. In particular, the Treasury has an institu-
tional interest in maintaining its position in Whitehall, involving control of
public expenditure, as well as nancial policy. Treasury control of expen-
diture was reinforced in the nineteenth century to protect the interests
of the taxpayer.
7
The balanced budget rule in force prior to the Second
World War ensured that more money for one minister meant either less
money for others, or an increase in taxation. Consequently, the Chan-
cellor of the Exchequer rarely lacked allies in Cabinet when he was in
dispute with spending departments. Borrowing, except in wartime, was
restricted to expenditure that would produce a money return sufcient
to pay interest on, and to amortise, the debt. The balanced budget rule
did not t with the Keynesian concept of using scal policy to man-
age the level of aggregate demand in the economy, but in the post-1945
period maintenance of a xed, although adjustable, exchange rate down
to 1972 imposed a degree of nancial discipline. Thereafter there was
a lack of a credible macro-economic framework, and experience of very
high ination in the 1970s and 1980s strengthened the case for clear
rules of public nance. Consequently the 1998 Finance Act set out a
new scal policy framework, including the golden rule that over the
economic cycle the government would borrow only to invest and not to
fund current spending.
8
Purchasers of gilt-edged stock, including City
institutions, have naturally shared the Treasurys interest in rules that
inhibit nancial proigacy.
More generally the Treasury and City have shared an interest in placing
key decisions in nancial policy beyond party politics. Not the least of
the advantages of the gold standard was that decisions on interest rates
were taken by an independent central bank. In the words of a former
Treasury ofcial, the gold standard was knave proof, in that it could
6
R. Michie, The London Stock Exchange. A History (Oxford, 1999), esp. pp. 1823, 186,
2934.
7
M. J. Daunton, Trusting Leviathan: the politics of taxation, 18151914, and G. C.
Peden, From cheap government to efcient government: the political economy of pub-
lic expenditure in the United Kingdom, 18321914, in D. Winch and P. K. OBrien
(eds.), The Political Economy of British Historical Experience, 16881914 (Oxford, 2002),
pp. 31950, 35178.
8
HMTreasury, Reforming Britains Economic and Financial Policy: Towards Greater Economic
Stability, ed. E. Balls and G. ODonnell (Basingstoke, 2002), ch. 3.
The Treasury and the City 119
not be rigged for political, or even more unworthy reasons.
9
When the
gold standard was suspended in 1931, bank rate was changed only after
consultation with the Chancellor of the Exchequer. The delegation in
1997 of decisions on interest rates to the Monetary Policy Committee of
the Bank of England can be seen as a return to an older order.
There are good grounds for believing that the City would have inu-
ence on the Treasury. The Chancellors responsibilities included public
loans, the national debt, banking and currency, foreign exchanges and
international nancial relations. Chancellors rarely brought economic or
nancial expertise to their ofce and normally depended upon their of-
cials for advice. The skills of an administrative ofcial may be compared
to those of an advocate, who has to be the judge of a good argument
and to be able to cross-examine an expert. Expert advice regarding most
matters that would affect the City would be sought from the Bank of
England. In evidence to the Radcliffe Committee in 1958, Bridges, then
a recently retired permanent secretary, described Treasury ofcials as
laymen compared with the specialists in the Bank.
10
Advice from the
Bank would also come unsolicited. Norman, Governor of the Bank from
1920 to 1944, saw the relationship between the Bank and the Treasury
as in many ways akin to that between an old-fashioned banker and a
customer. He felt it his duty to give his views frankly to the Chancellor
and his senior ofcials, acting as the principal channel of communication
between the City and Whitehall.
11
Prior to 1914, visits by the Governor of
the Bank to the Treasury had been rare, but under Norman they became
routine. The relationship between the Treasury and the Bank evolved
over time, and was not without tensions as the Treasury took on more
responsibilities and the Bank became more subject to political control.
When in 1935, and again in 1939, the Treasury asked if it could borrow
a member of the Banks staff, Norman refused on the grounds that such
a transfer would suggest that the staff of the two institutions were inter-
changeable and would be a dangerous precedent. He also thought that
the member of staff involved might be in a difcult position because of
his divided allegiance.
12
In addition to communications through the Bank, Treasury ofcials
maintained informal links with the City on a personal basis. The diary
of Sir Edward Hamilton, who, rst as head of the Treasurys Finance
9
Lord Bradbury, quoted in P. J. Grigg, Prejudice and Judgment (1948), p. 183.
10
(Radcliffe) Committee on the Working of the Monetary System, Memoranda of Evidence,
3 vols. (1960), III, p. 47.
11
H. Clay, Lord Norman (1957), p. 296.
12
Extracts from Committee of Treasury minutes, 25 Sept. 1935, 3 May 1939, BoE
G15/7/1816/5.
120 G. C. Peden
Division and then as joint permanent secretary, was the most senior of-
cial dealing with nancial questions from 1885 to 1906, shows that he
socialised with leading gures in the City. His closest associates appear to
have been Ferdinand Rothschild and Cassel, but he also discussed ques-
tions relating to the national debt with Nathan Rothschild.
13
We have less
evidence for Hamiltons successors, but they seem not to have followed
his example so far as cruises in Ferdie Rothschilds yacht, or visits to
country houses, were concerned. However, the ease with which some
leading Treasury ofcials found employment in the City or the Bank
suggests previous acquaintance as well as considerable common ground.
Notable examples included Bradbury, permanent secretary, 191319,
whose directorships, after his retirement from the civil service, included
Williams Deacons Bank, and who was chairman of the Bankers Clear-
ing House Committee and president of the British Bankers Association
in 192930 and 19356; Blackett, controller of nance, 191922, who
became a director of the Bank of England in 1929 after service with the
Viceroys Council in India; and Niemeyer, Blacketts successor as con-
troller of nance, who was recruited as an advisor by the Bank in 1927,
and was a director from 1938 to 1952. In wartime, some City men were
recruited by the Treasury. For example, the stockbroker Falk served in the
Treasurys A division dealing with overseas nance in the First World
War, and the merchant banker, Brand, was the Treasurys chief repre-
sentative in Washington in 19445. Falk had in 1917 founded a small
dining club, known as the Tuesday Club, which brought together City
men, nancial journalists, academic economists and Treasury ofcials to
discuss economic questions. Its most regular members in the interwar
period included Blackett, Brand and Niemeyer, as well as Keynes, who
had served in the Treasury during the war and who was active in the
City as well as in academic life.
14
According to one Treasury ofcial who
attended its meetings, the clubs purpose was to educate the civil ser-
vants in nancial matters and to give the City men some off-the-record
tips about government policy.
15
The fact that the City was well placed to inuence policy does not, how-
ever, establish that its inuence was always predominant. The Treasury
has been able to exercise control of expenditure or establish rules of pub-
lic nance only when it has had the support of the Cabinet. Contrary
to popular mythology, Treasury views, although inuential, have not
13
The Diary of Sir Edward Walter Hamilton 18851906, ed. D. W. R. Bahlman (Hull, 1993),
pp. 343, 360, 364, 386, 405, 431, 453.
14
R. Skidelsky, John Maynard Keynes: The Economist as Saviour 19201937 (1992),
pp. 223, 197.
15
F. Leith-Ross, Money Talks (1968), pp. 1478.
always prevailed in Whitehall. Moreover, as government responsibili-
ties for social welfare were extended over the course of the twentieth
century, the City found it had to compete with more interest groups.
Likewise, as government responsibility for managing the economy devel-
oped, Chancellors of the Exchequer and their ofcials had to respond
to a wider spectrum of interests than that represented by the City, and
to defend national interests broadly conceived. The CityBankTreasury
nexus therefore needs to be considered in the light of changing polit-
ical circumstances. What follows is a series of case studies that cast
light on the nature of the relationship between the Treasury and the
City.
Edwardian political economy
The Boer War brought to an end a forty-year period in which there had
been budget surpluses and a steady redemption of the national debt.
Between 1899 and 1902 the national debt increased by about a quarter.
Naturally Hamilton consulted his friends in the City about the forms that
the borrowing should take, but he was by no means naive in doing so. As
he noted in his diary, the difculty about getting good advice is that I
dont believe it is possible to obtain really disinterested advice from City
men.
16
In order to relieve the pressure on the London money market,
the Treasury sought funds in NewYork, a step rather resented in the City,
and the views of J. P. Morgan & Co. had also to be taken into account.
Morgans had the advantage of being linked with the London bank of
J. S. Morgan & Co. (later Morgan Grenfell & Co.) and they established
contacts with the Treasury that were to be renewed for the purposes of
far greater borrowing in the United States during the First World War.
17
Borrowing in New York for the Boer War marked the beginning of a
process whereby, as Britains external nancial position was weakened
by war and relative economic decline, British policy-makers had to take
account of opinion in nancial centres around the world, and not just
those in London.
The Edwardian period also saw the beginnings of greater central gov-
ernment activity in relation to social services. Lloyd Georges proposal in
his 1909 budget to increase death duties to help to pay for social reform
provoked a major protest from the City. Thirty-six of its leading gures,
headed by Lord Rothschild, wrote an open letter to the Prime Minister,
16
Hamilton diary, 6 Feb. 1901, cited in K. Burk, Morgan Grenfell, 18381988. The Biogra-
phy of a Merchant Bank (Oxford, 1989), p. 119.
17
Burk, Morgan Grenfell, esp. pp. 11123, 12634; J. Wormell, The Management of the
National Debt of the United Kingdom, 19001932 (2000), pp. 319.
122 G. C. Peden
Asquith, in which they claimed that death duties were really paid out of
capital, to the detriment of trade in which that capital might otherwise
have been employed. More generally, they expressed the belief that the
prosperity of all classes has been greatly due to the fact that this coun-
try has afforded indisputable safety for capital.
18
The increase in death
duties had, in fact, been proposed by Treasury ofcials, and Lloyd George
refused to make any concession on this issue. The reason why Treasury
ofcials favoured progressive direct taxation to pay for social reform was
that the alternative was a revenue tariff, and they were no less in favour of
free trade than the Liberal government.
19
Thus, although both the City
and the Treasury favoured free trade, they differed over direct taxation.
A further increase in death duties was included in the 1914 budget, and
on that occasion Stamp of the Board of the Inland Revenue was asked
to examine arguments that death duties had an adverse effect on capital
accumulation. In a learned paper, drawing upon the views of economists
from Mill to Pigou, he concluded that there was no evidence that death
duties reduced savings and capital any more than income tax did.
20
The
Citys views did not prevail against New Liberalism.
War nance, 19141920
The Treasury, the Bank of England and the City had to work together
in 1914 to tackle a nancial crisis brought about by the outbreak of the
First World War. Following the Austro-Hungarian ultimatum to Serbia
on 23 July, most European stock exchanges closed, making it impossible
for foreigners to meet their liabilities in London. Consequently, London
accepting houses were threatened with insolvency, and clearing banks
faced heavy losses on re-discounted bills. The clearing banks sought
to preserve their gold reserves by refusing to provide the public with
gold coins, and proposed to the Chancellor on 31 July that the Bank of
England should make an emergency note issue and suspend gold convert-
ibility. However, Keynes, who had been summoned from Cambridge to
advise Treasury ofcials, produced a memorandum on 3 August arguing
that suspension of international gold payments would lower international
condence in sterling, and thereby impair Britains purchasing power in
world markets and damage Londons reputation as a nancial centre. His
arguments were accepted by Lloyd George, who had been sympathetic
to the bankers proposals, and only gold payments within Britain were
18
The Times, 15 May 1909, p. 4.
19
G. C. Peden, The Treasury and British Public Policy, 19061959 (Oxford, 2000),
pp. 435.
20
J. Stamp, The economic effects of estate duty upon capital, 20 June 1914, T 171/85.
restricted, this being made possible by the issue of currency notes by the
Treasury.
21
Meanwhile, on 2 August a conference at the Treasury with represen-
tatives of the City had agreed a moratorium on bills, thereby rescuing
the accepting houses. On 6 August a more general moratorium regarding
payments arising out of contracts made before 4 August was announced.
This measure eased pressure on City institutions, but created a cash-
ow problem for manufacturers who could not collect debts but had to
pay wages. The moratorium had been granted only after the banks had
promised to be sympathetic to the needs of their customers, but evi-
dence reaching the Treasury suggested that not all banks were carrying
out this promise, and that the moratorium was unpopular with manufac-
turers. John Peters has argued that the moratorium is a clear example of
favoured treatment for the City. However, his own evidence shows that,
while 67 per cent of manufacturers who responded to a survey conducted
by the Inland Revenue in August were against an extension of the mora-
torium, no fewer than 91.5 per cent reported that banking facilities were
reasonable compared with before the war.
22
Consequently, the Treasury
felt justied in extending the moratorium to 4 November.
If the Treasury was inuenced by the City in 1914, the direction of
inuence was soon reversed. From January 1915 all new issues required
Treasury approval and the Capital Issues Committee, which was estab-
lished to advise the Treasury, took an increasingly negative attitude to
applications for new issues, especially foreign ones, that could not be
shown to be in the national interest. In order to maintain the sterling
dollar exchange rate at about $4.76, holders of dollar securities were
invited to sell or lend them to the Treasury in December 1915, and a
penal tax was imposed in May 1916 on income from such securities that
had not been transferred. Finally, in January 1917 the Treasury was given
powers to requisition securities. Treasury ofcials also took an active part
in maintaining the sterling exchange rate too active, in the opinion of
the Governor of the Bank of England, Cunliffe. The resulting friction
between the Treasury and the Bank caused a crisis in July 1917 that
was resolved only by a promise from Cunliffe to work loyally and harmo-
niously with the Chancellor of the Exchequer.
23
The continuing weakness
of the exchange rate after the war led the Treasury and the Bank to bring
inuence to bear on the London Stock Exchange regarding new issues
whenever capital exports threatened the balance of payments. As Michie
21
D. E. Moggridge, Maynard Keynes: An Economists Biography (1992), pp. 2337.
22
J. Peters, The British government and the Cityindustry divide: the case of the 1914
nancial crisis, Twentieth Century British History 4 (1993), 12648, at 1445.
23
R. S. Sayers, The Bank of England, 18911944, 3 vols. (Cambridge, 1976), I, pp. 99107.
124 G. C. Peden
observes, the Stock Exchange invariably responded to such inuence by
behaving in the way it was asked to do.
24
The war brought about an increase in the national debt from
650 million in 1914 to 7,832 million in the nancial year 1919/20.
Failure to impose a capital levy to pay off part of the debt after the war
can be seen as an example of the Treasury favouring the City. However, as
Martin Daunton has shown, Treasury ofcials were prepared to consider
a capital levy, or alternatively a levy on increases in wealth resulting from
the war, as ways of dealing with the problem of reducing the tax bur-
den of servicing the debt. In February 1920 Blackett, as the Treasurys
controller of nance, gave evidence to a select committee on increases of
war wealth in which he stressed the advantage of some special method
of raising cash with which to pay off a considerable proportion of the
1,000 million outstanding in Treasury bills. The existence of so large
a oating debt made control of money markets by the Bank of England
ineffective, as holders of Treasury bills could allow them to run off and
force the government to borrow from the Bank on even more ination-
ary ways and means. However, three months later Blackett changed his
mind, as the postwar inationary boom was giving way to a slump. It
was the change in the economic climate, rather than opposition from
the City, that led to the change in the attitude of the Treasury to a war
levy.
25
Interwar nancial policy
The postwar slump created a new challenge for the Treasury. In 1921
Lloyd George, by then Prime Minister, asked the Financial Secretary of
the Treasury, Hilton Young, to investigate the reactions of City men and
industrialists to his idea of creating work for the unemployed, either on
public works or in their own occupations, by resorting to ination. By
ination, Lloyd George seems to have meant borrowing on ways and
means from the Bank of England or borrowing money created by the
banks, as in the First World War. Hilton Youngs enquiries were con-
ducted in the short space of ve days. As he himself observed, industrial
men, being mostly provincial, take longer to get at than nancial men. As
a result, most industrial enquiries were conducted in Glasgow by Dudley
Ward, a former temporary Treasury ofcial who was now manager of the
British Overseas Bank. City reactions were predictably hostile to any form
24
Michie, London Stock Exchange, p. 182.
25
M. J. Daunton, How to pay for the war: state, society and taxation in Britain, 191724,
English Historical Review 111 (1996), 882919; M. J. Daunton, Just Taxes: The Politics of
Taxation in Britain, 19141979 (Cambridge, 2002), pp. 7781.
of inationary nance, and industrialists preferred export credits to pub-
lic works. The gold standard had been suspended in 1919 but the Bank of
England and the Treasury were agreed that a deliberate attempt to make
British exports competitive by lowering the sterling exchange rate would
fail. They believed that trade unions would successfully resist a reduction
in the standard of living by claiming higher wages, and the burden of
higher prices would fall on people with xed incomes or the possessors
of capital. Lloyd George was subsequently persuaded to reduce his ideas
for new money for employment creation to a fraction of the gure that he
had rst thought of (35.3 million compared with 250 million), and the
possibility of Keynesian reation before Keynes himself had advocated
it faded.
26
This episode certainly shows that the City had closer links
with the Treasury than industry had, and that the City, the Bank and the
Treasury were at one in defending nancial orthodoxy. However, it is less
certain that the Treasury was responding to City inuence. The recent
experience of wartime ination, and the disruption it had caused to gov-
ernment nances, would have made the Treasury reluctant to resort to
more of the same.
The most notorious example of the CityBankTreasury nexus at
work is the decision to return to the gold standard in 1925 at the
prewar parity of $4.86, a revaluation by about 10 per cent compared
with 1924 that handicapped exporters. Of the three committees recom-
mending a resumption of gold payments, two, the Cunliffe Committee
in 1918 and the ChamberlainBradbury Committee in 1924, contained
no one with experience of manufacturing industry. The Committee on
Financial Facilities after the war, whose report followed that of the
Cunliffe Committee in 1918, did contain four industrialists, but was
dominated by bankers and merchants from the City. Both in 1918 and
in 192425 the evidence of the Federation of British Industries as to
the difculties that industry might face was given little weight com-
pared with the views of City men. The Chancellor, Churchill, was
impressed by Keyness criticisms of the gold standard, and expressed
the view that he would far rather see Finance less proud and Industry
more content. However, he lacked the technical competence to weigh
the arguments of his advisers, Niemeyer and Norman, against those of
Keynes.
27
26
G. C. Peden, The road to and from Gairloch: Lloyd George, unemployment, ination,
and the Treasury view in 1921, Twentieth Century British History 4 (1993), 22449.
27
R. Boyce, Creating the myth of consensus: public opinion and Britains return to the
gold standard in 1925, in P. L. Cottrell and D. E. Moggridge (eds.), Money and Power.
Essays in Honour of L. S. Pressnell (1988), pp. 17397; D. E. Moggridge, British Monetary
Policy, 19241931. The Norman Conquest of $4.86 (Cambridge, 1972), ch. 3, esp. p. 76.
126 G. C. Peden
In the long run the gold standard proved to be too tight a straitjacket
for monetary and scal policy in the post-1929 depression. Prices fell and
unemployment, andthe cost of its relief, soared. InJune 1931 a royal com-
mission on unemployment insurance reported that the Unemployment
Insurance Fund was actuarially unsound. Then, on 31 July, came the
report of the May Committee, which had been asked by the Chancellor,
Snowden, to consider all possible economies in government expenditure.
The committees chairman, Sir George May, had formerly been secretary
of the Prudential Assurance Company, and his report expressed the views
of City men on public nance. Government accounts were recalculated to
include not only expenditure within the budget as conventionally dened,
but also extra-budgetary items, of which the Unemployment Insurance
Fund was the most signicant. Of the recommended economies of 96.6
million, no less than 66.5 million were on unemployment benets, which
were to be reduced in line with the cost of living. The Labour cabi-
net was unable to agree on economies that would balance the budget
and resigned, to be replaced by the National Government headed by
the outgoing Labour Prime Minister, MacDonald. There quickly arose
a belief on the Left that the Labour government had been the victim of a
bankers ramp. New York bankers, when asked about the feasibility of a
government loan, had enquired if MacDonalds proposals for balancing
the budget would be supported by the Bank of England and the City
generally. However, as Philip Williamson has shown, both the New York
bankers and the Bank of England had been careful to avoid giving any
advice that would give the appearance of attempting to impose specic
economies.
28
Once sterling had been forced off the gold standard in September 1931,
the Treasury, not the Bank, determined what monetary policy would be.
The evidence is that ofcials showed an awareness of the problems of
industry that had been lacking in the 1920s. Within a week of the sus-
pension of the gold standard, Phillips, the rising star on the nance side
of the Treasury, was pointing out that the appreciation of gold since
October 1929 had lowered wholesale prices by 25 per cent and the cost
of living by 10 per cent, while wages remained practically unchanged.
He went on: This is what was crushing our farmers and manufacturers
for the benet of the rentier . . . Why go on with it?
29
Subsequently
the Treasury made clear that there would be no early return to the gold
28
P. Williamson, A bankers ramp? Financiers and the British political crisis of August
1931, English Historical Review 99 (1984), 770806.
29
S. Howson, Domestic Monetary Management in Britain, 19191938 (Cambridge, 1975),
p. 83.
standard, and settled on a target rate for the oating pound of $3.40
rather than $4.86. The Treasury wanted prices to rise to their pre-
depression levels, and Phillips noted in March 1932 that the only method
seems to be to hold sterling down until a rise in world gold prices takes
us there.
30
Suspension of the gold standard also removed the need to
prevent a drain of gold by raising the bank rate, and thus made pos-
sible a reduction in interest rates. As Phillips put it: we want cheap
money and plenty of it to stimulate industry.
31
Bank rate was reduced
by stages from 5 per cent in February 1932 to 2 per cent on 30 June,
at which rate it remained until August 1939. However, the banks were
slow to reduce their overdraft rates and in autumn 1932 Phillipss imme-
diate superior, Hopkins, was surprised to learn that the total amount
of overdrafts had fallen since bank rate had been reduced. He advised
the Chancellor, Neville Chamberlain, that the banks would resent any
Treasury intervention but that the matter could be raised informally
by Chamberlain with the principal bankers. In April 1933 Hopkins was
assured by the Bank of England that overdraft rates had been reduced
and that it was the general policy of the banks to give advances freely
to sound new borrowers.
32
It is difcult to nd evidence of bias against
industry in monetary policy in the 1930s after the suspension of the gold
standard.
War nance, 19371945
By 1937 the clouds of war were once more gathering. The City, how-
ever, objected to the governments intention to meet part of the cost of
rearmament by imposing a special tax, albeit a temporary one, on prots.
The original proposal for what was called the National Defence Contri-
bution (NDC) was for a tax graduated according to the growth of prots.
The estimated yield was only 25 million in a full year, compared with
total estimated revenue for 19378 of 863.1 million, but Chamberlain
believed that NDCwould help to prevent accusations of proteering. The
City and business organisations regarded it as a socialist measure. Share
values slumped. Horne, a former Chancellor and a prominent member
of the City, criticised the measure as a tax on enterprise. Chamberlain
felt that he had put his succession to the premiership at risk, and he and
Simon, his successor as Chancellor, had to come to terms with the busi-
ness community. Astraight 5 per cent tax on prots, estimated to produce
the same yield as the original NDC, was substituted for the graduated
30
Phillips, The Mond-Strakosch memorandum, 4 March 1932, T 175/57.
31
Howson, Domestic Monetary Management, p. 86.
32
Peden, Treasury, pp. 2589.
128 G. C. Peden
scale, making the tax easier to calculate and to pass on to the customer.
33
However, when a Bill for compulsory military training was introduced in
April 1939, Chamberlain responded to Labour demands for conscrip-
tion of wealth by promising that proposals for a tax on prots arising
from armament contracts were being prepared. Armament prots duty
was enacted a few weeks before war broke out but was merged with a
new excess prots tax (EPT) in Simons budget of 27 September. Both
the duty and EPT were levied at 60 per cent on prots above a stan-
dard based on pre-1938 prots. In Woods rst budget on 23 July 1940
EPT was raised to 100 per cent, to appease workers resentment about
shareholders prots, even although Treasury ofcials realised that such
a rate would take away all incentive from businessmen to take risks in
new investment.
34
The outbreak of war altered relations between the Treasury and the
City. The Stock Exchange immediately introduced a rule that, if the
Treasury objected to any new issue, it would not be listed or quoted. On
26 September the Chancellor wrote to Norman asking for the Bank of
England to request the banks to restrict advances to the needs of defence
production, exports, coal-mining and agriculture. With regard to both
the Stock Exchange and the banks the Treasury relied upon co-operation
from the institutions concerned rather than imposing detailed control
fromWhitehall. In return, the Treasury agreed to legislation whereby only
members of a recognised stock exchange could deal in securities, thereby
empowering the Stock Exchange to act, in effect, as an agent of the
state, as the still independent Bank of England had long done.
35
Political
considerations dictated that the government should not offer more than
3 per cent for long-termloans, comparedwith5 per cent inthe First World
War. Firms and nancial institutions were reluctant to hold long-term
debt on such terms, with the result that, of the 14,800 million borrowed
by the government within Britain during the war, 4,273 million
was held in the form of oating debt, such as Treasury bills. The exis-
tence of these reserves did not matter so long as the government exer-
cised direct controls over investment, including Board of Trade licensing
of steel and machinery. However, decontrol of the civilian economy, as
33
HC Deb 323, cc. 24957, 27 April 1937; K. Feiling, The Life of Neville Chamber-
lain (1946), pp. 2923; R. Shay, British Rearmament in the Thirties: Politics and Prot
(Princeton 1977), pp. 14755.
34
Woods 1941 budget recognised the need to restore incentives to enterprise by converting
20 per cent of EPT into a deferred credit to be repaid after the war, on condition that
the credit was ploughed back into a business: Peden, Treasury, pp. 31821, 324.
35
Michie, London Stock Exchange, pp. 2914; R. S. Sayers, Financial Policy, 19391945
(1956), pp. 1846.
after the First World War, would produce an inationary boom similar to
that of 191920. Consequently, even the Treasury favoured the continua-
tion of controls on investment into the postwar period. It is not surprising
that, when peace came in Europe in May 1945, there was no assumption
in the City of a ready return to a golden past.
36
Postwar domestic monetary policy
The prospects of a return to what the City would regard as normality were
not enhanced by Labours victory in the general election of July 1945.
During the period of reconstruction planning the Treasury and the Bank
of England had put pressure on the clearing banks to put up capital for
an institution (later known as the Industrial and Commercial Finance
Corporation) that would ll the Macmillan gap by providing nance for
small and medium-sized companies.
37
As Eady of the Treasury pointed
out, any alternative scheme devised in Whitehall was likely to be less
acceptable to the bankers.
38
In the event, the Investment (Controls and
Guarantees) Act of 1946 made permanent the wartime Capital Issues
Committee, and created a National Investment Council (NIC) under the
chairmanship of the Chancellor of the Exchequer. The NICmight be seen
as the entry of the City into Whitehall, as its membership included the
chairman of the London Stock Exchange, and most other members had
a City or industrial background. However, the NIC was purely advisory
and, according to Dalton, the Chancellor, Treasury ofcials did not like
it because they thought that its advice might conict with their own.
39
At all events, the NIC was wound up by Daltons successor, Cripps, in
1948.
Labours postwar chancellors believed that planning and direct con-
trols offered a better way of controlling investment than variations in
interest rates. They seem to have assumed that the banks could be asked
to restrict credit, as during the war. However, the Bank warned the Trea-
sury in September 1948 that it would be most unwise to set a xed limit
to bank advances; instead it proposed to invite the banks to shorten their
advances. In June 1951 Treasury ofcials asked the Treasury Solicitor
about the Chancellor of the Exchequers power to issue directions to the
36
Kynaston, City of London, III, p. 507.
37
In 1931 the Macmillan Committee on Finance and Industrys report (Cmd. 3897)
referred to the lack of provision for supplying long-term capital, in amounts too small
for a public issue, to small and medium-sized rms. This lack became known as the
Macmillan gap.
38
Kynaston, City of London, III, pp. 4956.
39
H. Dalton, High Tide and After: Memoirs 19451960 (1962), pp. 978.
130 G. C. Peden
banks under the Act nationalising the Bank of England, but were told
that he had none.
40
Relations between the Treasury and the City did not
change fundamentally with the election of a Conservative government in
October 1951. The governments reduction of direct controls over invest-
ment was offset by a more active use of bank rate, but the nancing of
government expenditure through the issue of Treasury bills increased the
clearing banks liquid assets. There continued to be excess demand in
the economy, and the Treasury continued to look to the Bank to per-
suade the clearing banks to restrict their advances. The Bank pressed
for curbs on public expenditure, but the Treasury did not get the sup-
port it hoped for from Conservative governments. The Conservatives
had pledged themselves before the 1951 election to deal with the housing
shortage, and they sought to hold the middle ground of politics by main-
taining the welfare state. Defence expenditure was reduced, but there
were limits to the extent of cuts in the armed forces that would be accept-
able to the Conservative party. As for scal policy, the Treasury shared
the Conservatives belief that reductions in tax rates were necessary to
encourage enterprise, but lower taxation also tended to increase demand.
Macroeconomic policy required that taxes be cut only slowly.
These problems were highlighted in 1955 when the Chancellor, Butler,
justied a reduction of 6d in the pound in income tax by saying in his bud-
get speech that he had monetary policy in reserve. The Bank of England
was expected by the Treasury to control bank advances in order to curb
demand, but Treasury ofcials learned from informal contacts with bank
chairmen that the Bank was applying the credit squeeze with less rigour
than the Governor, Cobbold, claimed. Most unusually, the Bank agreed
to a meeting between Treasury ofcials and representatives of the clear-
ing banks, in the presence of senior Bank ofcials, in July, and the banks
agreed to reduce their lending provided that the Chancellor make a public
statement asking them to do so. Even so, Cobbold persuaded the Chan-
cellor not to put a gure on what the reduction in advances should be,
although Treasury ofcials had proposed 10 per cent.
41
Cobbold had made it his business since becoming Governor in 1949 to
preserve the Banks independence and had kept contacts between Bank
and Treasury ofcials to a minimum. The failure of monetary policy to
restrict demand in 1955 forced Butler to introduce a second budget in
the autumn, and led Treasury ofcials to press for a joint BankTreasury
40
A. Cairncross, Prelude to Radcliffe: monetary policy in the United Kingdom 194857,
Revista di Storia Economica, 2nd series, 4 (1987), 120, at 5; S. Howson, British Monetary
Policy 19451951 (Oxford, 1993), pp. 11617, 297.
41
Peden, Treasury, p. 468.
working party to review the working of the monetary system. The work-
ing partys recommendation in 1956 that the co-operation of the banks
should be secured by mutual agreement rather than by direction merely
conrmed the Banks understanding of the status quo. The Radcliffe
inquiry into the working of the monetary system was set up in May
1957, but a sterling crisis in September led the Chancellor, Thorneycroft,
to consider more urgent action. He set up a working party of Treasury
and Bank ofcials, with the economist Lionel Robbins, to consider how
credit could be controlled. Under pressure fromthe Chancellor, Cobbold
accepted a scheme for special deposits, whereby banks could be required
to deposit funds with the Bank, which would then lend them to the Trea-
sury, as a means of reducing the governments dependence on Treasury
bills for Exchequer nancing. However, the Bank reserved the right to use
its own judgement in operating the scheme. The Radcliffe Report recom-
mended in 1959 that the Chancellor of the Exchequer, not the Court of
the Bank, should decide changes in bank rate, and that monetary policy
should be coordinated by a committee of representatives from the Bank,
the Board of Trade and the Treasury. Treasury ofcials, however, did not
wish to share the conduct of monetary policy with the Board of Trade,
and the committee was not set up. Relations between the Bank and the
Treasury remained substantially unchanged because Treasury ofcials
believed that too direct political control of the monetary system would
have an adverse effect on condence in sterling, abroad as well as in the
City.
42
The Banks leadership in control of policy towards the banking system
was conrmedinthe early 1970s. Ahigh-level TreasuryBank Committee
was set up in 1969 to re-examine the fundamentals of monetary policy.
The Bank wished to put an end to requests for ceilings on lending by the
clearing banks, as many smaller, newer, banking concerns escaped from
these restrictions. Its plan, which became known as Competition and
Credit Control, was designed to place the different institutions offering
credit on a level footing. Competition was to be secured by ending the
clearing banks cartel on interest rates. The Bank was to be able to call
on all banks, not just the clearing banks, to place a proportion of their
assets with it as special deposits, but the Bank expected that interest
rates would be the chief method of inuencing the monetary system.
The plan was presented by the Governor, OBrien, to the Chancellor of
the Exchequer, Barber, at a private dinner in January 1971 at which both
42
A. Ringe and N. Rollings, Domesticating the market animal? The Treasury and the
Bank of England, 19551960, in R. A. W. Rhodes (ed.), Transforming British Government,
I: Changing Institutions (2000), pp. 11934.
132 G. C. Peden
were accompanied by senior advisers. It appears that Treasury ofcials
would have liked to have been consulted earlier than they were about
the plan, and were reluctant to abandon loan ceilings. However, the plan
was very much in line with the Conservative governments ideology, and
was nally approved in the autumn of 1971. In the event, the new sys-
tem was unable to prevent, and may have helped to stimulate, a highly
unstable boom in property development companies that broke at the end
of 1973, leaving many smaller nancial concerns, known as secondary
banks, on the brink of insolvency. The Bank and the clearing banks had
to launch a joint rescue of the secondary banks, to prevent a collapse of
condence in the banking system. The Treasury was kept informed by
the Bank of England, but seems to have played no active part in directing
what became known as the Lifeboat operation.
43
Postwar international monetary policy
As regards external monetary policy, the City, the Bank and the Treasury
had shared the goal of making sterling an internationally convertible cur-
rency as soon as possible after the Second World War. An early attempt
in 1947 with a xed exchange rate failed. In 1952 Bank and Treasury
ofcials devised a plan, code-named Robot, for making sterling convert-
ible with a oating exchange rate. However, in contrast to the decision
to return to the gold standard in 1925, the Bank and the Treasury no
longer had a monopoly of advising the government on external nancial
policy. Hall, the head of the Economic Section of the Cabinet Ofce,
and MacDougall, an economist in the ofce of the Paymaster-General,
Cherwell, warned ministers of the risk of unemployment if the plan were
implemented, and the Cabinet withheld approval.
44
Thereafter exchange
controls on sterling were eased only gradually, with the Treasury react-
ing cautiously to Bank advice, while accepting that the Bank are the
experts. In 1955 Rowan, the principal Treasury ofcial on the overseas
nance side of the Treasury, thought that, given the choice between full
employment and maintaining the exchange rate, public opinion would
insist on full employment. Nevertheless, he believed that the discipline
of maintaining a stable exchange rate could be a good thing to get gov-
ernments to take unpopular measures.
45
In the event, full convertibility
was achieved in 1958 at the post-1949 exchange rate of $2.80, and the
43
M. Reid, The Secondary Banking Crisis, 19731975: its Causes and Course (1982), esp.
pp. 1819, 302.
44
P. Burnham, Britains external economic policy in the early 1950s: the historical signif-
icance of Operation Robot, Twentieth Century British History 11 (2000), 379408.
45
Labour government of 196470 went to considerable lengths to avoid the
devaluation to $2.40 that eventually took place in 1967, and defended the
latter rate at the expense of projected public expenditure.
46
Both the Bank
and the Treasury had believed that convertibility would strengthen the
position of the City in international nancial markets, but the Treasury
had had its own, additional motive.
By the mid 1960s it had become apparent that Londons role did not
depend upon sterling being a reserve currency. After devaluation in 1967
it was increasingly realised that the City could work in foreign curren-
cies (especially dollars), and that therefore the exchange rate was almost
an irrelevance to the Citys success as a nancial centre.
47
Consequently
there was little opposition in the City to the decision in 1972 to allow
sterling to oat. The decision reected and reinforced the inationary
situation in the economy at the time, and it left the Treasury without any
clear target with which to guide macroeconomic policy. By 1976 con-
dence in sterling was so low that the Labour government was persuaded
to make a formal application to the International Monetary Fund (IMF)
for assistance to prevent a free fall in the exchange rate. Cuts in pub-
lic expenditure programmes were negotiated with the IMF, and a letter
to the IMF set out limits to domestic credit expansion.
48
Opinion in
the City was by then rapidly becoming convinced by monetarist argu-
ments of nancial journalists, in particular Brittan and Jay. The Treasury
was sceptical about the value of monetary targets, but nancial markets
were strongly inuenced by them. A money supply overshoot in 19778,
followed by an expansionary budget in April 1978, led to the City refus-
ing to purchase the gilt-edged securities required to fund the govern-
ments decit. The Bank warned the Treasury that something had to be
done to restore condence, and a deationary package followed in June
in the form of a mini-budget and an increase in the Banks minimum
lending rate. The City was in effect monitoring the governments poli-
cies from a monetarist perspective even before Thatchers government
brought monetarist economists into Whitehall.
49
In the event, the devel-
opment of global capital markets, nancial deregulation and changing
technology meant that there was no clear and stable relationship between
money demand and ination. Membership of the exchange rate mech-
anism of the European Monetary System between October 1990 and
46
A. Cairncross and B. Eichengreen, Sterling in Decline: the Devaluations of 1931, 1949 and
1967 (Oxford, 1983), ch. 4.
47
S. Strange, Sterling and British Policy: A Political Study of an International Currency in
Decline (Oxford, 1971), ch. 7.
48
K. Burk and A. Cairncross, Goodbye Great Britain. The 1976 IMF Crisis (New Haven
and London, 1992).
49
D. Smith, The Rise and Fall of Monetarism (1987), ch. 5.
134 G. C. Peden
September 1992 made the exchange rate once more the key target for
macroeconomic policy, but proved to be unsustainable in view of nan-
cial markets lack of condence in sterling.
Mutual interdependence
The interdependence of the different parts of the CityBankTreasury
nexus was brought out clearly by developments in the 1990s. In 1993
the Treasury took over most of the Department of Trade and Indus-
trys responsibility for supervising nancial services, and the transfer was
completed in 1998 when the Treasury took over regulation of general
insurance. The Treasury thus found itself dealing with a national scandal
in relation to personal pensions, which the public had been encouraged
to take out since the mid 1980s as an alternative to the State Earnings-
Related Pension Scheme. Helen Liddell, the economic secretary to the
Treasury, made her reputation in Whitehall in 1998 by successfully pres-
suring nancial institutions to compensate people who had been mis-
sold personal pensions.
50
The Bank of Englands independence in setting
interest rates from1997 did not remove ultimate control of monetary pol-
icy from the Treasury, since it was the Chancellor of the Exchequer who
set the ination target that the Banks Monetary Policy Committee had
to meet. On the other hand, the new scal policy framework set out in
the Finance Act of 1998 made it easier for the City to see if the Treasury
was meeting its scal objectives. The Treasury and the City were thus in
a position to monitor each other.
Historical evidence leaves no doubt that the Treasury and the City have
shared interests. What is less certain is the direction of inuence between
them. The Treasury has had to take account of conceptions of the national
interest as well as the Citys particular interests. The overriding national
interest was most obvious in wartime, but there have been other examples
too. Monetary policy may have been shaped by the interests of the City
in the return to gold in 1925, but the same cannot be said of the 1930s,
once the gold standard had been suspended. Likewise the City had to
accept credit squeezes in the 1950s and 1960s. On the other hand, the
Citys refusal to buy all the gilt-edged securities that the Treasury wished
to sell in the spring of 1978 powerfully illustrated the Treasurys need to
have the condence of nancial markets. Since that condence rested on
sound public nance, it was a constraint that was not unwelcome in the
Treasury.
50
D. Lipsey, The Secret Treasury (2000), pp. 21, 23, 21213.
7 The Liberals and the City 19001931
Anthony Howe
Until comparatively recently, historians have often accepted uncritically
the notion that the City of London was able to exert a primary inu-
ence on economic policy-making by the British state. Balanced budgets,
the gold standard, and adherence to free trade have all been put down
to the power of the City of London.
1
In a subtler variation, Peter Cain
and Anthony Hopkins have ascribed predominant inuence to a social
nexus between the City and the aristocracy, the fusion of the wealth of
the City with that of landed society.
2
Despite the industrial revolution,
they suggest that gentlemanly capitalism had relegated industrial power
to the margins of political inuence. In the Edwardian period, the failure
of tariff reform with its promise of modernisation and industrial regener-
ation has similarly been attributed to the power of cosmopolitan capital,
embodied in the City, which was able, in conjunction with other forces,
to undermine the productivist vision of Joseph Chamberlain.
3
For many
in the City, it is held, the beau id eal was to create in Britain a paradise for
rentiers, with the grimy-handed workers shipped off to their paradise in
the colonies, removing the threat of proletarian revolution as well as that
of environmental deterioration fromexcessive industrialisation. This type
was well observed by Beatrice Webb in the person of her brother-in-law,
Daniel Meinertzhagen:
a great City nancier, earning his tens of thousands each year, upright and hon-
ourable, cordially hating the social question, describing frankly his ideal: English
capitalists retired from business living on an income of foreign investments, the
land given over to sport, the people emigrated or starved out, no inhabitants
except a few dependents to serve in one way or another the fortunate capitalists.
4
1
G. Ingham, Capitalism Divided: The City and Industry in British Social Development (1984).
2
P. J. Cain and A. G. Hopkins, British Imperialism, 2 vols. (1993; 2nd edn 2001); R. E.
Dumett (ed.), Gentlemanly Capitalism and British Imperialism (1999); S. Akita (ed.),
Gentlemanly Capitalism: Imperialism and Global History (2002).
3
S. Newton and D. Porter, Modernisation Frustrated (1988); E. H. H. Green, The Crisis of
Conservatism (1995).
4
The Diary of Beatrice Webb, I: 18731892, ed. N. and J. Mackenzie (1982), p. 321 (1 Feb.
1890). Meinertzhagen (18421910) was a partner in Frederick Huth & Co., merchant
bankers.
135
136 Anthony Howe
However, it is unlikely that many nanciers in the City of London
by 1914 imagined that they were living in any such rentiers paradise.
Rather, under the Liberal government since 1905 they had found them-
selves under steady attack, the plutocosm assailed by more steeply grad-
uated taxation, super tax, and land taxes in a Peoples (emphatically
not a City) Budget, with the threat of industrial unrest ever present,
with civil disturbance not unlikely in Ireland, and war with Germany
in prospect. In addition, while foreign investments and migration had
boomed in the Edwardian period, the social question had become insis-
tent as the Liberals found themselves under growing pressure from the
nascent Labour party. In many ways, therefore, it is possible to claim that
under the Liberals between 1905 and 1914, rather than unfettered licence
being granted to the aspirations of cosmopolitan capital, those aspira-
tions were increasingly reined in by the democratic promise of the post-
Gladstonian Liberal party. This essay will argue rstly that in respect of
monetary, budgetary and commercial policies, the Liberal governments
of 190514 consistently put what they saw as the wider needs of the
British state and people above the narrow interests of the City. This in
turn was to provide partial justication for Lloyd Georges otherwise ten-
dentious claim in 1931 that the prewar Liberal governments, unlike the
second Labour government, had successfully resisted pressure from the
City of London, reducing its supposedly potent magnates to frigid and
apping silence, as if a row of penguins in the Arctic Ocean.
5
Ironically, as the second part of this essay will show, one of the immedi-
ate effects of the outbreak of war in 1914 was to bring the City penguins
back from the cold into the warm embrace of the Liberal and then Coali-
tion governments. Yet the First World War fundamentally undermined
the political economy of free trade, the gold standard, and limited gov-
ernment expenditure, which had served so well both the Liberal party
and the City of London. After the war, the City found its prosperity
and international pre-eminence impaired, while the political basis of the
Liberal party had been shattered by the rise of Labour and by internal
party division. This dual transformation necessarily altered the relation-
ship between the Liberals and the City. On the one hand, many Liberals,
including some City nanciers, linked the restoration of economic pros-
perity based on an identity of interest between the City and industry with
5
HC Deb 248, cc. 7313, 12 Feb. 1931; R. W. D. Boyce, British Capitalism at the Crossroads
(Cambridge, 1987), p. 300. This graphic image probably derived from the Westminster
Gazettes cartoon (28 June 1909) of The City Penguins opposed to the Peoples Budget.
In a later series of Potted Peers Lord Rothschild was depicted with the caption, The
whole of the British capital having been exported to the South Pacic as a result of the
Budget revolution, Lord Rothschild ies from St Swithins Lane to the Antarctic regions
disguised as a Penguin: reproduced in N. Ferguson, The Worlds Banker (1998), p. 955.
The Liberals and the City 19001931 137
the restoration of their own party fortunes based on opposition to social-
ism and tariffs.
6
On the other hand, as any such prospect receded in the
drastically altered political and economic conditions of the 1920s, Liberal
attitudes to the economy and to the City were to show far greater dis-
unity and diversity than in the past. As a result, by 1931, the Liberals had
failed either to redene themselves as a traditional party of City-based
economic virtues, able to challenge the Conservative party, or to pro-
vide, as they had between 1908 and 1914, a progressive radicalism able
to bolster their electoral fortunes at the expense of the Labour party.
The City and the people, 19051914
Before analysing the relationship between the City and policy-making
under the Liberals, it is worth considering briey the political complex-
ion of the City of London in the early twentieth century. For while the City
Liberal Club retained an important political presence, the City had shown
an intense hatred of Gladstone from the 1880s and the City constituency
had been solidly Conservative for a generation.
7
The implosion of the free
trade issue within the City revived Liberal opposition but the Citys last
Liberal MP had been elected in 1880 and the Liberals had not contested
the seat since 1885. As Lloyd George was to put it in 1912, the City
is a rather chilly atmosphere for Liberalism.
8
It is also unlikely that the
1905 Liberal government felt any debt of gratitude to the City. Rather,
the Liberals would have been only too well aware that Balfour, leader
of the Opposition, after losing his seat at the general election, had been
granted an easy return to the Commons by the City Conservatives in a
by-election in February 1906.
9
Nor, we may surmise, did the Liberal gov-
ernment readily turn to the City for collective advice on particular issues
of policy. Rather as Herbert Gibbs, the Conservative nancier, lamented
in1908, there was a time whenif these [commercial andbudgetary] ques-
tions were raised, the City of London was consulted, but at the present
time they were not consulted.
10
Inuential City magnates who had had
close links with previous Liberal governments also found themselves
6
. . . the present juncture offers a wonderful opportunity for the old Liberal Party brought
up to date, if it were taken: R. H. Brand to C. Sheridan Jones, 15 Jan. 1920, Brand
Papers, 93/2, Bodleian Library, Oxford. For his war and postwar views, War and National
Finance (1921). Brand, a partner in Lazards, consistently rejected tariffs while defending
private property and the prot motive, e.g. Brand to A. Chamberlain, 27 Dec. 1923,
Brand papers, 67/1; Socialism and the banks, The Times, 17 Apr. 1924; Why I am not
a Socialist (Daily News Ltd, 1923).
7
Kynaston, City of London, I, pp. 337, 371, 373, 375.
8
The Times, 5 Feb. 1912.
9
Alban Gibbs stood down: Kynaston, City of London, II, p. 416.
10
The Times, 3 July 1908.
138 Anthony Howe
marginalised, for example Nathaniel Rothschild, who, as Sir Edward
Hamilton had noted in 1902, had become so strong a party man, he
will now be out of it whenever the other side comes in.
11
On the other
hand, the Liberal cabinets did have ready access to individual Liberals
occupying prominent positions in the City such as Sir Felix Schuster.
12
The City also contributed an important number of Liberal MPs, elected
outside London, several of whom were to obtain ofce and preferment,
even if Asquiths quirky desire to make the chairman of the Midland Bank,
Sir Edward Holden, Chancellor of the Exchequer was not to succeed.
13
If the Liberals were not beholden to the City for their chancellor,
how far was the City able to inuence major areas of policy-making
before 1914? Traditionally economic policy-making has been considered
as dominated by the gold standard, the balanced budget and free trade. Of
these, the gold standard had ceased to be an important topic of debate
after the bimetallic movement of the 1880s and 1890s. Some Liberals
such as Lord Swaythling and the Montagu family continued to be heavily
involved in the silver interests of India and this gave rise in 191213 to an
embarrassing Indian Silver scandal exploited by the right-wing and anti-
semitic press.
14
But however rebarbative the issue of Indian currency, it
no longer called into question the desirability of the gold standard itself.
This meant that the main issue of monetary debate was the size and nature
of the banking reserves necessary to back up the gold standard. This was
hardly the stuff of popular politics, but it provided a nice issue for the
pages of the Bankers Magazine and became a growing concern of Britains
defence planners, alarmed by what they sawas the negligible reserve stock
of British gold.
15
Even so, the Liberal cabinet remained, for the most
part, unimpressed by the Citys argument for larger gold reserves, leav-
ing clearing bankers increasingly alienated from its monetary policy.
16
They were also alienated by the absence of any genuine attempt by the
Liberals to revive the price of Consols, whose decline since the 1890s had
itself substantially reduced the value of banking reserves. The decline in
11
Hamilton diary, quoted in Ferguson, Worlds Banker, p. 946.
12
Hamilton, the Treasury ofcial, sent Asquith a list of City wise men: Kynaston, City of
London, II, p. 414.
13
As suggested in E. Green, Holden, in D. J. Jeremy (ed.), Dictionary of Business Biography
[hereafter DBB], III, p. 295.
14
G. R. Searle, Corruption in British Politics, 18951930 (Oxford, 1987), pp. 20112. This
scandal also indirectly affected Schuster, a Liberal candidate for the City in 1906.
15
Sir George Clarke (secretary of Committee on Imperial Defence) to Asquith, 2 May
1906, we could not enter upon a war of which the opening phase would be a general
crash in the City: Clarke papers, Add. ms 50836, British Library; Holden to McKenna,
23 March 1909, on Britains lack of a war chest, Holden papers 150/1, Hong Kong
and Shanghai Banking Corporation Group Archives.
16
Kynaston, City of London, II, pp. 38790ff; Holden diary, 190614, passim.
Consols was attributed in the City to excessive taxation and expenditure
reducing the attractiveness of British government securities, encourag-
ing a ight of capital abroad. City nanciers such as Rothschild drew a
ne distinction between capital attracted abroad (under Conservative
administrations) and capital driven abroad (under the Liberals). The
Liberals fended off this charge by pointing out the even greater decline
in the price of Consols under the Conservatives and their own success-
ful attempt to reduce the national debt, brought back practically to the
level of twenty years ago as Asquith proudly boasted.
17
But they were
also ready in 1912 to consult the City, as to the best way to restore its
losses, with Lloyd George promising a Treasury inquiry.
18
Interestingly
among the Liberals own City supporters, Kleinwort compared the City
agitation over Consols to the earlier bimetallic agitation as an articial
attempt to alter market prices.
19
If reserves and the price of Consols were arcane, technical, and sub-
political issues, budgets remained very much the stuff of Liberal, as of
Conservative politics, in this period. Gladstonian nance had arguably
been pushed to its furthest extreme under Hicks Beach and Ritchie in the
Conservative governments of 18951903. In many ways Asquith at the
Exchequer between 1905 and 1908 was ready to break with Gladstonian
tradition, and to mould, as Martin Daunton has recently argued, a new
progressive scal constitution.
20
Firstly, in a way that pleased City
opinion, he was prepared for greater armaments expenditure and his
rst budget disappointed Liberals expecting immediate retrenchment.
21
Secondly, he was prepared to introduce progressive taxation to pay for
social reform. Following the introduction of the differentiation of taxation
in 1907, in 1908 Asquith graduated the income tax, and looked forward
in 1909 to diverting some very substantial portion of that sum [surplus
tax revenue] to the nancing of necessary social reform.
22
It was this
threat of higher taxation of the rich that immediately rankled with the
City, leading to the charge of socialistic nance.
23
Even so, important
17
To F. W. Hirst, editor of The Economist, 9 May 1908, Hirst papers, uncatalogued,
Bodleian Library.
18
Announced at the City meeting of 3 Feb.; for the text of the speech, see Lloyd George,
Liberal Finance (1912), pp. 1718.
19
15 Feb. 1912, T 172/92.
20
M. J. Daunton, Trusting Leviathan. The Politics of Taxation in Britain 17991914 (Cam-
bridge, 2001), pp. 33074.
21
Hirst to Asquith, 30 Jan. 1906 (copy), Hirst papers, on the shocking Army estimates.
22
Asquith to Hirst, 9 May 1908, Hirst papers.
23
On the Liberal government as socialistic, e.g. W. M. Campbell, Governor-elect of the
Bank of England, to Hamilton, 3 Oct. 1907, Hamilton papers, Add. ms 48628. The
newly elected Liberal banker Holden was apprehensive of the socialistic tendencies of
a great number of Members: to James Simpson, 23 Jan. 1907, Holden papers 150/4.
140 Anthony Howe
City voices, for example Schuster, had given qualied support to higher
direct taxation.
24
As is well known, what Asquith started, Lloyd George was to take up
with Celtic dash and amboyance. Here, it is surprising that those who
argue that the City exerted a primary inuence on policy-making have
so often ignored the level of orchestrated City opposition to the Peoples
Budget, with the full panoply of petitions, a Budget Protest League, and
hostile meetings. In the formulation of the budget City concerns were
given due weight. In particular the Treasurys suggestion of doubling the
duty on bills of exchange was successfully resisted on the grounds that it
endangered Londons nancial pre-eminence.
25
But the Budget as even-
tually presented to the House of Commons on 29 April 1909 was imme-
diately deemed by many in the City, with Lord Rothschild leading the
attack, to be totally opposedto its interests, endangering the whole basis of
British prosperity. The gravamen of this charge lay in two main proposals,
the departure from the tradition that any surplus revenue in any one year
was devotedto reducing the Sinking Fund, andthe disproportionate share
of taxation to be borne by the rich. In particular, the increase and gradu-
ation of death duties, it was claimed, would deplete the nations stock of
investible capital, and ultimately diminish wages and employment. Even
well-known City Liberals such as Schuster joined the protests, which took
the form of an impressively signed letter to Asquith in May and a City
meeting attended by over a thousand merchants and traders.
26
This was
to no avail. Rather, Lloyd George showed himself ready to take up the
charge against the gentlemanly capitalists. At the Holborn restaurant in
June 1909, he singled out Rothschild (we are having too much Lord
Rothschild) in a speech The Times subsequently recalled as practically
telling the bankers and merchants of London that they were a parcel of
impertinent busy bodies who were blocking the path to progress.
27
Lloyd
Georges Holborn speech is less well known than his anti-aristocratic (but
also anti-City) Limehouse speech a few weeks later, but it conrmed that
the gulf between the Liberals and the City was almost as great as that
opening between the Liberals and the Lords. Indeed, as Ferguson notes,
City opposition to the budget was symbolically linked to that of the peers
when Rothschild presented the Budget Protest Leagues petition to the
House of Lords on 22 November.
28
Lloyd George nance was both
24
Select Committee on Income Tax, Report (Parliamentary Papers 1906 (365) ix. 659), qq.
2851ff.
25
B. K. Murray, The Peoples Budget 190910 (Oxford, 1980), pp. 1578.
26
Rothschild to Asquith, 14 May 1909, Asquith papers 12/32, Bodleian Library; The
Economist, 15 May 1909; The Times, 15 May 1909.
27
The Times, 24 July; cf. original report, 25 June 1909.
28
Ferguson, Worlds Banker, p. 953.
the symbol and the construction of an alienated City, dispossessed
of its accustomed inuence over nancial policy under the Liberals.
Indeed, contrary to the arguments of those who urge the primacy of
the City, it might even be suggested that Liberal budgetary policy found
much greater enthusiasm in the ranks of industry. For example, the
(pro-)Budget League seems to have been largely funded by the industri-
alist Mond and the Dundee manufacturer Caird, and the Leagues rep-
resentation in the City was certainly far below that of the Budget Protest
League.
29
But in formulation the budget owed nothing to the CityBank
Treasury nexus nor to industry, but much to Lloyd Georges desire to cir-
cumvent socialismby advancing on broad, sympathetic lines as far as the
mass of the people are concerned.
30
As Daunton has persuasively argued,
the Edwardian Liberals had upheld the tradition of the disintereste-
dness of the state, not of its subservience to powerful interest groups.
31
By 1909 budgets were inextricably linked to the issue of free trade, for
the tariff reformers had widely proclaimed as one of their objectives the
provision of a source of government revenue contributed by the foreigner,
not the taxpayer. Of course the more sophisticated City tariff reformers
did not succumb to this crude argument. But undoubtedly they did con-
sider indirect taxation a more eligible form of government nance than
taxing capital, with the belief that this would destroy incentives to invest
and would lead to a ight of capital abroad. Even so, the City of London
initially had proved hostile to the case for tariff reform. Indeed, Green
has suggested that for the tariff reformers the City became the enemy
within, an internal other whose non-productive interests marked it out
as different from and opposed to the interests of the national produc-
tive industrial base.
32
This polarisation should not be exaggerated; there
was growing support for tariffs in the City, and in June 1906 the City
Conservatives forced the retirement of Sir Edward Clarke in favour of
the more committed Sir Frederick Banbury.
33
By 1909, as the fear of
socialism grew, the City undoubtedly swung in an anti-Liberal direction,
so that as Cain and Hopkins have argued, pace Green, by 1909 there
was no differentiation between industry and the City on the tariff issue.
34
In particular, the fear of capital driven abroad by Liberal scal policies
provided an unexpected common ground between City nanciers and
29
For the League, see Murray, Peoples Budget, pp. 18890, 2026, and C. Hazlehurst and
C. Woodland (eds.), A Liberal Chronicle: Journals and Papers of J. A. Pease, 1908 to 1910
(1994), pp. 1212, 1456. For the League in the City, see The Times, 24 July 1909.
30
Lloyd George, Liberal Finance, p. 13.
31
Daunton, Leviathan, p. 388.
32
Green, Conservatism, p. 238.
33
Council and Executive Committee minutes, 3 April, 23 May, 8 June 1906, City of
London Conservative Association Archives 487/29, Westminster Library.
34
Cain and Hopkins, British Imperialism, I, pp. 21421.
142 Anthony Howe
industrially based tariff reformers. Both could now see some merits in
tariffs designed to improve the national economy, and City nanciers
who had for generations helped capital ee abroad, were convinced by
the Peoples Budget of the merits of domestic investment. This, it is sug-
gested, helped cement a previously rather improbable alliance between
the City and the tariff reformers.
35
Both now sought to promote the
interdependence of the interests of the City and industry, however much
some of the tariff reform productivist ideologues had proclaimed the
need to free the direction of policy-making from the seductive charms of
the money power. Ironically, against City opposition, the Liberal gov-
ernment now based its policies on what had been the traditional City
view, namely that capital exports beneted the nation as a whole and
not just its rentier elements. This view underpinned Lloyd Georges
budgetary policy, sustained by his economic advisers Paish, a City
journalist, and Speyer, a City nancier, as well as by Hirst, editor of The
Economist.
36
On the broader issue of free trade versus tariffs, City of London elec-
tions showed that opinion favoured tariff reformers, but elections were
weighted by numbers especially, to Liberal dismay, towards plural vot-
ers; arguably, the City elite the Court of the Bank and the leading City
nanciers still upheld free trade.
37
Even so, they did not rally in any
sizeable force to the City of London Free Trade Committee set up in
1909. This naturally received some support from well-known City Liber-
als, for example Holden, but relied for its dynamism on enthusiasts such
as Hirst.
38
Yet whatever the strength of its free-trade sentiment, the vis-
ible identity of the City remained Conservative and protectionist. Since
by 1910 the City was willing to adopt the Chamberlainite line on tariffs,
this served further to distance it from the Liberal government, much of
whose raison d etre now became the defence of free trade. Of course the
City still contained many free traders, some of them highly articulate,
such as Schuster and Huth Jackson. They enjoyed too the support of the
leading City weekly, The Economist, whose editor Hirst was tempted but
eventually turned down the chance to contest the City in the January 1910
election, fearing the damage which an inevitable Liberal defeat would do
35
On City motives, see also A. Marrison, British Business and Protection 19031932 (Oxford,
1996), p. 206.
36
A. Offer, Empire and social reform: British overseas investment and domestic politics,
19081914, Historical Journal 26 (1983), 11938; F. W. Hirst, British Capital At Home
and Abroad (1910); cf. Holden to Lloyd George, 24 Sept. 1909, Holden papers 150/1:
it is absolutely imperative for you to do something as the sending of money out of the
country for investment is spreading to an alarming extent.
37
Green, Conservatism, p. 240.
38
Holden diary, 8 Aug. 1909; Hirst papers, 1909 passim.
to the free-trade cause. In fact no Liberal nancier could be found to
ght the January 1910 election in the City, a dubious honour left to a
Northern industrialist Sir Hugh Bell, who won only 20 per cent of the
votes cast.
39
But nationally, the Liberal party rallied to free trade and
the Peoples Budget, issues unpopular in the City but which had helped
sustain popular support for the Liberal party. By 1910, the New Liberal
Hobson delineated, in his analysis of the January election, two nations, the
productivist North attached to industry, free trade and Liberalism, and
the rentier South, attached to tariffs, City-based incomes, and Conser-
vatism.
40
This was an exaggerated picture but one which rightly assessed
the growing disjunction between the interests of the City and the poli-
cies of the Liberal party. Arguably those policies were now far more open
to inuence from the Labour party, on whom the Liberals increasingly
depended in Parliament, rather than from a City whose challenge had
been seen off in 1910.
41
If therefore, as many have argued, the nineteenth century saw a
GovernmentCity consensus over free trade and budgetary policy, that
consensus had been largely shattered by 1910. On the one hand, the City
had ostensibly abandoned its traditional commitment to free trade as
the organising principle of the international economy, and on the other,
the Liberals, under pressure from progressive intellectuals and organised
Labour, had abandoned Gladstonian nance. Liberal policy after 1909
continued in a mildly progressive vein as it went on to tackle the issues
of national insurance and even land ownership, which smacked to the
City mind of the social question which it found so inherently distasteful.
But interestingly the Liberal government strove to convince the City that
social reform was an alternative to, not the embodiment of, socialism.
Lord Lucas, for example, urged the City to realise that after all what
we are striving for is to make that base upon which all their interests,
all the labours and the industry which they create depends, as sound
as it possibly can be made.
42
As a result, it might be suggested that
Liberal policy indirectly sustained at least the short-term interests of the
City. As recent debates on globalisation have illustrated, the period before
1914 remained for Britain one of unparalleled openness, with extremely
high volumes of capital export in relation to GNP.
43
Having rejected
39
A. Howe, Free Trade and Liberal England (Oxford, 1997), p. 287. Hirst had been invited
to stand by an impressive list of City gures: see H. Bell to Hirst, 20 Nov. 1909; J. L.
Mackay to Hirst, 29 Nov.1909, Hirst papers.
40
J. A. Hobson, The general election: a sociological interpretation, Sociological Review 3
(1910), 113.
41
Daunton, Leviathan, p. 358.
42
HC Deb 4, c. 1059, 24 Nov. 1909.
43
P. Hirst and G. Thompson, Globalisation in Question (Cambridge, 1999); K. ORourke
and J. Williamson, Globalisation and History (Cambridge, Mass., 1999).
144 Anthony Howe
the tariff-reform case for closure (looking inwardly to the empire), the
Liberal government remained committed to the international economy,
encouraging the maximum export of capital, goods and services. Lloyd
Georges Mansion House speech of 1912 boasted that the supremacy
of London as the banking centre of the world is greater today than it
has ever been.
44
Paradoxically, against opposition from the City itself,
the Liberal party in its defence of the liberal international economic order
had sustained what have traditionally been conceived as the Citys central
interests. But there is little evidence that in doing so they had responded
specically to pressure from the City. Rather the City of London, like the
cotton interest of Lancashire, had uncharacteristically been persuaded
to endorse tariff reform for political reasons in which fear of socialism
exceeded fear of the economic costs of tariffs.
45
On the other hand, the
wider political dynamics of Edwardian liberalismdictated policies of pro-
gressive taxation and social reform, which had further alienated nanciers
disdainful of the social question.
While the Edwardian Liberal governments had succeeded in escap-
ing the constraints of City inuence on the main elements of policy-
making, they did not wholly escape its embrace in other more insidious
ways. In particular, as is well known, a series of scandals, above all the
Marconi affair, suggested that individual Liberals used ofce for the pur-
poses of individual fortune-seeking and reward. In addition, the grow-
ing sale of honours saw the Liberal party ready to reward its nancial
supporters with an array of titles. As Geoffrey Searle has argued, this
provoked a vigorous attack on Radical Plutocracy which proved a seri-
ous impediment to the Liberals credentials as a party of progress and
democracy. The anti-Liberal press was keen to point out that, judged
by names such as Speyer, Kleinwort, Swaythling and Strauss, the Party
of the rich had been in power since 1906. This supposed increasing
sway of cosmopolitan nanciers, satirically epitomised in Sir Ludwig
Saurkraut of Little Britain EC and Sweatem Towers, Kent, one of our
Free Trade stalwarts, left a legacy of distrust which both the Conserva-
tive and Labour parties could exploit in a rhetoric which identied the
Liberals with the interests of international capital rather than those of
domestic industry.
46
In this way the Liberal party, having successfully
escaped the constraints of the systemic links between government and
44
Draft speech, with memo by Paish, T 171/20. Paish considered the export of capital
as the real alternative to tariff reform: Paish, My Memoirs (unpublished), p. 16, Coll.
Misc. 621, British Library of Political and Economic Science.
45
Thus the early reluctance of the City to support Chamberlain contrasts markedly with
the tariff reformers later success in City elections.
46
Searle, Corruption, esp. pp. 133, 134.
the City, found itself tarnished by its vicarious connections with nan-
cial scandal and corruption. This continued during and after the First
World War especially in relation to the sale of honours associated with
Lloyd George and through the notoriety of the Lloyd George Fund, the
existence of which proved such an obstacle to restoring party fortunes.
Lloyd George beneted from his own City contacts for the chairman of
the Fund was no less than the hugely inuential City investment banker
J. W. Philipps, Lord St Davids, a keen defender of Lloyd George nance
in the Lords before 1914.
47
Even so, it is perhaps doubtful whether this
negative imagery had serious long-term implications for the party, set
against the far broader canvas of the changes in the relationship between
the Liberals and the City induced by the outbreak of the First World
War.
The First World War, the City and Liberal political
economy, 19141931
Ironically, in the light of the strained relations between 1905 and 1914,
the outbreak of war was the prelude to a gradual restoration of the old
CityBankTreasury nexus. The nancial crisis of August 1914 led to the
creation of a new wartime network of institutional co-operation, with the
formation of a number of joint committees, such as the London Exchange
Committee and the Capital Issues Committee. The City has also been
seen as better placed than industry to preserve its interests on the outbreak
of war, although, as we have seen, this should not necessarily be seen as
typical of the primacy of City over Industry.
48
Government policy in
wartime necessarily led to the suspension of the Liberals wider objectives
permitting this rapprochement, while no government facing war could
afford to risk a nancial collapse.
49
This favoured a conservative approach
and as a result, the City found itself treated generously by the government
under Lloyd George, although it is generally agreed that this increased
the power of government over the City.
50
Lloyd Georges handling of
the nancial aspects of the outbreak of war averted any real crisis, and
won the encomia of erstwhile adversaries, for example the Rothschilds.
51
47
HC Deb 4, c. 958, 24 Nov.1909; DBB, IV, pp. 6627.
48
J. Peters, The British government and the Cityindustry divide: the case of the 1914
nancial crisis, Twentieth Century British History 4 (1993), 12648.
49
T. Seabourne, The summer of 1914, in F. Capie and G. Wood (eds.), Financial Crises
and the World Banking System (1986), pp. 77116.
50
Kynaston, City of London, III, ch. 2.
51
Rothschilds to Lloyd George, 13 Aug. 1914, Lloyd George papers C/11/2/2, House
of Lords Record Ofce; Ferguson, Worlds Banker, pp. 9656; D. Lloyd George, War
Memoirs, 6 vols. (19336), I, pp. 11516.
146 Anthony Howe
In a wider irony, Lloyd George, once the b ete noire of the City, became
virtually its idol. Thus, it was said that Cunliffe, the Governor of the Bank
of England, on hearing that Lloyd George was to leave the Treasury,
had tears in his eyes. GovernmentCity relations became more fractious
under his successor McKenna,
52
but Lloyd Georges accession to the
premiershipin1916 was welcomedinthe City. I think City people like the
idea of being governed by Mr Lloyd George, wrote Mildmay, a partner
in Barings.
53
This acceptability owed much to Lloyd Georges rescuing
of the City in 1914 but was cemented by the fact that he was now in
coalition with the Conservative party, with Bonar Law as Chancellor of
the Exchequer. Not surprisingly, as Lloyd Georges stature grew among
Conservatives, it fell with the Liberal faithful in the City, for example
Holden, who in 1917 declared he had no faith in the premier or the
Chancellor: They mean mischief to the Bankers.
54
Holdens mistrust of the Coalition mirrored wider currents in Lib-
eral opinion, as the war undermined classical economic orthodoxy, dis-
posing of free trade, the gold standard and low government expendi-
ture. This enforced breach with traditional beliefs encouraged a wider
rethinking of attitudes in the business community, with many industrial-
ists nowmuch more readily inclined than in the past to endorse tariffs as a
means towards the more effective organisation of production.
55
However,
Liberals and certainly the minority of Liberals left in the City were far
slower than their Conservative and industrial counterparts to abandon
free trade. Whatever the justication for a wartime abandonment of eco-
nomic orthodoxy, they continued to argue that the only true course for the
City and for Liberalismwas to return to the Gladstonian past: to retrench-
ment, free trade and sound nance on which the Citys pre-eminence had
been based before 1914. This position had achieved much support in
the City during discussions of postwar economic policy, when for exam-
ple the City by and large tended against support for a government
sponsored trade bank and against trade war and tariffs.
56
The Paris
Economic Resolutions of 1916, deemed to herald a departure from free-
trade orthodoxy, met strong resistance in the City, in part orchestrated
by Liberal publicists such as Hirst but supported by inuential nanciers
52
Kynaston, City of London, III, p. 16. But for a contrary tone of gratitude, McKenna to
Holden, 9, 12 July 1915, Holden papers 558/04.
53
Quoted in P. Ziegler, The Sixth Great Power. Barings 17621929 (1988), p. 326.
54
Holden to Sheppard, 12 Jan. 1917, Holden papers 150/4; DBB, III, p. 295.
55
F. Trentmann, The transformation of scal reform, Historical Journal 39 (1996),
100548.
56
Kynaston, City of London, III, p. 40. For Brands scepticism as to the applicability of
German banking methods, see Brand to Balfour, 13 Aug. 1918, Brand papers le 11.
such as Addis.
57
Typically, after the war, as the Liberals returned to
their traditional economic prescriptions, their parliamentary chairman
Maclean proclaimed in 1921 that the interests of industry and commerce
could not be separated from those of the City:
The bankers of London were the very linchpin of national nancial safety . . .
inuenced not in the slightest degree by what is known as Party Politics; they are
acting solely and absolutely in the interests, not only of those great institutions
which are given into their charge, but of the nation itself.
58
Signicantly too a powerful City manifesto, mirroring the famous London
Merchants petition of 1820, called in May 1921 for the abolition of
economic controls and restoration of the free exchange of goods.
59
If the longer-term desirability of free trade was uncontroversial in the-
ory, far more contentious became an understanding of sound nance in a
period of rapid wartime ination. In some ways it seemed perfectly con-
gruous with Edwardian Liberal views on progressive nance to propose
a capital levy.
60
This nostrum soon became caught up in the idea of the
conscription of wealth and socialism. But in its origins it was supported
by liberal economists such as Cannan, Pigou and Edgworth, while Paish
believed it justiable in the absence of voluntary contributions from vast
wartime prots.
61
It was also endorsed by Keynes and had some City sup-
port.
62
However, this was a policy fromwhich Liberals increasingly back-
tracked while enthusiasts, including its main advocate Sydney Arnold,
moved to the Labour party.
63
The Liberal jettisoning of the capital levy
may in part be ascribed to City resistance, for the idea of a levy tted
badly with City psychology.
64
But more convincingly it may be ascribed
to changing economic conditions for as ination gave way to rapid dea-
tion, it seemed less needed and even if interest charges became heavier as
prices fell Gladstonians could value this as a budgetary check on social
57
R. A. Dayer, Finance and Empire. Sir Charles Addis 18611945 (Basingstoke, 1988),
pp. 87, 91; Charles Addis, Free Trade and the Colonies (privately printed, 1916); The
Economist, 8 July 1916; Hirst to Addis, 13 Feb. 1916, Addis papers PP MS 14/378,
School of Oriental and African Studies, London.
58
Report of discussion in Bell, The Recent International Finance Conference at Brussels at the
National Liberal Club Political and Economic Circle, 25 Feb. 1921 (1921), pp. 1314.
59
The Economist, 14 May 1921, pp. 9645; Addis papers PP MS14/394, 12 May 1921.
60
R. C. Whiting, The Labour Party and Taxation (Cambridge, 2000), pp. 2234;
M. Freeden, Liberalism Divided (Oxford, 1986), pp. 1514.
61
See report of paper, 12 Feb. 1919, in M. Freeden (ed.), Minutes of the Rainbow Circle,
18941924 (Camden, 4th series, 38, 1989), p. 290.
62
T. J. Carlyle Gifford, Ination of credit and a tax on capital, The Accountants Magazine,
June 1918, 22943. I am grateful to Richard Whiting for this reference.
63
C. A. Cline, Recruits to Labour (New York, 1963), pp. 5966.
64
R. C. Whiting, The Labour party, capitalism and the national debt, 19181924, in P. J.
Waller (ed.), Politics and Social Change in Modern Britain (Brighton, 1987), pp. 14060.
148 Anthony Howe
spending. In addition, Labour enthusiasm for the levy encouraged Lib-
eral distancing from a policy seemingly based on class envy and sectional
interest.
In a wider context, as the Conservatives moved towards agreement on
tariffs and taxation, the Liberals were forced back to their pasts. In the
early 1920s, many City experts with Liberal sympathies, like Addis, con-
tinued to work for free trade and a return to gold.
65
Lloyd Georges former
economic adviser and prewar enthusiast for internationalism, Paish, now
toured Europe, as Richard Cobden had done in the 1840s, to preach
the virtues of free trade and international liberalism.
66
This image of the
prewar City of London giving stability to the world economic system
continued to provide a benchmark for nanciers and policymakers, how-
ever remote it often seemed from the realities of the market in the 1920s.
This worldview was shared by many in the City who desired to see the
liberal international order restored, and believed this was more likely to
result from policies of free trade and currency stability than from trade
embargoes, tariff wars and imperial preference. But however liberal in
its political economy, the City remained rmly Conservative in its poli-
tics.
67
Hence, the most noisy City demonstrations in favour of pre-1914-
style economic orthodoxy came from an unrepresentative Liberal minor-
ity, and did not necessarily betoken a more general division of opinion
between the City and industry.
68
For if many City experts tended to such
views in theory, they were propagated with particular ideological vigour
by a group of retro-Gladstonians with Hirst as high priest, and Lord
Gladstone, Liberal scionbut also merchant banker, as gurehead.
69
How-
ever, to a large extent liberal political economy was nowdetached fromits
party politics, and became rather the basis for the search for expert solu-
tions to economic questions. For leading bankers the key objective was to
wrest economies out of the control of volatile political regimes and restore
the automatic mechanism that had seemed to work before 1914. In this
context, City experts such as Addis and Brand became vital contributors
to the series of international economic and nancial conferences in the
1920s, however time-consuming and unproductive they often proved.
70
65
Dayer, Addis, passim.
66
Paish, Memoirs, fos. 11725.
67
For example, Lord Inchcape abandoned the Liberals in 1926 but remained a free trader
until 1931: S. Jones, Trade and Shipping: Lord Inchcape 18521932 (Manchester, 1989),
p. 194.
68
Boyce, British Capitalism, pp. 11617; Henry Bell, The Bankers Plea for Free Trade and
its Reception (reprinted from Manchester Guardian, 1927).
69
Howe, Free Trade, p. 282.
70
For example Bell was willing, although Brand demurred, to join a public protest against
what appears to be the entire avoidance of practically everything the [Brussels] Confer-
ence recommended: Bell to Brand, 11 May 1921, Brand papers le 37.
The League of Nations and its subordinate bodies proved institutionally
attractive to nanciers used to operating on an international plane, and
for whomit was vital that decision-making should lift itself above the lim-
its of a corrosive nationalism.
71
Thus, the pre-Home Rule Gladstonian,
classical scholar and banker Sir Walter Leaf played an enthusiastic part
in the 1920s in the International Chamber of Commerce and the League
of Nations.
72
Similarly, Henry Bell, managing director of Lloyds Bank,
took part in the Brussels Financial Conference in 1920 and later cam-
paigned for the League of Nations Union before attempting to revive
Liberal fortunes in the City in a 1924 by-election.
73
But an abiding faith
in the liberal economic order could still unite a range of City voices, with
even its Conservative MPs prepared to join Liberals in opposing exces-
sive governmental intervention in trade at home and in support of the
reconstruction of European trade.
74
However great the theoretical support for an international solution
to Britains economic problems, this approach never fully satised those
Liberals who, particularly under the inuence of Keynes, looked for more
active prescriptions for the revival of domestic industry. This group of
Liberals, among them Brand, Layton and McKenna, all intimately asso-
ciated with the City, now adopted what may be seen as more exible and
innovative policies, with regard to both the Citys international position
and its relationship with industry.
75
Keynes himself was always ambigu-
ous in his relationship to the City and the most acute in his recognition
that the prewar economic Eldorado could not be restored.
76
He bitterly
deplored the Citys conservatism, lamenting that capitalist leaders in the
City are incapable of distinguishing novel measures for safeguarding cap-
italism from what they call Bolshevism.
77
As a Liberal, he supported
71
The Central Bankers are still held by the bonds of Nationalism, Addis lamented to
Cannan, 3 Nov. 1931, Cannan papers 1031, British Library of Political and Economic
Science.
72
Leafs father had known Cobden: Charlotte M. Leaf, Walter Leaf, 18521927. Some
Chapters of Autobiography with a Memoir (1932).
73
The Times, 12, 28, 29, 30 Jan. 1924; City Press, 26 Jan., 2 and 9 Feb.; Bankers Magazine,
1935, p. 480; his share of the vote improved on Hugh Bells (no relation) in 1910.
74
Banbury, City MP, 190624, and a committed tariff reformer spoke with Runciman and
Cox in 1919: Speeches by Rt Hon. Walter Runciman and the Rt Hon. Sir Frederick Banbury
(National Producers League, 1919); Anderson in 1926 supported a European trade
League: Boyce, Capitalism, p. 116.
75
Kynaston, City of London, III, passim. For a good insight into their criticisms of govern-
ment policy in the 1920s, see N. Davenport, Memoirs of a City Radical (1974).
76
John Maynard Keynes, Economic Consequences of the Peace (1919); Keynes to Lloyd
George, 21 June 194[?2], Lloyd George papers G10/15/6: In 1918 everyone was full
of an urge to go back to the pleasures of pre-1914. No-one today feels like that about
pre-1929.
77
Quoted in Kynaston, City of London, III, p. 77.
150 Anthony Howe
progressive policies consistent with prewar New Liberal ideas in exter-
nal and domestic spheres.
78
But it proved more difcult to move forward
domestically than internationally, for not only were the Liberals divided
over the capital levy, they were also split in 1925 over the desirability
of the return to the gold standard. This was perhaps supported by the
majority but Keynes was a voluble dissenter. Addis, for example, recog-
nised that the return to gold would involve sacrices but believed them
not too high a price to pay for the substantial benet to the trade of
this country and its working classes, and also, although I put it last, for
the recovery by the City of London of its former position as the worlds
nancial centre.
79
Interestingly, a rm supporter of the return such as
Brand denied that it would benet the City at the expense of industry.
Rather, he believed the City would be far more adept at prot-making in
a regime of oating exchange rates and that it was industry that required
the stability the return to gold offered.
80
But the return to gold also proved cathartic, for its failure to restore
prosperity and stability released many Liberals from their prewar toils,
and propelled them towards more innovative policies with regard to
employment and industry. Many now recognised that the nancing of
industry did require new policies, and that the gold standard itself might
need revision: leading bankers such as McKenna and Brand therefore
moved towards the Keynesian idea of a managed currency.
81
However,
the Liberals even at their most radical proposed no dramatic structural
alterations to the City of London and its part in the economy. Keynes
himself always emphasised more the conduct of the City than its func-
tions. In the famous Liberal Yellow Book, the prewar debate on the
export of capital was reprised in the recommendation that overseas loans
should be sanctioned by a National Investment Board.
82
On the other
hand, only minor changes were envisaged to the constitution of the Bank
of England, stopping well short of nationalisation.
83
This more inter-
ventionist approach to the economy led in the election of 1929 to the
famous Lloyd GeorgeKeynes programme to conquer unemployment.
78
R. Skidelsky, John Maynard Keynes, 3 vols. (19832000), II; Freeden, LiberalismDivided,
pp. 15473.
79
Quoted in Dayer, Addis, p. 166.
80
Brand to Professor J. H. Jones, 22 Oct. 1925, Brand papers le 67(i).
81
McKenna was chairman of the Midland Bank; Layton, editor of The Economist but with
City directorships, including the National Mutual Life Insurance Co., of which Keynes
was chairman.
82
Britains Industrial Future being the Report of the Liberal Industrial Inquiry (1928),
pp. 11115, 40917.
83
Among City gures Brand had played an important part in the Liberal Industrial Inquiry,
his advice toning down Keyness more radical ideas: see Brand papers, passim; Skidelsky,
Keynes, II, pp. 2667.
This helped foster a Liberal revival nationally but in an interesting local
variation, the Liberal vote in the City collapsed, to a mere 12 per cent,
far below the 30 per cent Bell had secured in 1924.
84
Conquering unem-
ployment was not a cry to revive City Liberalism.
In 1929, Keynes initially looked to the new Labour government for the
more effective reformof capitalism. But as the international and domestic
crises of 192931 intensied, a variety of Liberal responses emerged,
highlighting the diversity of ideas and policies that had characterised the
Liberals since the First World War. Already by July 1930, one group of
City bankers, including the former Liberal Chancellor McKenna, nally
abandoned the prospect of the revival of European trade in favour of
imperial preference.
85
A second group, less impressive when judged by
its City credentials but one that became politically weighty through the
support of several leading Liberal politicians, promoted economy and
retrenchment as part of an orthodox response to scal crisis.
86
While
some hopedthis wouldprovide a means towards greater Liberal inuence,
for others it rather served to provide common ground with Conservatives,
such that Schuster was by October 1930 prepared to advocate National
government.
87
This campaign by the Friends of Economy continued
to build up City support, and to promote non-party politics, arguably
always a popular motif in a City disdainful of politicians as a breed.
88
If this dened the middle ground, there was a nice congruity in the left
still being occupied by the Chancellor of whose budget in 1909 the City
had been such a vociferous critic. For Lloyd George, although largely
isolated politically, now rediscovered his pre-1914 credentials as a lead-
ing opponent of the power of the City. He lambasted the Labour cabi-
nets succumbing to City pressure in abandoning its employment poli-
cies, and the ideas he himself had put forward in 192930. The City,
he proclaimed in February 1931, devoted the whole of their tremendous
inuence for the purpose of restricting the raising of money for national
84
The Liberal candidate was Thomas Owen Jacobsen, Liberal MP for Hyde, 191618,
and a leading City stationer, president of the Federation of Envelope Makers and
Manufacturing Stationers, 19257 a nice reminder of the Citys own industrial inter-
ests: City Press, 17, 24 May 1929.
85
Boyce, Capitalism, p. 253; Marrison, British Business, p. 399.
86
P. Williamson, National Crisis and National Government. British Politics, the Economy and
Empire, 19261932 (Cambridge, 1992), esp. pp. 1945, 2056; Marrison, British Busi-
ness, pp. 4016. The Liberal economy expert Maclean recorded his resistance to City
magnates urging support for an emergency tariff: to his wife, 18 Aug. 1931, Maclean
papers dep. c. 468 f.116, Bodleian Library.
87
For Schuster, see DNB; Marrison, British Business, p. 400; Williamson, National Gov-
ernment, pp. 150, 151.
88
The Friends of Economy, 1st Annual Report, 1 Nov. 1931; Addis diary, 27 Jan. 1931,
Addis papers 14/49.
152 Anthony Howe
development.
89
His critique of City power interestingly pregures the
charge of a bankers ramp which became popular among Labour politi-
cians in the wake of the August crisis of 1931.
90
In February, Lloyd
Georges attacks served to win him the support of the Labour left, rather
than to act as a rallying cry for the Liberal party, although as late as
October 1931 Keynes regarded Lloyd George as the natural leader of a
new Progressive alliance.
91
But the main effect of the August crisis, from
the Liberal perspective, was to end the prospect of any such alliance.
For, as Williamson has shown, the crisis demonstrated the Liberal partys
reuniting, albeit only temporarily, around the older prescriptions of econ-
omy and retrenchment, with its ultimate allegiance to property and the
taxpayer, its tenuous commitment to radical economics in 192729
and to progressive politics in 19301.
92
However self-congratulatory
and fruitless Lloyd Georges stance, it provided an apt reminder that
the Edwardian Liberals had within the context of an earlier progres-
sive alliance successfully disregarded the views of the City, with a self-
condence quite beyond the Labour party in 1931. The bankers ramp
of 1931 has long been exposed as mythical; but, as this chapter has sought
to demonstrate, it is equally mythical to believe that the Liberals before
1914 had been enmeshed in the gentlemanly shackles of City power.
89
HC Deb 248, c. 731, 12 Feb. 1931.
90
P. Williamson, A bankers ramp? Financiers and the British political crisis of August
1931, English Historical Review 99 (1984), 770806.
91
Keynes to Lloyd George, 1 Oct. 1931, Lloyd George papers G10/15/6; cf. Skidelsky,
Keynes, II, p. 344.
92
Williamson, National Crisis, esp. p. 352.
8 The Conservatives and the City
E. H. H. Green
In terms of British political history the twentieth century has been
justiably termed the Conservative Century;
1
it would be equally justi-
able to describe British economic history in the twentieth century as the
Citys Century. Of course the term that has been most closely associated
with the economic history of twentieth-century Britain is decline, reected
in the titles of many of the most celebrated and widely used studies of
British economic development in the past hundred years.
2
But the ser-
vice sector, and in particular banking and nancial services, have until
recently stood out as apparently immune to the British disease. That the
service sector, particularly the City, ourished has raised the question of
whether this was due simply to market strengths or to the Citys interests
being actively fostered by government economic strategy and policy over
the long term. Inasmuch as governments throughout the century were
overwhelmingly Conservative this in turn raises the question of whether
the politics of the Conservative century and the economics of the cen-
tury of the City were related. At rst glance the City and the Conservative
party do appear to have enjoyed close relations. In the last quarter of the
nineteenth century the Conservatives had replaced the Liberals as the
pre-eminent political representatives of City opinion, and in the last two
decades of the twentieth century Big Bang players on Londons interna-
tional dealing, commodity and capital markets were very much associated
with Thatchers Conservative party. But, as with even the closest relation-
ship, matters between the Conservative party and the City did not always
run smoothly: there were tensions and conicts which at times rendered
their apparently productive partnership tempestuous.
1
A. Seldon and S. Ball (eds.), Conservative Century (Oxford, 1994).
2
For example, A. Gamble, Britain in Decline (1983) went into four editions. There are
also B. Elbaum and W. Lazonick (eds.), The Decline of the British Economy (Oxford,
1986); D. Coates, The Question of UK Decline (1994); M. Wiener, English Culture and
the Decline of the Industrial Spirit (Cambridge, 1980); W. D. Rubinstein, Capitalism, Cul-
ture and Decline in Britain (1993); K. Robbins and B. Collins (eds.), English Culture and
Economic Decline (1990); M. Dintenfass, The Decline of Industrial Britain (1992); P. Clarke
and C. Trebilcock (eds.), Understanding Decline (Cambridge, 2000).
153
154 E. H. H. Green
The Edwardian tariff debate: the rhetoric of
producers versus rentiers
The decade before the First World War witnessed one of the most serious
policy disagreements between the City and the Conservatives, caused by
the Conservative partys commitment to tariff reform. This was explicitly
presented by its adherents as a producers policy, on the basis that produc-
tion, both agricultural and industrial, was the essence of a healthy national
economy. In the late nineteenth century British agriculture, especially the
arable sector, had been unable to compete with imported foreign food-
stuffs and suffered serious difculties, for which the most effective remedy
was deemed to be a return to protection. However, tariff reformers saw
similar problems beginning to affect British industry. Hence they advo-
cated a combination of preferential imperial tariffs and protective duties
to secure both the growing imperial markets and the British domestic
market for British manufacturers.
3
In contrast, tariff reformers saw the
service sector as ourishing. According to the tariff argument, Britains
position as an international nancial and banking sector had waxed as
Britains agriculture and industry had waned, with both developments
resulting from free trade. The argument here was straightforward. The
interests of the nancial sector were cosmopolitan and not national: capi-
tal owed to where it would gain returns, insurance ourished no matter
whose trade was insured, and bills of exchange could be protably dis-
counted no matter who presented them. The Citys interests were seen
to lie in a net expansion of world trade anyones trade and in a con-
tinuation of Britains role as the worlds mart. Most tariff reformers used
a rhetoric that was openly contemptuous of the nancial sector. Joseph
Chamberlain himself stated at Birmingham in May 1904 that invisible
exports are invisible as far as the working man is concerned. What does
he see of them?,
4
while another Conservative tariff reformer, Sir Gilbert
Parker, argued that for invisible exports there were only invisible com-
mercial travellers.
5
The tariff campaign argued that non-producers were largely para-
sitic upon producers. The free-trade conception of rational economic
action, namely to buy in the cheapest market and sell in the dearest,
was thought to have encouraged a short-term, consumerist approach to
economics. In particular, the great failure of free trade was that Britain
was no longer paying for goods with goods, but covering its foreign trade
3
For an extended discussion see E. H. H. Green, The Crisis of Conservatism (1995).
4
Chamberlain at Birmingham, 22 May 1904, in W. E. Dowding, The Tariff Reform Mirage
(1912), p. 236.
5
Ibid., Sir Gilbert Parker.
The Conservatives and the City 155
imbalance with the income from capital assets, or in other words living
off its capital. But for the tariff reformers Britains stock of capital was in
itself the expression and the result of our ascendancy in manufactures in
the past which had been the principal base from which the supremacy
of Great Britain as the chief reservoir of capital in the world has been
built up.
6
Given these assumptions, the tariff-reform case was that with
the gradual diminution of the industrial power of the United Kingdom
England will cease to be the great nancial and commercial centre of
the world.
7
Productive enterprise was deemed essential to the national
economy, including its cosmopolitan sector.
The tariff-reformmessage was clear. The British economy consisted of
a productive sector, agriculture and industry, which would be best served
by the national economic logic of tariffs, and a non-productive sector,
nancial services, served by the cosmopolitan economics of free trade.
This message reected the tariff campaigners experience of dealing with
the service sector. Throughout the campaign, relations between the tariff
camp and the City, especially the banking sector, were always strained
and often hostile. Only eight bankers were listed as co-operating with the
enquiries of the Tariff Commission, the investigative body established by
Chamberlain to study the condition of Britains productive sector and
design a scientic tariff. Of these eight, three Sir Vincent Caillard,
Vicary Gibbs and A. L. Jones were members of the Commission, and
lack of City co-operation made life difcult for the Commission. Its secre-
tary, the economist W. A. S. Hewins, found it almost impossible to gather
data or detailed observations about Britains role as a nancial centre. At a
meeting of the Commission in May 1906 Hewins noted that the position
of the bankers, I gather, is that any change in our scal system would be
disastrous to London as a banking centre.
8
This was certainly the view
expressed by Sir Felix Schuster in his address to the Institute of Bankers
in December 1903. Later assertions at Commission meetings that almost
every banker is opposed to tariff reform
9
were challenged on the basis
that bankers whose business is largely on the Exchange are against it . . .
[whilst] those who are doing general business and who would benet by
the increased prosperity of the country more or less favour it,
10
but in
6
B. Kidd, Colonial Preference, 5th article, section I of printed manuscript, Benjamin
Kidd papers, Cambridge University Library MS 8069.
7
W. A. S. Hewins memo. of conversations with A. J. Balfour, 1, 3, 4 Nov. 1907, Balfour
papers, British Library Add. mss 49779/11728.
8
Tariff Commission, Minutes of Proceedings, 17 May 1906, Tariff Commission papers
(TC) 2/1/12, British Library of Political and Economic Science.
9
Tariff Commission, Minutes of Proceedings, statement by C. Phillips, 31 May 1906,
TC 2/1/13.
10
Ibid., A. Mosely statement.
156 E. H. H. Green
fact not even the domestic clearing banks provided support for the tariff
cause.
The experience of the tariff campaign bore out the ndings of a survey
of City opinion on the tariff question carried out by the journalist H. A.
Gwynne, on Chamberlains behalf, in late 1903. Gwynne discovered a
range of opinion, pointing out that on the Stock Exchange and in the
insurance world there was support for tariff reform, but also noting that
in banking circles . . . opposition shows itself very strongly.
11
An inter-
esting feature of the tariff campaign, however, was that the position of
the City was conated with that of the banks. By concentrating attention
on the banks, the tariff campaign directed criticism at the City elite, a
sector which was socially, structurally and geographically separated from
industry. In this respect the tariff campaign both reected and helped cre-
ate a sense of social and regional stratication in the Conservative party
between, in particular, provincial industrial interests and metropolitan
gentlemanly capitalism. Socio-economic divisions were clearly crucial
to the construction of different imagined communities within the Con-
servative party, but so too were ideological divisions over the optimumpath
for British economic development. Frequently explicitly, always implic-
itly, the tariff debate saw many Conservatives question whether it was
either benecial or necessary for Britain to become more and more a
creditor country a banking country rather than an industrial country,
12
and many concluded that it was neither. The outbreak of the war saw the
tariff debate subside, but the question of whether the service sector, and
in particular the banks, made a positive contribution to the health of the
British economy re-emerged in a different but equally potent form after
1918.
The interwar years: a deepening concern?
The interwar years sawhard times for important sections of British indus-
try, most notably the staples of coal, iron and steel, shipbuilding and
textiles. The difculties facing the Victorian staples became very apparent
following the downturn of the autumn of 1921; the intractable million
of unemployed workers that was a particular feature of the British econ-
omy in the 1920s was concentrated largely in these industries. Contem-
porary analyses of the problems, like those of later economic historians,
focused on a number of micro- and macroeconomic factors. At the micro
11
H. A. Gwynne memo. on arguments against Mr Chamberlains policy, n.d. (Dec.?) 1903,
ms Gwynne 27, Bodleian Library, Oxford.
12
Ashley to Balfour, 4 July 1904, Balfour papers Add. mss 49870/3845.
level the organisation of the staple industries was seen as an important
structural weakness. At the macro level the labour market was regarded
as insufciently exible, largely as a result of the sticky wage problem
resulting from the intransigence of trade unions. The desire of industrial-
ists, particularly in the export sector, for wage reductions was highlighted
after the return to the gold standard at prewar parity in April 1925, for
the 10 per cent overvaluation of sterling led industrialists to seek com-
pensatory wage-cost adjustments. The historically best-known diagnosis
of and prescription for Britains economic problems was that advocated
most forcefully, although by no means solely, by J. M. Keynes, who called
for extensive public works to boost employment and aggregate effective
demand.
The Conservative party engaged with all of the analyses outlined above,
and as with the pre-1914 tariff debate the question of the Citys role was
frequently raised. With regard to policy, Conservative governments of the
1920s did not always see eye to eye with City priorities. For example in
1923 the Baldwin administrations advocacy of tariffs ran counter to the
Citys long-standing commitment to free trade, and although the 19249
government eschewed tariffs some Cabinet members and many of the
party rank and le remained tariff enthusiasts. The return to gold pleased
the City, but there was some unease in industrial circles where many
regarded it as a fait accompli rather than an unmixed blessing.
13
Indeed
there was concern that the Citys close relationship with and inuence
over the governments economic policy machinery led to a prioritisation
of pro-City policies which were at best indifferent to industrys interests.
This concern was perhaps understandable, for in the discussions which
led up to the return to the gold standard several of the Treasury hier-
archy, notably Bradbury, Niemeyer and Hawtrey, expressed the view that
a large measure of industrial decline was inevitable, that the future lay
with the service sector and that to reestablish the business of London as
a world clearing centre it was necessary to create conditions in which a
sufcient number of foreign currencies . . . [were] xed in value in relation
to sterling, that is to say it was essential to restore the gold standard.
14
For those who had opposed the return to gold and who denounced its
economic impact, notably Keynes, there was no doubt that it was a dis-
astrous policy for industry,
15
but the main target of Keyness criticism,
13
Some prominent City gures, notably McKenna, Chairman of the Midland Bank,
expressed similar concern.
14
See Hawtrey notes on Sterling and gold, n.d. July 1924, Hawtrey papers 1/26, Churchill
College, Cambridge.
15
For the classic statement of Keyness position see his The Economic Consequences of
Mr Churchill (1925).
158 E. H. H. Green
Churchill the Chancellor of the Exchequer who presided over the
return to gold himself stated in 1927 that he would rather see indus-
try more prosperous and nance less proud, and later declared that the
re-introduction of the gold standard had been the greatest mistake of his
career.
16
The concern that deference to City interests and judgement had
been misplaced was not conned to committed critics of the City but was
part of Conservative intraparty debate on the condition of the economy.
17
But if the issue of the gold standard revealed some disquiet about the
Citys inuence over macroeconomic policy decisions, there was arguably
more concern in Conservative circles over the Citys microeconomic fail-
ings. In their book Industry and the State, published in 1927, Robert
Boothby, Harold Macmillan, John Loder and Oliver Stanley voiced the
concern that our banking system. . . has been insufciently elastic to play
a substantial part in the vital process of industrial reorganisation.
18
This
criticism was developed over the late 1920s and the 1930s. The Bank
of England appeared to respond positively to these concerns, and estab-
lished the Bankers Industrial Development Corporation (BIDC) as a
means of increasing co-operation between the nancial sector and indus-
try in the process of industrial amalgamation and rationalisation. The
creation of BIDC was regarded by many Conservatives as a step in the
right direction, not least because it promised to forestall radical Labour
initiatives, but the adequacy and effectiveness of its operations were ques-
tioned. To some extent this was hardly surprising. Norman had not cre-
ated BIDC out of a new-found enthusiasm for investment banking, but
because, rstly, he wished to pre-empt the possibility of state intervention,
which he dened in whatever form as socialist, and, secondly, to sta-
bilise the banking system. The Banks involvement in the formation of the
Lancashire Cotton Corporation (LCC) from1929 exemplied Normans
system of priorities, insofar as he informed the Banks Court that action
was necessary in order to rescue local banks that had over-extended their
cotton accounts and faced possible collapse, to forestall state action and,
only nally, to rationalise the industry. The fact was that the LCC proved
to be an extremely irrational rationalisation from an industrial point of
view, in that it was a horizontal rather than vertical integration,
19
and
was made up of rms that were most subject to creditor pressure, many
of which were close to bankruptcy and, therefore, least protable and
16
P. Grigg, Prejudice and Judgement (1948), p. 180.
17
For a discussion of the full range of Conservative positions see P. Williamson, National
Crisis and National Government. British Politics, the Economy and Empire 19261932
(Cambridge, 1992).
18
R. Boothby, H. Macmillan, J. Loder and O. Stanley, Industry and the State (1927), p. 64.
19
It amalgamated ninety-six rms from the spinning sector, but included no weaving rms.
efcient.
20
The BIDCs involvement with amalgamations in the iron and
steel sector revealed similar problems of coordinating banking interests
with those of industry.
21
It was concern over the shortcomings of the BIDC and the Citys,
especially Normans, activities on the industrial rationalisation front that
prompted Sir Arthur Steel-Maitland, who had been Minister of Labour
in Baldwins second government, to propose an alternative approach to
the question. In his book The Trade Crisis and the Way Out, published
in 1931,
22
Steel-Maitland warned against the way the term rationalisa-
tion was being often too glibly used, and pointed out that it was not a
synonym for amalgamation.
23
He felt that the state could assist indus-
tries to reorganise and re-equip, as it had done in Belgium and France,
24
but he also argued that it should play an arms-length, facilitating role,
and that nancial institutions should take the lead in coordinating indus-
trial reorganisation. However, Steel-Maitland was not convinced that the
banks would spontaneously develop this strategy in Britain, and so in
mid December 1930 he proposed that government should raise a large,
low-interest loan to fund a major programme of rationalisations under
the management of a committee of businessmen. This scheme drew a
lukewarm response from the City hierarchy. Peacock, a leading Bank of
England director, told Steel-Maitland that both he and Norman were of
the view that the Government should be kept out of intervention in the
nancing of industry, and that his scheme would be acceptable only as
an alternative to schemes which threatened greater intervention.
25
Steel-
Maitlands response was to seek to persuade Peacock.
26
that the Bank
should be more active on the industrial front. Earlier in 1930 Norman
had of course set up the BIDC, and by late 1930 it was already deeply
involved with the iron and steel and cotton industries. Steel-Maitland
told Peacock that he had great admiration for the Governor, both for
his judgement and his courage in breaking through tradition, by taking
a lead in industry, but he felt that Norman was still somewhat tentative
in pursuing this new strategy and that there was a sense of too little too
late. He recalled that:
20
Some of the rms brought into the LCC had already ceased operations. For a full
discussion of the LCCs creation and the strategy of Norman and the banks, see J. H.
Bamberg, The government, the banks and the Lancashire cotton industry (PhD thesis,
Cambridge, 1984).
21
See S. Tolliday, Business, Banking and Politics (Cambridge, Mass., 1986).
22
The book was based on a series of articles he had published in The Observer in November
1930.
23
Steel-Maitland, Trade Crisis, p. 37.
24
Ibid., p. 110.
25
Peacock to Steel-Maitland, 18 Dec. 1930, Steel-Maitland papers GD 193/119/1/8,
National Archives of Scotland.
26
He was also Steel-Maitlands friend and frequent golf partner.
160 E. H. H. Green
In 1918 before he [Norman] was Governor and I was at the Board of Trade, he
came . . . to dine with me and two or three of my head ofcials, so that we might
question him. I asked him then whether it would not be possible for the Banks to
do with Industry what he is doing now. I was not talking wildly or without thought.
He was amused, quizzical, determinedly negative, said that British banks werent
built that way. (It was the bankers not the banks who were not adaptable.) Now
he is taking the lead in doing it. Had the Banks taken the business in hand earlier,
the cotton industry would not be in such a mess to-day, nor some of the other
industries.
27
Steel-Maitlands concern, even scepticism, about Normans commitment
to industrial reorganisation was, in effect, what had prompted him to
advocate his own scheme, for he told Peacock that if the Bank and BIDC
could multiply itself tenfold and deal with other industries as it is doing
with cotton . . . [my] proposal would not be needed, but he added that
it was clear that the Bank could not do this, that others wont, and that
a government-sponsored programme was necessary.
28
One of Steel-Maitlands main aims was the same as that of Norman
and the Conservative party generally to keep the state as far away as
possible from the control and management of industry. For a minority
of Conservatives, any state intervention in the economy was socialism,
but Steel-Maitland denied that his scheme carried any such danger. He
told Peacock that he should hate the Government to interfere in the
management of industry as much as you or the Governor or anyone,
and claimed that his proposal would ensure that we can get the remod-
elling done now without the Government retaining any permanent con-
trol.
29
Indeed, he argued that far from being socialist, his scheme was a
way of thwarting socialism. But in spite of his efforts to assuage concern
Norman described it as really a means of reaching purgatory instead of
hell.
30
Although Steel-Maitlands proposals came to nought his criticisms of
the failings of the banking sector provide an interesting window on to an
important sub-theme of Conservative political economy in the interwar
period. Moreover, it was a sub-theme that was to be developed in the
1930s. The Conservative leadership was largely content with the bank-
ing sectors role, and was deferential to the Bank of Englands claims to
expertise, but the partys grass roots demonstrated no small degree of
scepticism and unease. The Conservatives newly established College at
27
Steel-Maitland to Peacock, 26 Dec. 1930, GD 193/119/1/5.
28
Steel-Maitland to Peacock, 26 Dec. 1930, GD 193/119/1/6. That Steel-Maitland sent
two letters on the subject on the same day indicates his determination to pursue the
issue.
29
Steel-Maitland to Peacock, 26 Dec. 1930, GD 193/119/1/5.
30
Norman to Steel-Maitland, 18 Dec. 1930, GD 193/119/1/23.
Ashridge held numerous conferences on the role of the banks over the
course of the decade, and one bank manager who attended such a con-
ference noted that at tea . . . it was passed from mouth to mouth that
there were (in bated breath) a number of bankers present, and there was
a sort of furtive scrutiny of ones neighbours which searched for signs of
horns or tail!
31
With Britains departure from the gold standard in 1931 the Citys
international role was reduced, and the terms of its relationship with the
domestic economy came in for fresh scrutiny. In the 1930s the Treasury
and the Bank of England adopted a low-interest-rate regime, but the
nancial sector still faced criticisms from some Conservative quarters.
Two in particular are worth noting. The rst is Harold Macmillans The
Middle Way of 1938; the second is J. W. Hillss Managed Money, pub-
lished in 1937. As noted earlier, Macmillan had expressed concern at
the nancial sectors lack of co-operation with industry in 1927. In the
1930s his own interest in this problem developed considerably. In his
1932 pamphlet The Next Step he advocated the creation of an investment
and development board made up of a membership drawn from govern-
ment, industry and the nancial sector. This board was to direct invest-
ment into the correct channels as advocated by the Macmillan Commit-
tees Report . . . [and] the Federation of British Industry, which meant
directing new money into capital modernisation and if unfavourable
market conditions discouraged borrowers, engaging in investment activ-
ity itself.
32
Keynes told Macmillan that, although he liked the pamphlet
very much, he found its proposals for developing the investment func-
tions of the State . . . not nearly bold enough. In Keyness view the main
problem was the sort of middle position Macmillan occupied, which
meant that he overestimated the level of private investment that could
be encouraged in a depression, and underestimated the extent of direct
investment necessary to reate the economy and provide a stimulus to
private investors.
33
Macmillan accepted much of Keyness criticism, and
argued that political considerations had led him to moderate his position.
I amstill trying, he explained, the perhaps hopeless task of [inuencing]
the Government . . . [and] have to conceal a certain amount and to
preserve certain political decencies!
34
31
E. J. Garmeson, As others see us: a visit to the Bonar Law College at Ashridge, Ashridge
Journal, Sept. 1935, p. 27, quoted in C. Berthez` ene, Les Conservateurs Britanniques
dans la bataille des id ees. Le Ashridge Bonar LawMemorial College: des Conservateurs
Fabiens ` a la conqu ete des esprits, 192954 (unpublished PhD thesis, University of
Paris III, La Sorbonne Nouvelle, 2003).
32
H. Macmillan, The Next Step (1932), pp. 312.
33
Keynes to Macmillan, 6 June 1932, Keynes papers, microlm reel 61.
34
Ibid., Macmillan to Keynes, 9 June 1932.
162 E. H. H. Green
Political caution may have inuenced Macmillan, but whether this
explains his stance completely is open to question. That Keynes pointed
to Macmillans middle position as a problem is important here, insofar
as Macmillan nding a middle way was the whole point. Certainly his
position changed little through the 1930s. He sat on the committee that
drafted The Next Five Years, which was clear that the existing capital mar-
ket in Great Britain leaves much to be desired.
35
The Next Five Years
group did not advocate state ownership and control of either the Bank
of England or merchant or joint-stock banks, but it did call for the cre-
ation of a National Investment Board (NIB) to regulate and encourage
the capital market. Regulation was to include not only powers against
fraud but also to discourage share issues of a kind which it considered to
be already overdone and to encourage issues in directions where further
investment seemed to be desirable.
36
In addition the NIB was to mon-
itor the volume of savings available for investment and to endeavour to
see that they were sensibly distributed.
37
Encouragement meant that
the NIB had the duty of creating an active and adequate capital market
and watching over its development. This was to include the creation of
a domestic issuing house, which would perform the function for home
investment that the merchant banks performed for overseas lending, and
thereby rectify the institutional bias against domestic lending that charac-
terised the existing British capital market.
38
However, much as it wished
the new institution and existing banks and nance houses to invest in the
reorganisation of old and the creation of new enterprises, The Next Five
Years stressed that none of these functions can properly be performed
by the State.
39
The state was to act as a midwife not a mother, on
the assumption that having created the requisite institutional framework
investors would want to lend and industrialists borrow. The state would
rectify defects of the capital market which had rendered it by far the
weakest section of the nations nancial machinery,
40
but was not to
replace it.
Whether or not political niceties separated Macmillan and Keynes on
the issue of direct state investment, they were certainly not divided when
it came to criticism of the British capital market and banking system.
In his General Theory Keynes famously looked forward to the euthana-
sia of the rentier,
41
on the grounds that investment was far too impor-
tant an activity to be left in the hands of a casino-like nancial market.
Macmillan shared this disdain. In The Middle Way he pointedly remarked
35
The Next Five Years (1935), p. 116.
36
Ibid., p. 120.
37
Ibid., pp. 11920.
38
Ibid., pp. 1201.
39
Ibid., p. 122.
40
Ibid., p. 123.
41
J. M. Keynes, The General Theory of Employment, Interest and Money (1936; 1973 edn),
p. 376.
that nance is a service. Its function is not, or ought not to be, to dictate
or determine the condition under which industry and commerce have
to be conducted.
42
The state, Macmillan contended, needed to exer-
cise a greater inuence over the capital market, which was dominated by
irrational and anti-social speculation in the uctuating volume of secu-
rities. Credit and investment, he argued, were needed by productive
industry, but they tended to be used for speculative purchase of exist-
ing securities, and, as a consequence, were performing no useful social
function.
43
Like Keynes, Macmillan thought that British nancial insti-
tutions, and the City in particular, needed to change their outlook and
their practices and that the state had an important part to play in helping
to bring this about.
In order to create a more rational nancial mechanism it was neces-
sary, Macmillan argued, to have ve main elements in place. First the
accumulation of idle balances in banks was to be prevented. Second,
the volume of credit and the quantity of money was to be regulated in
accordance with the needs of production rather than being dominated
by irrational and anti-social speculation. Third, the price of goods was
to be determined by the cost of production rather than manipulation
of the value of the medium of exchange. Fourth, money was to be a
measure of value and a medium of exchange and not a store of idle
value. Finally, the central bank was to be made a public institution and
be in a position to inunce the direction of investment as well as its
volume.
44
Some of Macmillans themes were also explored in J. W. Hillss unde-
servedly neglected work Managed Money. Hills criticised the return to
gold and its attendant high-interest rate regime as having caused great
damage to British agriculture and industry, and noted that although there
had been much lamenting when the standard had been abandoned when
we woke up next morning we found that, like Christian, we had cast off
an exceeding great burden.
45
Hills acknowledged that ensuring the sta-
bility of the currency and exchange rate had become more problematic
with the removal of the standards automatic mechanism, but felt that
a combination of international negotiations, such as that of September
1936 between Britain, France and the United States, and careful man-
agement of short-term interest rates and judicious budgetary policy were
the best route to avoiding wild uctuations.
46
But Hills had broader con-
cerns than currency stability, and indeed argued that one of the main
42
H. Macmillan, The Middle Way (1938, 1978 edn), p. 194.
43
Ibid., pp. 2578.
44
Ibid., pp. 2568.
45
J. W. Hills, Managed Money (1937), p. 100.
46
Ibid., pp. 2195.
164 E. H. H. Green
failings of the Bank of England was that it had been and largely remained
xated on the exchange.
47
The key goal of managed money, in Hillss
view, was to ensure domestic economic stability, and he declared what
we have to look for is an authority which will be the judge of the money
which trade, industry, and commerce require, and which would increase
or decrease monetary circulation with the objective of preventing a con-
traction of prices or extreme expansion.
48
This, he argued, could be
achieved in a number of ways. If an expansion was required the govern-
ment could either borrow money for public works or lower taxes, and he
noted that Mr Keynes has said that it lies within the power of the Chan-
cellor to get this money without producing conditions of ination.
49
Hills rejected Harrods scheme for a reation fund on the basis that it
would be too open to political misuse, but he accepted that decit nance
was an acceptable option, and suggested that taxes should be raised in
times of prosperity and lowered in times of scarcity in combination with
suspension of the sinking fund and loan-nanced public works.
50
In addi-
tion, lower interest rates and active buying and selling of securities by the
Bank were also an option for the management of money.
51
Taken together
these steps would, Hills contended, provide the basis for economic man-
agement that would avoid swings between boom one day, slump the
next.
52
Hills felt that related institutional and psychological changes were
required to bring his scheme to fruition. The newinstitutional mechanism
he proposed was the establishment of a Currency Authority (CA), which
would examine the state of unemployment, costs, prices, prots and trade
and would calculate how much currency was needed in circulation to
maintain prosperity and stability.
53
The CA was to have a membership
drawn from four areas, the Treasury, the Bank of England, the business
community and independent experts. Hills specically rejected the Bank
as an adequate CA on the basis that it had shown that it possessed only a
narrow, nancial expertise, whereas the CA needed to know all business
interests and thus, Hills argued, its controllers must be drawn from a
wider area.
54
This he deemed essential in order to meet the common
complaint of manufacturers that nancial decisions of the Chancellor of
the Exchequer are taken solely on the advice of the Bank of England,
or, if any further authority is sought, of the City,
55
a complaint which
Hills clearly shared. He also stressed that the CA should not be a depart-
ment of State but an independent authority. The government was only
47
Ibid., p. 100.
48
Ibid., p. 107.
49
Ibid., p. 98.
50
Ibid., pp. 11617.
51
Ibid., p. 109.
52
Ibid., p. 12.
53
Ibid., pp. 107, 134.
54
Ibid., pp. 1234.
55
Ibid.
to assist the CA with information, but otherwise it was not to interfere.
Government, with Parliament as the nal arbiter, was to take decisions on
taxation and spending; the CAs role was to provide expert advice for the
long term, and it was thus not to be political.
56
Parliament would thus
necessarily retain a veto over any CA advice, but the weight that the CAs
political independence was to carry was to render this unlikely.
57
Hills
also viewed the CAs non-political role as crucial in helping to bring
about a shift in public economic assumptions and behaviour. He noted
that the difculty of this [counter-cyclical] policy is that it runs counter
to ordinary opinion. An individual thought that bad times required belt-
tightening and he expects the government to practise the same austerity
as is forced upon himself .
58
This mentality, Hills argued, was hard to
combat,
59
and Bank and City opinion tended to reinforce rather than
modify prevailing orthodoxy. The CA, however, because of its indepen-
dent authority, could assist the government in educating the banks and
people at large to invest rather than save during slumps, and also help to
make clear that increased public expenditure, even if it meant a budget
decit, was acceptable.
60
The work of Macmillan and Hills provides interesting insights into the
development of a Conservative critique of the City in its most articulate
form in the 1930s. Obviously not all Conservatives shared their opinions,
and very few could have matched the sophistication of their ideas, but in
many respects this should not detract from their signicance. Conserva-
tive concern over the Citys contribution to the economic difculties of
the 1920s and its failure to provide more effective assistance during the
192930 slump and its aftermath was both pervasive and often very deep.
The critical themes that Macmillan, Hills and Steel-Maitland raised also
surfaced in Conservative Research Department (CRD) and Conservative
Central Ofce (CCO) Committee discussions on the condition of indus-
try in the 1930s;
61
party conference also sawsimilar views expressed. That
Macmillans position shifted over the 1930s to the point where he advo-
cated public ownership of the Bank of England is an interesting develop-
ment, given his concern, expressed in his correspondence with Keynes,
as far as possible to accommodate or not drastically offend the political
sensibilities of his party. Indeed it is perhaps the case that the percolation
of disquiet through the party about the nancial sectors activities, and
especially the outlook of the City elite, contributed to the Conservative
56
Ibid., pp. 12536.
57
Ibid., p. 126.
58
Ibid., p. 113.
59
Ibid.
60
Ibid., pp. 11316.
61
See in particular the discussions of the Central Ofce Committee on Future relations
between the state and industry in 1934, CPA, CRD 1/65/2.
166 E. H. H. Green
partys lack of resistance to the nationalisation of the Bank of England by
the Attlee government.
The postwar decades: a brave new world but
with old concerns
The Second World War and postwar reconstruction had a major impact
on the City. The war saw the liquidation of much of Britains portfolio of
overseas investments, exchange controls were introduced and retained in
peacetime, sterlings international convertibility was suspended and not
fully restored (apart from the very brief episode in 1947) until the late
1950s. The Bank of England was nationalised in 1946, and government
economic policy after 1947 was focused on active scal and monetary
initiatives as successive governments employed Keynesian techniques
of demand management. The 1950s saw the City seek, with some suc-
cess, to re-establish its position as a world nancial centre, with active
encouragement from the government which looked to the Citys invisible
earnings as an important weapon in the ongoing struggle over the bal-
ance of payments. Moreover, sterling, even when not fully convertible,
was still an important international reserve currency, not least as a conse-
quence of the sterling balances held by many Commonwealth countries
and the continued importance of the Sterling Area as a discrete currency
region.
But although the steady ow of criticism of the interwar years was
somewhat reduced, the City still faced signicant Conservative displea-
sure in the 1950s, as new areas of conict arose. Intriguingly, whereas
in the interwar years the City was held to be supportive of and partly
responsible for deation, in the 1950s it was the nancial sectors con-
tribution to the problem of ination that led to renewed criticism of the
City by the Conservative governments of the 1950s. It was in and after
1955 that these new tensions became most apparent, as attention was
focused on the contribution of the British monetary system to ination-
ary pressures. An important episode in the debate on ination was the
resignation of the Conservative Treasury ministers, Thorneycroft, Birch
and Powell, in January 1958. The proximate cause of the resignation was
the refusal of their Cabinet colleagues to agree to the full measure of
public expenditure cuts demanded by the Chancellor and his Treasury
ministers.
62
These cuts had been proposed on the basis that the growth
of public expenditure was contributing to an expansion of the money
62
For a discussion of this episode see E. H. H. Green, The Treasury resignations of 1958:
a reconsideration, Twentieth Century British History 11 (2000), 40930.
supply, and that this in turn was a major cause of ination. However, the
part played by government expenditure was only one aspect of the prob-
lem under discussion in 1958, and indeed for the most part it played
a secondary role in the contemporary debate on monetary causes of
ination.
In July 1957 Macmillan, as Prime Minister, had told Thorneycroft
that if the government was to obtain proper control over the level of eco-
nomic activity, for either expansionary or contractionary purposes, then
this would require greater control over the banking and credit system.
63
Thorneycroft concurred. In a Treasury memorandum in August, which
emphasised control of the money supply as a key anti-ination device,
Thorneycroft stressed that private as well as public expenditure and bor-
rowing had to be curbed,
64
and in September he complained to Powell
that we are not in control of the credit base.
65
This was not a new com-
plaint. The Treasury had been concerned about this issue since at least
1955, and in April 1957 the Radcliffe Committee had been set to inquire
into the workings of the monetary system in order to explore more effec-
tive controls. However, Thorneycroft was faced by immediate difculties
and sought more rapid action.
For Thorneycroft the crucial problem was how to limit the level of
credit made available by Britains banks. Hire-purchase restrictions were
available to deal with the lower-grade elements of consumer credit, but
bank advances were a more difcult question. Short-term interest rates
were a well-established means of acting upon private borrowing, but by
the mid to late 1950s they were increasingly regarded as a clumsy instru-
ment, and they had the further drawback that, if raised, they increased
the cost of government borrowing.
66
Thus the Chancellor and his Trea-
sury ofcials looked to establish other, more direct methods of curbing
bank lending. But how was this to be done? Since 1945 informal govern-
ment approaches to the banks, pursued through the medium of the Bank
of England, had been the preferred option. But Thorneycroft felt that
this approach was inadequate, and that the severity of the inationary
problem he faced was clear evidence of this. Hence he began to explore
the possibility of issuing direct orders to the clearing and other banks to
limit their advances, but soon discovered that there were limitations to
this approach that he had not expected.
63
Macmillan to Thorneycroft, 19 July 1957, T 233/1369.
64
Ibid., Thorneycroft, Ination, 7 Aug. 1957.
65
Thorneycroft to Powell, 20? Sept. 1957, T 233/1370.
66
For Treasury concern on this point see S. Howson, Money and monetary policy in
Britain, 194590, in R. Floud and D. N. McCloskey (eds.), The Economic History of
Britain Since 1700 (2nd edn, 3 vols.; Cambridge, 1994), III, pp. 22154.
168 E. H. H. Green
Like his predecessors, Thorneycroft sought to use the Bank of England
as the institutional route to dealing with the banking system. This was
problematic to begin with, for the Bank was far from enthusiastic about
acting as the governments monetary catspaw. As early as April 1955
Robert Hall, the governments economic adviser, had noted that
the Bank of England havent been as co-operative on monetary policy as they
might have been. They have been none too keen on being tough with the Banks.
Nowthe Governor tells the Chancellor that he is being tough . . . but Oliver Franks
(now Chairman of Lloyds) tells us that this is not so, and E[dwin] P[lowden] got
the same story from the Chairman of the Westminster [Lord Aldenham] and
T. L. [Rowan] from the Chairman at Barclays [A. W. Tuke].
67
Although in May 1955 Hall felt the Bank had been tougher, in
December he was recording that he had told Oliver [Franks] that I
thought the Bank of England and the Clearing Banks were on trial as
well as the Government and the Treasury as a result of rising ination
and the apparent inability of the credit squeeze to bite effectively.
68
In
1957 Thorneycroft, his ofcials and some members of the Conservative
Cabinet, including Macmillan, came to the conclusion that the banks
were failing this trial.
Thorneycrofts aimin late summer 1957 was to get the banks to reduce
their advances by 5 per cent. This he felt would do as much, if not more,
to dampen economic activity than even his proposed public expenditure
reductions. However, in late August Compton noted that Cobbold, Gov-
ernor of the Bank, was opposed to this course of action, and had told
him that if the Chancellor was to proceed it would require compulsion
which he deemed not appropriate.
69
Cobbold himself informed Roger
Makins, the head of the Treasury, that an attack on bank credit was
unwise and would prove ineffective, insofar as the only thing it would
affect would be the nancing of H[er] M[ajestys] G[overnment]s sea-
sonal autumn decit and the November maturity [of Treasury Bills].
70
Discussions between the Chancellor, Treasury ofcials and the Bank in
the rst week of September produced a statement that the City was will-
ing to co-operate,
71
but further meetings with the Committee of London
Clearing Banks (CLCB) seemed to indicate that the Bank may have been
indulging in wishful thinking, for the banks made clear that limitations
67
The Robert Hall Diaries, ed. A. Cairncross, 2 vols. (1991), II, p. 33 (19 April 1955).
68
Ibid., pp. 37, 55 (26 May, 21 Dec. 1955).
69
Compton, note of meeting with Cobbold and OBrien, 22, 23 Aug. 1957, T 233/1369.
70
Ibid., Cobbold to Makins, 22 Aug. 1957.
71
Notes of meeting between Mynors, Deputy Governor of the Bank of England, the
Chancellor, Padmore, and Maude, 4 Sept. 1957, T 233/1369.
on their advances would damage their business.
72
All of these discus-
sions conrmed Cobbolds view that a limit had been reached in terms of
what could be achieved by talking to the banks about limiting advances,
73
but that left the question of what action could be taken. Unfortunately
for Thorneycroft the answer was very little, for the Treasury Solicitor
was clear that the Bank of England Act of 1946 did not provide the
Treasury with the powers to compel the Bank to issue directives to the
nancial sector.
74
The Bank was only obliged to comply with Treasury
requests if its Court agreed that such requests were necessary in the
public interest, and the Courts attitude, Treasury ofcials concluded,
would probably be determined by its view of the look of the govern-
ments policy as a whole.
75
Makins told Thorneycroft that any attempt
to limit bank advances would run into the teeth of the opposition of the
Court,
76
and the Chancellor, surprised to nd himself effectively pow-
erless in the face of the Banks opposition and the Citys non-cooperation
in limiting advances, considered sacking Cobbold.
77
Given that the lat-
ter course was both politically and administratively difcult, a frustrated
Thorneycroft was left searching for a way (a) . . . to control bank credit
(b) . . . to amend the law to give the Treasury the powers it thought it had
already.
78
Legislation either to amend the 1946 Act, or to redene the rela-
tionship between the Treasury and the Bank would have required time
that Thorneycroft did not have in his crisis, and there was little else
he could do other than exhort and hope in his efforts to control pri-
vate bank credit. Consequently the problems on which Thorneycrofts
chancellorship had focused attention did not go away, and Macmillans
government continued to be exercised about bank credit. In February
1958 Macmillan enquired of his new Chancellor, Heathcoat Amory,
as to what steps were being taken to reconstitute TreasuryBank rela-
tions as it was very important that we should have adequate techniques
when the need for re-ination comes, a point he had also made to
Thorneycroft in October 1957.
79
In reply Heathcoat Amory complained
that
72
Notes of meetings with the CLCB, and with the chairman of the CLCB, 9, 17 Sept.
1957, T 233/1369, 1370.
73
Cobbold to Makins, 22 Aug. 1957, T 233/1369.
74
Anderson to Armstrong, 5 Sept. 1957, T 233/1664.
75
Treasury ofcers to the Chancellor, 23 Aug. 1957, T 233/1369.
76
Ibid., Makins to Thorneycroft, 23 Aug. 1957.
77
Hall Diaries, II, p. 126 (29 Oct. 1957).
78
Ibid., p. 127.
79
Macmillan to Heathcoat Amory, 20 Feb. 1958, PREM11/41199. For his earlier remarks,
see Macmillan to Thorneycroft, 28 Oct. 1957, PREM 11/41199.
170 E. H. H. Green
It seems clear that our present controls over the provision of credit by the Banks
and other agencies are inadequate to deal with severe inationary pressure.
Requests to the Banks to co-operate on a voluntary basis . . . may succeed within
limits . . . But by themselves they are not desirable as a long continuing arrange-
ment.
80
When the Radcliffe Committee reported in 1959 it recommended a new
relationship between the Treasury and the Bank, with greater authority
for the former, and also suggested giving the Bank powers to request
Special (non interest-bearing) Deposits from the clearing banks, which
would reduce their liquidity and thereby their advances if the govern-
ment felt the economy was overheating. Both of these recommendations
were acted upon, but these measures did not stem either concern or crit-
icism. In August 1960 Macmillans fury was aroused when the Midland
Bank, having been asked to make a Special Deposit, proceeded to sell
$15 million of Treasury bills to replenish its liquidity. Writing to Selwyn
Lloyd, who had replaced Heathcoat Amory at the Exchequer, the Prime
Minister launched into what can only be described as a diatribe, arguing
that
The City, especially the Clearing Banks, seem to me to be out of touch with
modern conditions. It is all very well for them to say it is their job to make
money for their shareholders and that they wont co-operate with the Treasury
on something which may cause themlosses or may reduce their prots. If capitalist
society as a whole were still to take that view we should be very near the crash . . .
If the Chancellor says he wants the base of credit restricted he ought to be able to
have a meeting with them, tell them what he wants, and rely upon them to carry
it out . . . At present it is all kept as a sort of mystery, very much on an old boy
basis. This is all very well, but it needs some new look at it.
81
Given that this remark was made less than a year after the Radcliffe Com-
mittees report had supposedly provided such an in-depth new look, the
Prime Ministers outburst was eloquent expression of a deep-seated frus-
tration at his governments inability to make any substantial headway on
the question that had so vexed Thorneycroft.
The continuing debate over control of the credit base has some impor-
tant implications, and not simply for a proper consideration of the
Treasury resignations of 1958. In so far as Thorneycroft and his contem-
poraries, including Macmillan, regarded the money supply as crucial to
the problem of ination their emphasis was on the role of bank advances
and private credit as the key engines of monetary growth. In terms of both
monetary theory and practice what Thorneycroft and other members of
80
Ibid., Heathcoat Amory to Macmillan, 26 Feb. 1958.
81
Macmillan to Lloyd, 1 Aug. 1960, PREM 11/3756.
the Conservative hierarchy were advocating was what has come to be
termed Monetary Base Control (MBC). This particular form of mone-
tarism, if rigorously implemented, could not but have a major effect on the
market activities of the nancial sector. Macmillans governments fought
shy of establishing more rigorous controls over the private credit base. In
part this was because they did not wish to provide a future Labour gov-
ernment with ready-made mechanisms to lay its hands on the City,
82
and also there was a question of whether the banks would nd them-
selves more rigorously supervised than the burgeoning secondary bank-
ing sector.
83
In the late 1950s and early 1960s the political and technical
difculties of MBC were it seems too difcult to confront.
84
Embracing the City in the Thatcherite era
Throughout the twentieth century many Conservatives regarded the
nancial sector in general and the City in particular with critical suspi-
cion. In the last quarter of the century, however, the Conservatives took
a more positive view of the Citys activities. Following the 1962 deci-
sion to allow trading in foreign-denominated securities and bonds on the
London market the Citys position as an international nancial centre was
greatly enhanced, and its international earnings vastly extended. Earlier
in the century the Citys cosmopolitan market and investment activities
had attracted much Conservative criticism, and in the 1930s some had
called for government regulation of the ow of capital from London, but
fromthe 1970s the Conservative partys tone and policy approach became
markedly pro-City. In 1978 Thatcher, speaking to overseas bankers based
in London, praised the Citys contribution to Britains overseas earnings,
noting that invisible earnings . . . shipping, banking, insurance and other
services provided for the world community by the City of London
brought in $4.5 billion: more than all the savings in foreign currency
which we hope to enjoy from North Sea Oil. She also celebrated the fact
that this was not the achievement of politicians [because] the services
provided by the City attract no subsidies, no hidden subventions from
Government.
85
For Thatcher the only thing that government did for the
82
Ibid., D. Eccles, The organisation and status of the Bank of England, 3 Aug. 1960,
enclosed with Eccles to Macmillan, 4 Aug. 1960.
83
See Green, Treasury resignations, for a discussion of this question.
84
The issue of MBC was, however, to emerge again in the 1980s, when some monetarists
argued that the Thatcher governments had, by failing to pursue MBC, failed to pursue
a genuine monetarist economic strategy. For this perspective see in particular G. Pepper
and M. Oliver, Monetarism Under Thatcher: Lessons for the Future (2001).
85
M. Thatcher in the City of London, 7 Feb. 1978, in Margaret Thatcher: Complete Public
Statements, 194590, ed. C. Collins, CD-ROM (Oxford, 2000).
172 E. H. H. Green
City was to place barriers . . . in the way of its improvement, and the
Conservative governments from 1979 moved to dismantle any such bar-
riers. One of the rst things the rst Thatcher administration did was to
abolish exchange controls, and this was followed between 1983 and 1986
by the wholesale deregulation of the London nancial markets known as
Big Bang. In the Thatcher era the City boomed, at any rate until the
crash of October 1987, and the Prime Ministers admiration for and
support of the City was reciprocated.
86
Whereas Conservatives earlier in
the century had tended to valorise the real economy,
87
Thatcherite Con-
servatives had no such prejudice. Thatcher again expressed the position
well, when she stated at the Lord Mayors banquet in 1981 that the City
of London is a precious national asset and declared that any government
which fails to recognise this, fails to understand our national interest.
88
Thatcher was clear that she and her government had grasped not only the
importance of the City but also how best to ensure its continued growth
and prosperity, in that they understood that what had made the City
perhaps the greatest banking centre in the world was not simply the
standards of excellence of City rms but also the freedom for British
banks to transact business wherever they will provided by the Conser-
vatives rolling programme of deregulation.
89
The Thatcher years saw an
important new departure in the political economy of Conservatism, in
that the period after 1975 saw the Conservative party actively embrace
the structural shift in the British economy from the secondary to the
tertiary sector.
The Conservatives late-twentieth-century enthusiasmfor the City ulti-
mately resulted in a somewhat paradoxical, or ironic, outcome. The
nature and structure of Britains nancial sector changed, as did the Con-
servative party, over the course of the century, and the elite at the heart of
the system changed as much as did its broad constituents. For the greater
part of the century the nancial sectors elite were the gentlemanly cap-
italists of Londons accepting, discount and merchant-banking houses
whose origins pre-dated the industrial revolution; alongside them there
had emerged the big ve clearing banks that had come to dominate the
domestic capital markets by the early twentieth century. By the late 1950s
the growth of secondary banks and credit agencies had rendered the struc-
ture of the British credit and capital market complex, but the City, with
86
The chorus of City brokers singing ve more glorious years in celebration of the 1983
Conservative election victory in Carol Churchills musical Serious Money is one of the
authors abiding memories of the 1980s, as is his witnessing actual brokers singing the
very same song in a City wine bar on the evening after the Conservatives 1987 victory.
87
A position taken by Thatchers internal party critics in the 1980s.
88
M. Thatcher at the Guildhall, 16 Nov. 1981, in Thatcher: Complete Public Statements.
89
Ibid.
its long-established institutions, was still the hub of the system. But the
establishment of the Eurodollar market and the increasing international-
isation of London had, by the 1970s, begun to alter the socio-economic
and functional make-up of the City, and the comprehensive deregulation
of the 1980s and the increasing pace of the globalization of the London
capital markets sawthe make-up of the City alter dramatically. At the close
of the twentieth century London had witnessed, in terms of the related
institutional and socio-economic structures that had once dominated it,
the death of gentlemanly capitalism.
90
The market-led expansion of the
Citys activities that the Conservatives had embraced had brought about
if not the destruction then the replacement of the old-boy City elite that
early twentieth-century Conservatives had so frequently criticised.
90
See P. Augar, The Death of Gentlemanly Capitalism. The Rise and Fall of Londons Investment
Banks (2000).
9 Labour party and the City 19451970
Jim Tomlinson
The Labour partys relationship with the City of London in this period
was complex and often troubled because of fundamental conicts over
aims and objectives. Occasionally these divergent aims were compat-
ible with tactical alliances over the means to achieve these aims, but
more often the conicts were predominant. The partys objectives over
this period may be summarised as economic efciency and social jus-
tice.
1
Of course, for Labour economic efciency was seen in a very
particular light. Labours vision of an efcient economy was one in
which the state played a signicant role in setting economic priori-
ties, regulating the market and inuencing resource allocation. More
specically, efciency was seen as delivered by high levels of invest-
ment in industry, economies of scale, state-sponsored technical advance
and co-operative industrial relations, underpinned by full employment
and corporatist institutions. Social justice included ideals of both the
national minimum and equalities of opportunity and outcome, but in
practice generally meant (alongside full employment) expanding state
provision of welfare, especially in the areas of income support, health and
housing.
2
The City, even more than the Labour party, was divided in its ideology
andaims (thougharguably less inthis periodthaninsubsequent decades),
but it is perhaps fair to see the latter as predominantly twofold. Pride of
place must go to the aim of maximising its autonomy, the ability to do its
business and make prots with the minimum of state regulation. From
this primary aim owed specic economic policy goals (low ination,
a stable exchange rate, low government borrowing, for example), these
I am grateful to David Kynaston for discussion of some of the issues covered in this
chapter, for very useful references, and to the fourth volume of his magisterial work, The
City of London.
1
J. Tomlinson, Labour and economic policy, in D. Tanner, P. Thane and N. Tiratsoo
(eds.), Labours First Century (Cambridge, 2000), pp. 4679.
2
A. Thorpe, A History of the Labour Party (1997; 2nd edn, 2001).
174
Labour party and the City 19451970 175
being highly important but always ultimately to be seen in the light of the
overarching attachment to autonomy.
3
From this clash of aims we may schematically identify three cri-
tiques of the City that, in descending order of generality, played a role
in Labours policy agenda in these twenty-ve years. First, central to
Labours approach, if diffuse in its consequences, was the belief that the
(unelected) City was too powerful in its ability to shape economic policy,
compared with elected (Labour) governments. Labour believed the City
had to be persuaded or coerced into supporting government aims. Such a
view was built upon Labours interpretation of the events of 1931, when
the City was seen as having imposed its priorities on enough of the cred-
ulous Labour Cabinet to have caused the collapse of the government.
4
Labours second critique of the City owed from the rst, alleging that
the Citys orientation towards external goals had biased policy away from
domestic concerns, especially those of full employment and growth. This
again had roots in the interwar period, but was powerfully reinforced
after 1945 when these domestic goals were seen as much more widely
accepted, even consensual. The nal critique suggested that City institu-
tions, because of their external orientation, were unsuitable for the task
of raising investment in the domestic industrial sector. Such views can be
seen as an extension of the Macmillan gap arguments of the 1920s and
1930s, but in Labours minds tended to have a broader thrust, including
a sociological-cum-cultural suggestion that aristocratic bankers and the
like disdained the dirty business of making things in favour of their own
clean-handed but unproductive pursuits.
This essay examines how these three strands of criticism evolved in the
twenty-ve years after 1945, but with special weight given to the period
after 1960 when Labour was developing the policies that they took into
ofce in 1964. The account given of this period in ofce seeks in particular
to emphasise the tensions between the party and the City, and to counter
the widespread view that Labours economic policy-making was largely
subordinate to the aims of the City.
5
3
R. Stones, Government nance relations in Britain 19647: a tale of three cities, Economy
and Society 19 (1990), 3255; D. Kynaston, The Bank of England and the government,
in R. Roberts and D. Kynaston (eds.), The Bank of England: Money, Power and Inuence
16941994 (1995), p. 50. For an analysis of City aims in a broad context, E. H. H. Green,
The inuence of the City over British economic policy c. 18801960, in Y. Cassis (ed.),
Finance and Financiers in European History 18801960 (Cambridge, 1992), pp. 193218.
4
P. Williamson, Financiers, the gold standard and British politics 192531, in J. Turner
(ed.), Businessmen and Politics (1984), pp. 10529; D. Kunz, The Battle for Britains Gold
Standard in 1931 (1987).
5
In developing this argument I have learnt a great deal from Stones, Governmentnance
relations.
176 Jim Tomlinson
Who is in charge?
The rst of these arguments led most obviously to the nationalisation
of the Bank of England in 1946, though by common consent this did
little to change the actual distribution of policy-making power. However,
the ambiguities in the status of the nationalised industries, while clearly
emerging in some sectors almost as soon as the new public corporations
of the 1940s were created, did not surface much in relation to the Bank
under the Attlee government. All three Labour Chancellors of the Ex-
chequer in these years set themselves against the use of monetary policy
as a macroeconomic instrument, and at the same time maintained strict
controls over most of the Citys activities. Together these elements created
an environment in which the City, politically on the defensive for much
of the time, seems to have had little impact on the big economic policy
decisions.
6
Apart from the nationalisation of the Bank, the Attlee government did
remarkably little to reform the City. That hardy perennial of Labour
manifestos, a National Investment Board, remained unestablished. The
stock exchange was allowed to revive slowly, with a limited role only for
the Capital Investment Council. In sum, Labour retained strict physi-
cal controls over much of the area of the economy where the City was
normally active, but did little to change the inherited institutional struc-
ture. When that control regime was eroded, a process begun in the late
1940s, but gaining pace after the Conservative victory of 1951, most of
that structure remained to underpin a revival in much of the Citys old
ways.
7
The belief that the City was too powerful remained an article of faith in
Labour circles in the 1950s, and later in the decade this view was seen as
justied by the evident failure of Bank nationalisation to settle the ques-
tion of how far government rather than the Bank could determine policy.
The 19556 episode, leading to the setting up of the Radcliffe Commit-
tee, brought out the extent to which Daltons claim that his streamlined
socialist statute (of nationalisation) fell short of establishing that to-day
the Chancellor in disagreement with the Bank always has the last word.
8
In evidence to Radcliffe one key Labour gure, Balogh, argued that sub-
ordination of the Bank was the right policy, and should be secured by
6
On the Citys role in monetary policy see S. Howson, British Monetary Policy 19451951
(Oxford, 1993).
7
On Labour and the City in the 1940s, see J. Tomlinson, Attlees inheritance and the
nancial system: whatever happenedto the National Investment Board?, Financial History
Review 1 (1994), 13955.
8
Dalton, cited by Balogh in (Radcliffe) Committee on the Working of the Monetary
System, Memoranda of Evidence, 3 vols. (1960), III, p. 33.
the Permanent Secretary to the Treasury becoming the Chairman of
the Court of Governors.
9
However, Baloghs ideas seem to have been
regarded as too extreme by most Labour policy-makers, whose views
were more in line with the Radcliffe Reports own emphasis on greater
co-operation between Bank and Treasury rather than subordination of
the former to the latter.
10
Baloghs critique of the Bank of England included arguments about its
amateurismas well as its excessive inuence on policy. In a line of rhetoric
he was famously to extend into a critique of many of the British policy-
making institutions, he suggested that the Bank lacked the economic and
nancial expertise necessary to give good policy advice. Others were to
take this argument further, suggesting this amateurism was a function of
the sociology of the Bank, with its alleged domination by effete aristocrats
who inhabited old-boy networks that excluded talented individuals with
less elevated social credentials.
11
Wilson made much of this kind of argu-
ment in his contributions to the debate around the Bank Rate Tribunal.
12
This was not just a passing diversion in the debate on economic policy
and the role of the City; such sociological reductionism was to become a
staple of the declinist accounts of the British economy emerging at this
time, which are discussed in the following section.
A historian familiar with the literature about Britains economic policy
in the twentieth century, its alleged domination by gentlemanly capital-
ism, and the alleged suborning of Labour by City interests is likely to
be astonished by the records of the 196470 period, which show almost
uninterrupted and often bitter clashes over policy between the govern-
ment and the City. It is true that Labours manifesto of 1964 had no
programme of seemingly radical institutional reform, unlike that of 1945
with its plans for public ownership of the Bank and creation of a powerful
National Investment Board. But the policies pursued in ofce after 1964
brought much more of a hostile response from nancial quarters than
almost anything actually done under Attlee.
13
These hostilities were pursued across a broad swathe of policy issues.
Perhaps most anger was roused by Labours external economic policies,
where the City saw major errors of both commission and omission. As
part of the policies for improving the balance of payments, controls over
9
Ibid., pp. 335.
10
For more mainstream Labour views, see Memoranda of Evidence, III, pp. 15969.
11
Apotheosis of the Dilettante, in H. Thomas (ed.), The Establishment (1959), pp. 83126.
12
On the Bank Rate Tribunal episode see Kynaston, City of London, IV, pp. 8796.
13
The Labour manifesto of 1964 in the section on the national plan talked vaguely of a
Labour government providing better terms of credit where the business justies it and
improving the facilities and help for small enterprises. In the 1940s the major dispute
had been about Daltons pursuit of cheaper money: see Howson, Monetary Policy, ch. 4.
178 Jim Tomlinson
foreign investment were greatly intensied under Labour, and were infor-
mally extended to the Sterling Area, which had previously been exempt.
In 1965 the Bank of England accepted extremely reluctantly that given
the payments position some temporary constraint on foreign investment
might be inescapable, but fought very hard against any proposals that
implied that such investment should be permanently curtailed. This was
of course to hit at what many in the City saw as its raison d etre as supplier
of capital to the world.
14
Particular hostility was evinced against pro-
posals that suggested that any depth of crisis could justify government
requisition of privately held foreign assets.
15
The City was unsuccessful
in its general resistance to tightening controls on British investment out-
side the Sterling Area, and investment there did fall quite sharply,
16
but
it successfully fought against formal controls on ows within the area.
Instead, informal guidance was instituted, especially relating to devel-
oped area members.
17
Success in this respect was probably helped by
Labours continuing attachment to the idea of the (largely political) ben-
ets of the Sterling Area, an attachment only slowly eroded after 1964, a
point returned to below.
18
The City was also highly critical of Labours slowness in cutting over-
seas public expenditure, contrasting the proigacy of government with
the earning power of the City.
19
This was part of a more general set of
criticisms of the failure of the government to pursue the Citys preferred
strategy of public spending cuts, lower direct taxes and emphasis on con-
straining the public rather than the private sector. As Governor of the
Bank of England in the years 19646, Cromer enthusiastically pressed
this approach on the Labour government, showing little concern that it
directly conicted with Labours belief that the government had a demo-
cratic mandate for its own policies. Bitter clashes between Wilson and
the Governor occurred in November 1964 and March 1966.
20
In the
latter case Cromer made the classic ploy by saying that though he did
not himself agree, foreign bankers believed that Labours intention to
nationalise steel and its failure to bring in an effective incomes policy
14
Cromer to Armstrong, 17 March 1965, BoE G1/260; Cromer to Armstrong, 5 March
1965, T 171/801. Eventually scepticism on the impact of foreign investment led to W.
Reddaway, Effects of UK Direct Investment Overseas (Cambridge, 1968).
15
Cromer to Callaghan, 23 Mar. 1965, BoE G1/260.
16
Draft budget statement, 3 April 1965, T 171/809.
17
Cromer to Callaghan, 11 Feb., 6 April 1966, BoE G1/260.
18
The economic consequences of the Sterling Area came to greater prominence as attention
focused more on the capital account of the balance of payments e.g. Mitchell to Bancroft,
Economic Forecasts, 17 Nov. 1965, T 171/811D.
19
There was of course counter-pressure from the USA, e.g. Briefs for Chancellors visit
to the USA and Canada, June 1965, T 312/1206.
20
Meeting of 9 Mar. 1966, PREM 13/851; Kynaston, City of London, IV, pp. 3045.
were fundamental mistakes in policy. The argument then became even
more heated as Cromer wanted to raise bank rate, while Wilson said that
for the Bank to do so in the run up to an election and against the will of
the government would constitute deliberate interference with politics.
21
On this occasion Cromers bluff was called, but plainly he was willing to
try and pursue his own agenda to an extent that was bound to antago-
nise the government. Yet in following this line there is evidence that he
was doing no more than expressing the generality of City views, which
were absurdly paranoid at this time.
22
Labour was happy to see the end
of Cromer later in 1966. His successor, OBrien, had less of Cromers
patrician arrogance and was more sensitive to constitutional and polit-
ical realities, but nevertheless continued to urge the same deationary,
anti-public sector policies on the government.
23
An area of particular contention between City and government in the
1960s was taxation. The City combined a general distaste for higher direct
taxation with particular venom for Corporation Tax and the extension of
Capital Gains Tax. Hostility to the former was linked to the foreign invest-
ment issue, as Labours aim was to use the tax to equalise the treatment
of home and foreign investment to the disadvantage of the latter. The
Bank commissioned an opinion survey on this tax, which unsurprisingly
revealed enormous hostility amongst City institutions.
24
Aware of such
hostility, Wilson arranged a dinner to make more personal contact with
senior nanciers, only to be met with a barrage of generalised hostile
questions about taxation.
25
Another of Labours initiatives, the Selective
Employment Tax, was a red rag to the City bull because it quite explic-
itly rested on the assumption that service industries, including nance,
should be squeezed for the benet of the manufacturing sector.
26
This battle between widely differing ideologies and policies threatened
occasionally to get out of hand, especially under Cromer, but it never did
so. Partly this was because both sides were constrained by overarching
considerations which prevented them going too far in pursuit of partic-
ular policy goals. On the governments part the central concern was of
course to nd a third way between deation and devaluation to recon-
cile their ambition to have both a faster growing economy and a sounder
balance of payments. To prevent either a devaluation or (major) dea-
tion required the maintenance of nancial condence, and this in turn
21
PREM 18/851; also Cromer to Callaghan, 24 July 1965, BoE GI/260.
22
Kynaston, City of London IV, pp. 3067.
23
Cromer to Callaghan, 12 July 1966, BoE GV44/124; Cromer to Callaghan, 17 Nov.
1967, PREM 13/1447; and Governors tax proposals, 8 Feb. 1968, T 171/829.
24
Cromer to Armstrong, 2 Dec. 1964, 26 Jan. 1965, BoE G1/260.
25
Dinner for PM and Chancellor, 14 July 1965, BoE G1/182.
26
Kynaston, City of London IV, p. 319.
180 Jim Tomlinson
meant that substantial regard had to be had to nancial opinion, however
unwelcome the prejudices underlying that opinion. For this reason the
government could never disregard what it was being told by Cromer or
OBrien, however much it was suspicious of the way condence could
be manipulated by the Bank.
Undoubtedly the Bank did use its recognition of the governments
weakness to advance its own policy agenda. Thus, for example, a com-
mon ploy was to suggest that concerns of the government about the per-
ceived volatility of the sterling balances or the diversication of reserves
out of sterling were not really important, as they could readily be pre-
vented by more deationary domestic policies.
27
Equally, the Bank was
active in trying to shape foreign nancial opinion about what accept-
able policies on the part of the Labour government would look like.
For example, and with an echo of the manoeuvring of 1931, Cromer
in June 1966 wrote to Bill Martin of the Federal Reserve Board urging
that if the British government made inquiries about the possibility of fur-
ther borrowing beyond that already agreed it would be desirable if they
were told no such facilities were available, in order to persuade them
that the only real way forward was a display of resolute policy, that is,
deation.
28
The government was of course aware of the extent to which the need
to maintain condence constrained their freedom of action.
29
Part of
the governments response was to behave, as Barbara Castle put it, like
the parson who preaches against sin on Sunday and then fornicates the
rest of the week.
30
This behaviour understandably infuriated the Bank,
because they saw the government as telling one story to its domestic
supporters and another to those whose condence it wanted to retain.
31
Undoubtedly this meant that the government was involved in what would
now be called a complex process of spin, that involved putting the most
condence-boosting varnish on the minimumlevel of policy concessions,
an approach which ultimately failed in 1967, but might be said to have
worked with a degree of success until that time.
On the other side of the battle was the key concern within the City
to maintain its autonomy and freedom from formal government control.
This concern is evident, for example, in the continuing conict over the
control of bank rate. Although the Radcliffe Report was supposed to have
inaugurated a new era of BankTreasury co-operation on this crucial
27
BoE comments on HMT paper on OSA diversication, 1 March 1967, T 312/1701.
28
15 June 1966, BoE OV44/123.
29
Economic strategy, 15 April 1966, PREM 13/852.
30
B. Castle, The Castle Diaries (1984), p. 281, cited Stones, Governmentnance rela-
tions, 412.
31
Cromer to Wilson, 21 Dec. 1964, BoE G1/260.
matter, the right to set interest rates was still being fought over in the
1960s. The Bank was not only keen to preserve freedom of action in
this regard against the claims of the British government, but also fought
against Labours idea of consultation with the American authorities on the
rate.
32
This claimto autonomy impinged on issues beyond the economic,
into foreign policy. One of Cromers most audacious assertions of the
right not to conform to government wishes was over Rhodesia.
33
Part of this claim rested on ideological foundations. In the Banks view
nancial markets were superb but fragile mechanisms, interference in
which was a threat to their functioning because it undermined condence:
Uncertainty of no matter what cause, intervention by government to put the
market operator at a disadvantage, any action by authority which threatens the
free exercise of market forces and the threat of tax changes which may disturb
basically accepted relationships, each and all will undermine market condence.
34
The commitment to the sanctity of market forces could lead Cromer
into absurd hyperbole, as when he claimed that exchange control regula-
tions proposed were harsher than any other country, other than Hitlers
Germany, had applied in times of peace.
35
But alongside the ideological claims the Bank also wanted to sustain
its position as spokesperson for the City, resisting any ideas about other
channels of communication between nancial institutions and govern-
ment.
36
This desire may help to explain some of Cromers excesses,
because he was seeking to represent a body of opinion still largely unre-
pentantly reactionary. But this pattern also seemed to suit the government
because it had only to negotiate with one body.
However, this relationship rested on the club framework in which
competition was limited and regulation largely informal and self-policed.
In other words, for most of the postwar years the government let the
City conduct its own affairs, mainly steering policy at a macro level
through informal Treasury contacts with the Bank, indeed largely through
personal contact between the Governor and the Chancellor and the
Permanent Secretary to the Treasury. By the 1960s this framework
was coming under pressure from a range of changes, most notably
the growth of institutions and nancial innovation,
37
alongside growing
32
Cromer to Armstrong, 13 Nov. 1964, BoE OV44/123.
33
Cromer to Callaghan, 19 Oct. 1965, BoE G1/260.
34
Cromer to Callaghan, 31 Mar. 1965, BoE OV44/123.
35
Conversation with Goldman, 22 April 1966, BoE G1/556.
36
Deputy-Governors memo on Governors communication with D. Allen, ? July 1965,
BoE G1/182. This role seems to have been accepted by the City: see Kynaston, City of
London, IV, p. 319.
37
R. Roberts, The Bank of England and the City, in Roberts and Kynaston, The Bank of
England, p. 180.
182 Jim Tomlinson
scepticism in Labour and other circles about whether the existing
nancial and monetary system was really adequate to a modernising
society.
Really radical changes in the structure and behaviour of the City had to
await the 1970s, but the National Board for Prices and Incomes inquiry
of 1966, which began as a limited look at bank charges, widened out
into a critique of the whole cartelised arrangements which underpinned
both bank prots and monetary controls.
38
It was followed by a simi-
larly critical report from the monopolies commission.
39
Finally, in 1970
the Select Committee on Nationalised Industries looked at the Bank,
exposing that body to a wholly new critical gaze.
40
But a TreasuryBank
alliance prevented this inquiry from looking at monetary policy-making,
and Labours search for new ways of conducting this policy led only
to an agreement that the Bank would continue to use mainly informal
methods, though Special Deposits might be employed somewhat more
frequently.
41
These activities were not part of some strategic design by the
government to attack the City, but collectively they did mark a substan-
tial challenge to the secret garden of nance, which had underpinned
many of the claims to autonomy previously made by the City. However,
by the time Labour lost ofce the City, while undoubtedly more subject
to scrutiny from state agencies than it had ever been before, still hung
on to much of its traditional freedom of action. Regulation had been
extended to previously exempt areas, e.g. the takeover panel, but it was
still largely self-regulation. Despite Cromers rhetoric, the successful City
strategy was to give a little ground in the face of criticism, subordinat-
ing its disquiet with particular government actions to the belief that too
intransigent a response would bring about the ultimate hell of direct state
regulation.
42
Decline, sterling, Labour and the City
The belief that the Labour government after 1964 fell into the clutches of
the City is fundamentally based on the defence down to November 1967
38
National Board for Prices and Incomes, Report no. 34: Bank Charges (Cmd. 3292, PP
19667 xliii, 87); M. Moran, Power, policy and the City of London, in R. King (ed.),
Politics and Capital (1980), pp. 4968, at 556; M. Moran Finance capital and pressure-
group politics in Britain, British Journal of Political Science 11 (1981), 381404, at 397.
39
Monopolies Commission, Barclays Bank Ltd, Lloyds Bank Ltd, and Martins Bank: a
Report on the Proposed Merger (PP 19678 (319) xxvi, 395).
40
Kynaston, City of London IV, pp. 4058.
41
Goldman to Armstrong, 30 March 1967, T 171/825.
42
Stones, Governmentnance relations.
of the $2.80 sterling parity.
43
In accounts of this, Labours modernising
aims were understood to have been subverted by their subordination to
the deationary macroeconomic policies required to defend the pound.
That the Labour government did put a high priority on this defence
cannot be disputed, but what is at issue here is the argument that this
posture should be represented as surrender to the forces of nance and
the City. To see why this is not the case the argument needs to be taken
back to the Attlee period.
The Attlee government was committed to rebuilding Britains role
as a world power; Labour shared Churchills geometric conceit that
Britain was at the centre of three concentric circles of inuence with
the USA, with western Europe, and above all with the Commonwealth.
The latter was seen as broadly coterminous with the Sterling Area,
so that a broad geopolitical stance became translated into the defence
of this particular nancial arrangement. Further, the presumption was
clearly made that a stable and strong pound was integral to the sur-
vival of the Area. Labour also seems to have assumed that the pounds
strength was crucial to the nancial role of the City of London, but this
had a much lower political priority than the continuation of the Sterling
Area.
Some questions about the benets of the Sterling Area to Britain had
been asked under the Attlee government, especially the way in which,
because British investment in the area was unregulated, it facilitated the
huge outow of capital in the late 1940s.
44
But the predominant assump-
tion in Labour circles then and for a good few years while in opposition
was that the area was a symbol of the continuing economic importance
of Britain, and part of the cement of the Commonwealth. Crosland, for
example, in his book about the balance of payments published in 1953,
while recognising the problem of its encouragement of very high capital
outows from Britain, overall clearly saw the area as a good thing. He
assumed that in a world of continuing dollar shortage a discriminatory
CommonwealthSterling Area bloc was vital for Britain, his main con-
cern being to get the Dominion countries to accept more of the costs of
running the area.
45
In the early 1950s a more sceptical attitude became apparent in some
academic literature, but it was not really until the areas role was linked
to the nascent declinism of the late 1950s that criticism gained force
43
The most extreme but not untypical version of this thesis is C. Ponting, Breach of Promise
(London, 1989).
44
A. Cairncross, Years of Recovery: British Economic Policy 194551 (1986); J. Tomlinson,
Democratic Socialismand Economic Policy. The Attlee Years, 19451951 (Cambridge, 1997).
45
A. Crosland, Britains Economic Problem (1953), ch. 7.
184 Jim Tomlinson
and was taken up by some in Labour circles. A key text in declinism
generally, but particularly in linking decline to the Sterling Area was
A. Shonelds British Economic Policy Since the War (1958). He presented
a wide-ranging indictment of the area, which was to be a foundation for
most future critiques. The area, he argued, starved British industry of
capital by allowing free movement of funds to the Commonwealth, most
of which went, not to poor dependencies, but to the rich white Domin-
ions. The area underpinned the obsession with the international value
of sterling. Its encouragement of the use of sterling made the pound
inescapably vulnerable to speculative urries, which then had to be
fought off by deationary domestic policies, reducing investment and
retarding growth. He also suggested that much of the Citys activity was
not dependent on the strength of sterling, and therefore the direct eco-
nomic benets were almost vanishingly small.
46
Labour took such arguments, coming broadly from the centre-left,
seriously. In December 1957 the party set up a Working Party on the
Sterling Area within which the issues were debated.
47
For this group,
chaired by Jenkins, and including Wilson, Jay and Balogh, the problem
of the area was intimately linked to the viability of the Commonwealth
as an economic zone. On one hand was the view expressed by Neild and
Day, and similar to that of Shoneld, that the key aim was to reduce
Britains overseas commitments and to cut back on capital exports, and
that broadly the Sterling Area was a burden on Britain rather than an
advantage.
48
On the other hand was the Balogh view that the key issue
was to reverse the movement towards trade and exchange liberalisation in
order to rebuild a sustainable Commonwealth/sterling bloc as the key to
the improvement of Britains payments position.
49
The Working Partys
report did not come out clearly in favour of either of these views, but rec-
ommended further exchange control within the area, the encouragement
of bulk-purchasing agreements within the Commonwealth, agreements
with the holders on an orderly run down of sterling balances, the end of
ofcial support for transferable sterling, and greater co-operation within
the area on the use of the areas exchange reserves. It concluded by not-
ing the broader issue of international liquidity within which the sterling
46
A. Shoneld, British Economic Policy Since the War, esp. ch. 6. For an effective critique
of these arguments see C. R. Schenk, Britain and the Sterling Area. From Devaluation to
Convertibility in the 1950s (1994).
47
Finance and Economic Policy Sub-Committee, Working group on the Sterling Area,
minutes and papers 195759, Labour Party Archive [LPA].
48
R. Neild, Capital movements and the problem of sterling, District Bank Review 124
(1957), 320; A. C. L. Day, The Future of Sterling (Oxford, 1954), and What price the
Sterling Area?, Listener 21 Nov. 1957.
49
Balogh, Thoughts on the Sterling Area (1957), LPA, Re. 254.
issue was embedded.
50
These discussions showed the continuing strength
of pro-Commonwealth views in the party, the continuing attachment to
trade controls, some growth in scepticism about the benets of the Ster-
ling Area, but an unwillingness to accept the full logic of the declinist
case for abolishing effectively the area and ceasing to regard safeguarding
the pounds international role as a signicant policy goal.
During the 1959 general election campaign, Jenkinss The Labour Case
accepted Shonelds argument that the benets of sterlings role in terms
of aiding the prosperity of the City of London was greatly overstated,
and in general regarded sterlings status as a problem, but did not spell
out how this problem was to be dealt with.
51
But in the early 1960s,
especially after Wilsons accession to the leadership, there seems to have
developed a more positive attitude towards the Sterling Area, as part of
the Commonwealth link to be defended against emergent Conservative
Europeanism.
The new governments attitude in this area was well summarised by
Wilson in an interview he gave to the This Week TV programme in
November 1964. Asked if Britain did not pay too high a price for contin-
uing the role of the Sterling Area, he said emphatically not:
For one thing, this is one of the essential links with the Commonwealth and the
Commonwealth trade, and if we were to say that we were just going to cultivate
our own back garden, that would not only be bad for Britain it would be bad
for the Commonwealth.
52
During the course of the governments life after 1964 we can crudely
summarise the policy position on the Sterling Area as evolving from one
of defending its value to Britain (and the Commonwealth) to one of
acceptance that it imposed burdens that were no longer outweighed by
benets. This was part of the bigger story of disillusion with the Com-
monwealth and a growing enthusiasm for Europe, where the area was
at best irrelevant, and at worst positively harmful to Britains chance
of entry into the European Economic Community. But this evolu-
tion was never straightforward, and came only after some painful re-
evaluations.
Labours initial position in the face of the balance-of-payments decit
it faced on coming to ofce was famously that it could be solved nei-
ther by devaluation not by deation, but rather by pursuing a third
way of planned modernisation of the economy and higher productiv-
ity. In this perspective, balance-of-payments difculties were largely a
50
The Labour party and the future of Sterling (1958), LPA, Re. 299.
51
R. Jenkins, The Labour Case (Harmondsworth, 1959), ch. 5.
52
This Week broadcast, 3 Dec. 1964, BoE OV44/123.
186 Jim Tomlinson
consequence of Britains lack of competitiveness. This stance was used
to argue that the sterling crises arose neither from overvaluation nor from
the existence of the Sterling Area. If holders of sterling withdrew, this was
because of their perception of the weakness of the British balance of pay-
ments; once this was corrected, the vulnerability to sterling ight would
disappear.
In a post-mortemon the problems of sterling in 19645 Treasury advis-
ers sustained this emphasis on the issue of competitiveness. They argued
that while the imbalance of sterling assets and liabilities was linked to the
role of the pound as a key currency, the underlying issue was Britains
payments weakness. But they also recognised that this broad stance did
not rule out action to correct the asset:liability ratio, though they had no
specic suggestions on how to do this. This kind of focus on domestic
matters was, of course, music to the ears of conservative forces such as
the Bank of England, providing a useful weapon to use in its urging of
cuts in public spending and other deationary policies.
53
But it would be
wrong to suggest that criticism of the Sterling Area was not heard at this
time. In reporting on the Treasury experts report to the Prime Minister,
the covering summary rightly suggested the existence of a general feeling
that the Sterling Area has become in some respects one-sided, though it
also noted a lack of radical proposals to dismantle it.
54
These doubts about the area were partly due to the growing recognition
of Britains problems on the capital as well as current account of the
balance of payments, and the way in which the Sterling Area encouraged
such ows. But any proposal to regulate British investment in the Area
would undermine the main reason for those countries being members,
and therefore bring the whole edice into question.
55
Another problem of the area subject to increasing concern in the
mid 1960s was the diversication of reserves out of pounds by Ster-
ling Area members. Generally the problem was not one of an abso-
lute fall in sterling held; rather the volume was stagnating as countries
increased total reserves and holdings of dollars and marks.
56
Such pat-
terns tended to reinforce doubts about the extent to which the area could
be seenas reinforcing Commonwealthlinks, especially whenthe countries
involved included Australia and India. Like the weakening of Common-
wealth trade links, a large part of this reserve diversication reected
53
R. Kahn et al., Report of the enquiry into the position of sterling 19645, 1 June 1966,
T 312/1484.
54
Meeting of Governor of Bank of England with Prime Minister and Chancellor, 15 July
1966, PREM13/853; Sterling balances: ways to improve asset:liability ratio, June 1967,
T 312/1706.
55
Report of enquiry into the position of sterling 19645, PREM 13/852.
56
Balogh to Armstrong, Overseas investment, 11 Feb. 1965, PREM 13/250.
long-term structural patterns rather than short-term policy options,
though enthusiasm for holding sterling was hardly encouraged by the
persistent exchange-rate pressure of the 19647 period.
57
This pressure
led Commonwealth countries like Australia, as well as oil producers like
Kuwait, to seek dollar guarantees for their sterling reserves, another sign
of the weakness of Commonwealth solidarity. Londons viewwas that this
risk should be offset against the favourable access Sterling Area countries
had to the London capital market, though voluntary restraint operated
on these outows from 1966.
58
So far this account of Labours stance on the pound has suggested that
it needs to be seen in the light of the evolution of the partys global polit-
ical pretensions, above all the key role allotted to the Sterling Area and
Commonwealth in the thinking of the early to mid 1960s. Only as these
pretensions were found to be weak (and the illusion of the Common-
wealth as a basis for British power exposed) after 1964 did this stance
shift. But this, while deserving of emphasis, is by no means the entire
story of Labours attachment to the strength of the pound.
Also crucial to Labours stance on devaluation was the American
alliance. Here of course, immense amounts have been written. One theme
common to critics of the Labour government has been that it was sub-
servient to Washington, and to its discredit kowtowed to American foreign
policy on such issues as Vietnam in order to gain American support for
the pound.
59
Undoubtedly Wilson and Callaghan did regard good rela-
tions with the USA as central to their foreign policy, and tried to walk a
tightrope between Labour opinion at home and an American president
increasingly obsessed with the Vietnam issue. But this stance was under-
pinned by the assumption that only good relations with the USA could
stabilise the international nancial system, and that the defence of the
pound was in the joint interest of both countries. It needs to be empha-
sised that Labour saw itself as a key guardian of the institutions of the
international economy, and that stable exchange rates were seen as vital
to that system. This was a recurrent theme in the writings of Wilson and
Callaghan at this time.
60
The view that the pound was the rst line of defence for the dollar was
a position initially shared by many (but by no means all) of President
57
Bank of England, The problem of the sterling balances, 1 Nov. 1965; Treasury, Diver-
sication of Sterling Area reserves (n.d.), T 312/1700.
58
Policy on exchange guarantees 196166, T312/1487; Bank of England Treasury paper
on OSA diversication, 1 Nov. 1967, T 312/1701.
59
Ponting, Breach.
60
Wilson to Johnson, 24 Oct. 1964, BoE OV4/123; Callaghan to Shanks, 22 Jan. 1968,
PREM 13/2015.
188 Jim Tomlinson
Johnsons advisers. But United States attitudes were complex and shift-
ing. On one side were people like McNamara, the Defence Secretary,
who saw British weakness as a lever for imposing the American view that
Britain should retain its role as a major world power, especially east of
Suez. At the other end of the spectrum were those such as the presiden-
tial adviser George Ball who accepted the overstretch view of Britains
problems and thought the country should cut its global role and enter the
European Economic Community. In between were those who wanted to
support the pound but who eventually came round to the view that this
was an impossible task. As the crisis of the pound continued through the
mid 1960s, the predominant US view shifted from save the pound at any
cost or only help the Brits if they sustain their overseas defence effort
to recognition that Britain was over-extended and that devaluation need
not be disastrous for the international nancial system.
61
But the value of the pound was not just about international politics.
Rather than accepting the view of the critics that defence of the pounds
value undermined the domestic growth and modernisation strategy, key
Labour gures believed on the contrary that devaluation would wreck that
policy. First, it would destabilise the international economy and thereby
hit the balance of payments. Second, rather than devaluation being an
alternative to deation, it would require deation to push resources into
exports. Third, devaluation would depress real wages and in response
cause upward pressure on money wages and undermine the attempt at
voluntary incomes policy.
62
In its defence of the pounds parity between 1964 and 1967 Labour was
by no means a creature of the Citys prejudices. We can sensibly speak of
Labours largely internally generated politics of the pound, compounded
of the following mix: a belief that the Sterling Area and the strength of
the pound were inextricable, and that the area was key to Britains world
standing; concerns with the stability of the international nancial system
(to which the alliance with the USA was deemed vital); and the belief
that devaluation would hinder not help the fragile economic and political
balance required to increase the domestic rate of growth. There was also
no doubt a perceived popular politics of equating the strength of the
pound with the strength of Britain, though it is far from clear to what
extent the government was hoist with its own rhetoric in this regard.
63
61
These points are derived from research in the Lyndon B. Johnson papers and National
Archives (as well as the PRO), discussed in J. Tomlinson, The Labour Governments 1964
1970, III: Economic Policy (Manchester, 2004), ch. 2.
62
K. Morgan, Callaghan: a Life (Oxford, 1997), ch. 13.
63
D. Blaazer, Devalued and dejected Britons: the pound in public discourse in the mid
1960s, History Workshop Journal 47 (1999), 12140.
The support of the City for the defence of the pound was not the most
important factor in Labours approach. That support was in any event
not unconditional. As already suggested, the Citys overarching aim was
to sustain its autonomy, and by early 1966 there were inuential voices
arguing that the restrictions on that autonomy being imposed in the name
of defence of the pound were too great. McMahon (a senior gure in the
Bank of England) argued that current policy threatened a siege economy
and that a planned devaluation would help exports, make the need for
deation more evident and, above all, allow an easing of restrictions.
64
This was still a minority view, and many in the City as elsewhere defended
the parity not on any sophisticated analytic grounds but because of a belief
in it as a symbol of Britains strength and a moral feeling that devaluation
was to rob Britains creditors. As for 1925, we need to recognise the moral
dimension to the arguments about the pounds value.
65
But there was a further reason why informed opinion was shifting
against such priority being given to the value of the pound. For most
of the postwar years both supporters and declinist critics of the City
had assumed that the City of Londons earnings were dependent upon
the status and value of the pound. Shoneld typically argued that these
earnings were not very important relative to the costs imposed by the ster-
ling system, while defenders emphasised their signicance to the balance
of payments.
66
But fromthe early 1960s there grew a recognition that the
role of the City would not be hard hit by any diminution in the role of
sterling, that the City was an offshore entity which could happily oper-
ate in other currencies, especially dollars. An important change here was
that in the mid 1960s this argument was being made by City supporters
as well as critics, most notably William Clarke. He cut across traditional
declinist doctrine that commitment to the pound had favoured the City
at the expense of industry by arguing that it is the Citys usefulness both
to Britain and to the world that attracts pounds to London, not the pres-
tige surrounding a reserve currency. By late 1966 this view was readily
accepted in the Treasury.
67
64
McMahon, Economic policy, 18 March 1966, BoE OV44/123; Kynaston, City of
London, IV, p. 356 refers to similar views in 1967.
65
Kynaston, Bank of England; D. E. Moggridge, British Monetary Policy, 19241931: the
Norman Conquest of $4.86 (Cambridge, 1972), p. 270 described the 1925 decision as
ultimately an act of faith . . . undertaken for largely moral reasons.
66
Shoneld, British Economic Policy; W. Clarke, The Citys Invisible Earnings: How Londons
Financial Skill Serves the World and Brings Prot to Britain (1958).
67
W. M. Clarke, The City in the World Economy (1963), p. 245; W. M. Clarke, How far
does the City depend on sterling?, 21 Nov. 1966, T 312/312/1949. This development
was of course linked to the rapid growth of the Euromarkets, on which see G. Burn, The
state, the City and the Euromarkets, Review of International Political Economy 6 (1999),
22561.
190 Jim Tomlinson
The City and domestic investment
The argument that the Citys external priorities damaged British invest-
ment, especially in industry, were not central to Labours critique of the
City in the period discussed here. Labours major statements of economic
policy in the opposition years, Industry and Society (1957) and Signposts to
the Sixties (1961), focused on the perceived transformation of the econ-
omy into one dominated by giant enterprises in which ownership was
separated from control, and on the challenges posed for both democracy
and efciency by this transformation.
68
Investment needed to be raised,
but this was to be achieved partly by macroeconomic stability (an end to
stop-go) and greater incentives in the context of a national plan. There
was no strong sense of a supply-side failure in the capital market. There
was criticism of the City for its perceived speculative activities, including
in the takeover process, but this was not part of a broader critique of
short-termism, or like notions.
The Citys impact on investment in contemporary declinist literature
was mainly seen as indirect, a consequence of the attachment to the value
of the pound leading to growth-inhibiting stop-go policies. Undoubtedly
criticism of institutions like the banks grew in the 1960s, but this largely
derived from outside party or government circles, and focused more on
defending the interests of consumers than on linking the banks behaviour
to the issue of investment.
69
In part this quiescence may have been due
to the fact that the nancial system had been seen to be compatible with
a very rapid rise in investment in Britain in the 1950s and 1960s, as
recognised for example in the TUCevidence to Radcliffe.
70
There was no
perception of a Radcliffe gap to match that of the Macmillan committee.
The Industrial and Commercial Finance Corporation (ICFC), which
had been the Citys defensive creation to head off more radical state
intervention in industrial nance, was an object of criticism throughout
these years, but this was always a marginal issue.
71
Labours commitment
to raising investment via the process of merger largely outweighed criti-
cisms of the casino capitalism of the takeover process (begun, of course,
under the Conservatives). The creation of the Industrial Reorganisation
Corporation (IRC) was not predicated on major criticism of the City,
68
J. Tomlinson, Inventing decline: the falling behind of the British economy in the
postwar years, EcHR 49 (1996), 73157.
69
National Board for Prices and Incomes, Bank Charges.
70
TUC memo. in Radcliffe Committee, Memoranda of Evidence, II, pp. 14550.
71
Kynaston, City of London, IV, pp. 14, 25. The foundation of the ICFC was in the classic
calculation by the City (prodded by the Bank) that criticism should be responded to by
a City initiative to stave off government intervention: R. Coopey and D. Clarke, 3i: Fifty
Years Investing in Industry (Oxford, 1995) pp. 1316.
but mainly on the belief that there were opportunities for merger where
only government was powerful enough to overcome the obstacles. There
was a parallel belief that too many existing mergers were driven more by
speculation than industrial logic, but this was only a faint echo of radi-
cal criticisms of the Citys role. The creation of the IRC was not strongly
opposed in the City, though it was keen both to get its people in con-
trol of the institution and to minimise the states direct nancing role in
industry.
72
Conclusions
From Attlee to Wilson many in the Labour party disliked the City and
all it was seen to stand for. This attitude was largely reciprocated. There
was a gulf in values and policy objectives that if uninhibitedly articulated
would have made almost any relationship unworkable. In the 1940s the
advantage lay with the government, supported by a huge electoral and
ideological mandate, plus the inheritance of wartime regulations, which
kept the City rmly under government control. Nationalisation of the
bank was more a (misleading) symbol of this relationship than a radical
measure in its own right. But the Attlee governments failure to reform
the City meant that by 1964 the incoming government faced an opponent
now much stronger than in the days of its predecessor. The City had in
many areas revived its little-regulated strength under the Conservatives,
and in addition the weakness of the balance of payments in a liberalised
environment gave the City the powerful condence card to play as hard
as it dared. Labour and the City agreed on the need to defend the pound,
but for reasons that overlapped only in part, and with quite divergent
views of what should be done to achieve that aim. Hence the Labour
government was continuously embroiled in conict with the City over a
wide range of issues. After devaluation both recognised that the Sterling
Area no longer had the signicance previously attached to it, and the City
recognised that its fortunes no longer coincided with those of the pound.
Labour realised that the idea of the Sterling Area as part of a world power
role was an illusion, and focused much more attention on Europe.
Before Labour left ofce the groundswell of opinion in the Labour
party was moving leftwards, and part of this arose from growing criticism
of the failure of persuasion and incentives to raise industrial investment
as hoped.
73
This line of argument developed in the direction of calls for
72
The IRC, Cmd. 2889, 1966; D. Hague and G. Wilkinson, The IRC: An Experiment in
Industrial Organisation (1983), chs. 1, 14.
73
Labour Party, Labours economic strategy (1969); D. Hateld, The House the Left Built
(1978).
192 Jim Tomlinson
much greater public control of both nancial institutions and industry,
and when this shift in opinion coincided with the end of the golden age
and the beginnings of de-industrialisation, a much more radical critique
of the Citys domestic role developed in the 1970s. However, while this
tended to shift policy attention more onto the Citys investment role, there
was also continuity in Labours attitude that a major problem was that
the City had unaccountable power, and this was a vital underpinning to
the nationalisation proposals that were to be put forward in 1976, which
in turn led to the Wilson inquiry of 1977.
74
74
Labour Party, Banking and Finance (1976). The Labour party evidence to the (Wilson)
Committee to Review the Functioning of Financial Institutions is in First Statement of
Evidence (1977) and Second Statement (1979).
Part IV
The interwar period
10 Moral suasion, empire borrowers and the
new issue market during the 1920s
Bernard Attard
The problems of British monetary policy during the 1920s are well
known.
1
The effort to restore gold parity at $4.86, and subsequent weak-
ness of sterling under the gold-exchange standard, preoccupied the mon-
etary authorities and compelled the Bank of England to intervene in
markets in ways that had only been faintly anticipated before 1914. In
the capital market, the Bank curtailed the activities of overseas borrow-
ers.
2
Yet, apart from a brief period during 1925, empire governments
appeared largely to escape restriction, even though their loans interfered
most directly with domestic funding operations, drained what appeared
to be a diminishing pool of savings, and potentially threatened both ster-
ling and gold reserves.
This appearance, however, is partly misleading. The Empires inclu-
sion in the 1925 embargo on overseas loans has already been noted.
3
But
well before then its issues were incorporated in the marketing arrange-
ments for all trustee securities introduced in 1920, and afterwards subject
to the Banks increasingly determined efforts to control the terms of all
large new public offers. These measures, and their limited success, are
examined here as a case study of governmentCity relations with respect
to the Empire. While illustrating the Banks efforts to regulate the capital
market independently of ofcial controls, they also show the extent to
which it was subject to political constraints, particularly in dealing with
The research for this paper was made possible by a grant from the Faculty of Social
Sciences in the University of Leicester. I particularly wish to thank my colleague, Philip
Cottrell, and the editors of this volume for their comments and suggestions. All respon-
sibility for the contents remains my own.
1
For example, D. E. Moggridge, British Monetary Policy, 19241931. The Norman Conquest
of $4.86 (Cambridge, 1972); S. Howson, Domestic Monetary Management in Britain, 1919
1938 (Cambridge, 1975).
2
John Atkin, Ofcial regulation of British overseas investment, 19141931, EcHR, 2nd
ser. 23 (1970), 32435.
3
Ibid., 330; Moggridge, British Monetary Policy, pp. 2069; R. W. D. Boyce, British Capi-
talism at the Crossroads 19191932. A Study in Politics, Economics and International Relations
(Cambridge, 1987), pp. 957.
195
196 Bernard Attard
dominion governments which enjoyed the status of domestic borrowers
and whose relations with the British government were increasingly char-
acterised by partnership rather than subordination. Thus the Bank found
it increasingly necessary to seek government assistance (and even appeal
directly to dominion governments themselves) rather than rely solely on
its customary inuence in the City.
The rst part of this chapter comments briey on the record of empire
borrowing and the nature of imperial preference in the London capital
market during the 1920s. Two phases in the regulation of new issues are
then discussed. The rst runs fromthe removal of the last wartime restric-
tions on capital exports in November 1919 to the lifting of the embargo
on overseas loans at the end of 1925. The second follows the Banks
efforts from summer 1925 to divert some empire demand to New York
and to subject new loans in London to its approval. Some of the narrative
is familiar from Donald Moggridge and Robert Boyce, but a consider-
able amount of newmaterial is presented. Throughout the emphasis is on
what might be called the imperial factor in the regulation of the London
capital market during the 1920s. The concluding section reects on the
insights that the case study provides into aspects of governmentCity
relations during the decade.
Empire borrowing and imperial preference
during the 1920s
Regulation of overseas borrowing was initially reintroduced after the First
World War because of the postwar need to facilitate sales of British gov-
ernment and corporation stocks, and later continued as a result of the
Banks concerns about the level of capital export that could be sustained
without putting pressure on domestic savings and gold reserves. Empire
borrowing became a problem because certain Dominions began to weigh
increasingly heavily on the market.
4
Indeed, once allowance is made
for the massive growth of the national debt, empire stocks were one of
the few classes of securities during the decade to increase their share of
the nominal value of all securities quoted on the Stock Exchange.
5
Atkins statistics of newoverseas issues from1918 to 1931 illustrate the
point. Although the nominal value of capital issues on overseas accounts
was lower than during 190013, the loans of public authorities within
4
W. K. Hancock, Survey of British Commonwealth Affairs, II: Problems of Economic Policy
19181939, part 1 (1940) [hereafter Survey II/1], p. 179.
5
R. C. Michie, The London Stock Exchange. A History (Oxford, 1999), p. 184, table 5.2;
I. M. Drummond, British Economic Policy and the Empire 19191939 (1972), p. 29; for
surveys of empire borrowing, see pp. 4351; Hancock, Survey II/1, pp. 17798.
Moral suasion during the 1920s 197
the Empire rose from 17 per cent to over 45 per cent of the total.
6
Issues by overseas companies registered in the Empire accounted for
a further 20 per cent. Of all overseas borrowers, the Australian federal
and state governments (which until 1927 retained independent borrow-
ing powers) were by far the most active.
7
Between 1919 and 1929, they
took just under a fth of all subscriptions to new overseas issues, with the
result that by the end of the decade the Dominion was Britains greatest
debtor.
8
New South Wales alone raised more than either New Zealand
or South Africa. Moreover, while other borrowers turned increasingly to
New York, the majority of empire governments still looked to London as
the most favourable market. Only Canada sought funds exclusively from
Wall Street.
9
Its absence, together with that of India which for much of
the decade found it cheaper to raise domestic capital probably favoured
other empire stocks as near substitutes.
10
Amongst these, Australian secu-
rities were in greatest supply. Thus, while London began to focus more
narrowly on the supply of development capital to the Empire, Australian
governments were the most prominent of all overseas borrowers.
11
The
problem of regulating empire borrowing, therefore, largely became one
of restraining the Australians.
W. K. Hancock argued that the changes just described were in large
measure explained by . . . natural economic evolution rather than the
product of deliberate policy, but it would be difcult to maintain that
policy had nothing to do with it.
12
The most obvious form this had taken
was the Colonial Stock Acts of 1877 and 1900. The rst allowed colo-
nial governments to inscribe their stocks in the United Kingdom, per-
mitting them to pay a single composition fee that exempted all future
transfers from stamp duty. The second conferred trustee status on colo-
nial loans by admitting them to the list of securities in which trustees
could invest without requiring specic authorisation in a deed of trust.
13
The British authorities, including the Treasury, acknowledged that the
later Act was a very substantial measure of preferential treatment which
6
Statistics of newissues for 191831 fromJohn Atkin, British overseas investment, 1918
1931 (PhD thesis, University of London, 1968), based on the weekly list published in
The Economist; for 190013 from the revised Jenks-Simons series in Irving Stone, The
Global Export of Capital from Great Britain, 18651914: A Statistical Survey (Basingstoke,
1999). Placings and introductions are excluded.
7
C. B. Schedvin, Australia and the Great Depression (Sydney, 1970), ch. 5; B. Attard,
Australian nancial diplomacy, in C. Bridge and B. Attard (eds.), Between Empire and
Nation: Australias External Relations from Federation to the Second World War (Melbourne,
2000), pp. 11321.
8
Hancock, Survey II/1, p. 183.
9
Atkin, British overseas investment, p. 147.
10
Ibid., pp. 1712.
11
Ibid., p. 164.
12
Hancock, Survey II/1, pp. 1823.
13
Atkin, British overseas investment, pp. 1923, 7686.
198 Bernard Attard
virtually transformed empire securities into gilt-edged stocks.
14
Their
combined effect widened permanently the market for Dominion and
other securities, putting empire governments on the same footing as the
most favoured domestic borrowers and lowering the cost of capital by
between half and one per cent.
15
With the introduction of capital controls at the start of 1915, the
Empires parity with domestic borrowers was further emphasised, while
dominion access to the market became a matter of political judge-
ment rather than one determined solely by nancial conditions. The
Australians insisted that they be exempt from the embargo on capital
exports because of their need to nance current public works, with the
result that the Chancellor of the Exchequer conceded, in the words of
the Treasury notice, that empire issues would be allowed where it is
shown . . . that urgent necessity and special circumstances exist.
16
This,
together with the newinstructions in March 1919 that preference should
be given ceteris paribus to those cases in which the proceeds of the issues
are to be applied in British Dominions overseas, was the nearest the
British government ever came to explicit statements in favour of the
Empire.
17
But the concession had gone further. As sovereign govern-
ments, the Australian states objected to the requirement that they submit
their loan proposals to a capital issues committee which would scruti-
nise all domestic applications for new capital. Instead, these would be
dealt with directly by the Treasury.
18
In the event, with the Federal gov-
ernment taking responsibility for all wartime borrowing overseas (only
New South Wales standing aside) the Chancellor approved all requests,
most for political reasons. In practice, it proved impossible to deny the
Australians access, even when the nancial strain in London was greatest.
During 191518, Australia issued loans in the City for public works for
just under 33 million.
19
The need to allow Australia to continue borrowing was a consequence
of Britains increasing dependence on its partnership with the white
14
Niemeyer, Empire development, 28 June [1923], T 176/11; Overseas Loans Sub-
Committee Report, 16 Oct. 1925, C. R. (H.) 31, para. 44, CAB 58/9 (henceforth Over-
seas Loans Report). For gilt edged, Niemeyer to Chancellor, 7 Oct. 1921, T 172/1208.
15
Atkin, British overseas investment, p. 77; Drummond, British Economic Policy, p. 43.
16
R. S. Sayers, The Bank of England, 18911944, 3 vols. (Cambridge, 1976), III, app. 30,
no. 2; B. Attard, Politics, nance and Anglo-Australian relations: Australian borrowing
in London, 19141920, Australian Journal of Politics and History 35 (1989), pp. 1436;
Atkin, Ofcial regulation, pp. 3256.
17
Treasury instructions to the capital issues committee (Cmd. 99, PP 1919 xxxii, 99);
Hancock, Survey II/1, pp. 1834.
18
Attard, Politics, nance, pp. 1467.
19
Ibid., pp. 1516; Attard, Financial diplomacy, p. 112.
Dominions.
20
Arguably, this continued to be a factor after the war. With
the emergence of mass unemployment during the winter of 19201,
British governments also began to perceive a more immediate economic
advantage in encouraging imperial investment to provide direct relief for
depressed British industries, enlarge export markets and secure cheaper
rawmaterials.
21
Despite Treasury opposition to the expenditure involved,
Parliament passed a series of measures from the Empire Settlement Act
of 1922 to the Colonial Development Act of 1929 which, amongst their
provisions, widened the coverage of the Colonial Stock Act, guaranteed
some colonial loans, and authorised interest subsidies for certain domin-
ion capital issues. The ultimate results were disappointing but the legis-
lative effort was noteworthy nevertheless because of the political will it
embodied and its implicit assumption that empire borrowers would con-
tinue to have free entry to London. Even the Treasury had to concede this
much in 1923 when objecting to a Board of Trade proposal for further
interest subsidies: The recognised way in which Great Britain gives the
Dominions nancial assistance is by lending to the Dominions in the
market.
22
In conclusion, market forces played an important part in explaining the
prominence of particular empire borrowers in London during the 1920s.
But they were reinforced by institutional and political developments that
reached back into the nineteenth century. Empire governments operated
in London on the same footing as domestic public borrowers. Their right
of access was secured by political privilege which exempted them from
the restrictions imposed on foreigners. Moreover, public policy favoured
high levels of capital export to the Empire. In this context, it is reasonable
to view the governmentCity relationship as potentially triangular, with
the Empire as a third factor and the Dominions, in particular, inclined
to assert their independence of the Citys regulatory authorities.
Loan queue to embargo, 19201925
When the last ofcial controls on capital exports were nally removed
in November 1919, ination rather than unemployment was Britains
20
J. Darwin, A third British empire? The dominion idea in Imperial politics, in J. M.
Brown and W. R. Louis (eds.), The Oxford History of the British Empire, 5 vols. (Oxford
and New York, 1999), IV, pp. 667, 856.
21
Drummond, British Economic Policy, chs. 12; I. M. Drummond, Imperial Economic
Policy 19171939: Studies in Expansion and Protection (Toronto, 1974); S. Constantine,
The Making of British Colonial Development Policy 19141940 (1984); G. C. Peden, The
Treasury and British Public Policy 19061959 (Oxford, 2000), pp. 17884.
22
Niemeyer, Empire development, 28 June [1923], T 176/11.
200 Bernard Attard
principal economic problem.
23
In the City, the monetary authorities con-
fronted the task of funding the enormous oating component of the
national debt while allowing local authorities to issue loans to nance
Addisons housing programme. One regime of regulation passed almost
seamlessly into another. Yet while the rst had ultimately derived from
legislation, the second rested on the Bank of Englands moral authority.
Moggridge described this particular mode of operating as moral suasion
and saw it largely as an innovation following the return to gold.
24
But in
many respects it describes the typical way in which the Bank exercised its
inuence in the City, where the high degree of concentration, primacy
of personal contacts and dependence on the Banks good will made it
uniquely effective. It was also particularly suited to the personality of
Norman, the Banks Governor from April 1920. Apart from the con-
sultative bodies through which the Bank routinely communicated with
the Citys various constituents, Norman relied on personal contact and
a mixture of blandishment, bullying and cajolery to impose his will. As
one Dutch banker later recalled: He exerted power but always through
inuence.
25
From early 1920, the Governor managed the new issue market in two
ways.
26
First, at the Chancellor of the Exchequers request, he reinstated
the ban on overseas xed-interest loans that interfered with the govern-
ments funding operations, initially applying this to short-dated issues
with maturities of less than twenty years. Second, from May he arranged
with the three brokers who issued trustee securities to operate a queue
for new public offers. This was principally to facilitate the sale of housing
loans but also allowed the Governor to scrutinise the terms and timing
of new issues. Empire loans were subsumed within the arrangements
for trustee securities. Two of the three brokers concerned (the other
being Mullens, the government broker) virtually monopolised the issue
of dominion and colonial loans: R. Nivison & Co. underwrote for the
Australian governments and South Africa; J. & A. Scrimgeour was the
broker to New Zealand and the Crown Agents. Mullens dealt with what
remained, sometimes (as in Indias case) in association with one of the
23
24
Moggridge, British Monetary Policy, pp. 1668.
25
Quoted in D. Kynaston, The City of London, III, p. 66, also p. 162; D. Kynaston, The
Bank of England and the government, in R. Roberts and D. Kynaston (eds.), The Bank
of England: Money, Power and Inuence 16941994 (Oxford, 1995), p. 46; E. H. H. Green,
The inuence of the City over British economic policy, c. 18801960, in Y. Cassis (ed.),
Finance and Financiers in European History, 18801960 (Cambridge, 1992), pp. 1968.
26
For the following, see Atkin, Ofcial regulation, 32630; Sayers, Bank of England, III,
app. 30, pp. 2889; Kynaston, City of London, III, p. 59.
other two.
27
By the end of 1920, the brokers were alternating empire
with housing loans.
28
As regards the former, Norman also was inclined
to dislike proposals for short-term issues.
29
But a dominion sufciently
determined might still attempt to jump the queue by appealing to a higher
authority. In November, the Australians, who were making heavy weather
of solving a nancial crisis, asked for the Chancellors help in having a
Commonwealth loan oated ahead of a housing issue and succeeded in
getting rst place after Christmas.
30
With the completion of the housing-loan programme the following
summer, Norman prepared to drop the supervision of trustee issues
but the three issuing brokers chose voluntarily to continue the queue.
31
There is no evidence that these arrangements inhibited empire bor-
rowers. Bank rate fell steadily from April 1921 and new empire issues
boomed (see Table 10.1). The pace slowed a little from 1922, but this
left the eld clearer for the Australians, whose nominal annual raisings
of new money peaked in 1924 at 33 million. As early as June 1923,
Otto Niemeyer, nancial controller at the Treasury, commented on the
facilities for dominion borrowers in London: Many people . . . think that
in present circumstances these . . . are dangerously excessive.
32
With
wool prices rising, the high level of borrowing by Australia and New
Zealand during 1924 also meant that the Australian trading banks started
to accumulate funds in London and put pressure on the exchange by con-
verting them to gold in New York and South Africa. Between February
and June 1925, some 10 million were transferred to Australia in this
manner.
33
Through much of 1924, Norman worried about the strain on ster-
ling.
34
With the completion of the main phase of postwar funding oper-
ations, the Treasury agreed in January to drop the remaining restrictions
on foreign loans, except Treasury bills and other discounted paper.
35
27
Atkin, British overseas investment, p. 104; Nivison had also underwritten Canadian
loans before the war.
28
Blackett to Chancellor, 16 Nov. [1920], T 172/1156.
29
Ibid., Blackett to Gower, 12 Nov. 1920.
30
Ibid., Millen to Chancellor, 11 Nov. 1920, and A. Chamberlain to Goschen, 26 Nov.
1920.
31
Norman to Blackett, 11 June 1921, Bank of England archives [BoE] C 40/655; Norman
diary, 10 October 1921, in BoE.
32
Niemeyer, Empire development, 28 June [1923], T 176/11.
33
L. F. Giblin, The Growth of a Central Bank: The Development of the Commonwealth Bank
of Australia, 19241945 (Melbourne, 1951), p. 25; also, Norman to Niemeyer, 11 May
1925, T 176/17, part 1.
34
Sayers, Bank of England, I, pp. 13840; III, app. 30, no. 10.
35
J. Wormell, The Management of the National Debt of the United Kingdom, 19001932
(2000), pp. 435, 4435; Norman diary, 18 Dec. 1923; Sayers, Bank of England, III,
no. 9.
202 Bernard Attard
Table 10.1 New overseas issues in London by public offer, 19201929
Overseas issues
Proportion of total overseas
as a proportion
issues (%) (Economist series)
Total overseas of all issues
issues (Economist (%) (Midland Empire Australian Foreign
series) 000s Bank series)
a
government government government
1920 52,745 15 23 15 0
1921 113,234 54 65 18 5
1922 130,198 57 45 15 3
1923 137,576 67 50 19 19
1924 124,560 60 40 27 33
1925 77,055 40 40 19 0
1926 101,728 44 31 21 23
1927 148,442 44 38 18 8
1928 105,342 40 38 19 15
1929 87,697 37 30 9 4
a
British government issues excluded.
Source: Atkin, British overseas investment, tables 6 and 12 and app. A.
Yet by April, Norman was contemplating raising bank rate. He also
again tightened restrictions on foreign issues, telling the Banks Com-
mittee of Treasury that in view of the Exchanges and of the over-
lending by this Country in 1923, he was strongly of opinion that only
applications on behalf of those countries which were in need of money
for reconstruction purposes deserved consideration.
36
The big foreign
loans during 19234 were issues of just this kind for Austria, Hungary
and Germany. But the Empire remained the heaviest consumer of ster-
ling funds (see Table 10.1).
37
Apart from government loans, com-
panies registered in British territory were taking more than half the
capital issued on private account.
38
Finally the return to gold on 28
April 1925 forced Normans hand. Now the deciding factors were his
nervousness about reserves, the overhang of Australasian claims on
sterling, and his conviction that London was still lending beyond its
means.
36
Norman diary, 16 April 1924; Sayers, Bank of England, III, no. 10, 9 April 1924; Boyce,
British Capitalism at the Crossroads, p. 59.
37
A. Orde, British Policy and European Reconstruction after the First World War (Cambridge,
1990), pp. 145, 2723, 2645; Kynaston, City of London, III, pp. 814.
38
Moggridge, British Monetary Policy, table 16, p. 204, using Atkins unpublished data,
gives a breakdown of empire and foreign issues in government, municipal and company
categories.
In mid April, he asked the three issuing brokers to refrain from oat-
ing any new loans between 20 April and 1 May. At this point, his sole
purpose was to ease the transition to gold. Once the danger period
passed, he told the Agent-General for British Columbia that there was no
bar to Colonials in London.
39
He nevertheless worried that the appar-
ent comfort of the exchange position was illusory and that Australasia,
amongst other potential withdrawers of gold, was over-borrowed.
40
His
immediate instincts were to ask individual borrowers to go easy. On
4 May, he told Scrimgeours that the size and price of a forthcoming
New Zealand issue were too high. The government (for whom the Bank
acted as nancial agent) refused to be persuaded.
41
Norman later com-
plained that the real benets of the Embargo were being seized for them-
selves by the Dominions whose appetite for new Loans threatened to
become insatiable.
42
The trustee status of their stocks, however, gave
them no reason to stop borrowing. For the Governor, his only recourse
seemed to be to suggest its removal; from being a mere matter of City
policy the embargo thus suddenly became a question of high imperial
politics.
43
On 11 May, Norman wrote to Niemeyer, explaining his recent dif-
culties with New Zealand, and warning about the present effects of the
Colonial Stock Act in relation to Gold:
Under the Colonial Stock Act, the indebtedness of London to Australasia . . .
already considerable, is increasing and is largely needed for the local expansion of
credit and currency: it is an immediate menace to our Gold Reserves in precisely
the same way as would be the case with Foreign Loans, were we not able to turn
them away under present conditions.
The orthodox defence against overborrowing . . . is a high Bank Rate: at present,
the prospects of such a rate are being hastened more by the effects of the Colonial
Stock Act than by the general tendency of the Exchanges.
44
While sympathetic, Niemeyer was also alert to the political difculty
in stopping empire loans, partly on sentimental grounds and partly
because . . . they are Trustee Securities and therefore slightly more attrac-
tive to investors.
45
He advised Churchill, the Chancellor, that we ought
39
Norman diary, 14 April, 1 May 1925.
40
Ibid., 8 May 1925; Norman to Strong, 8 May 1925, BoE G 35/5.
41
Norman diary, 4, 8 May 1925; Norman to Niemeyer, 11 May 1925, T 176/17, part 1.
42
Norman to Blackett, 27 Oct. 1925, in Sayers, Bank of England, III, app. 30, no. 11.
43
Ibid.; also Normans note on Nugent to Governor, 15 Oct. 1925, BoE G 1/386. For
accounts of this episode, see Moggridge, British Monetary Policy, pp. 20611; Boyce,
British Capitalism at the Crossroads, pp. 958.
44
Norman to Niemeyer, 11 May 1925, T 176/1, part 1.
45
Ibid., Niemeyer memo., 13 May 1925 and covering note.
204 Bernard Attard
certainly to do all we can to slow down Colonial loans . . . but it is dif-
cult to do much in the case of the self-governing Dominions. His best
suggestion was that the Bank rely on its traditional methods:
I do not think there is any direct action we can take. We cannot repeal the Colonial
Stock Act (though there is much that might be said for doing so). Nor I think can
we very well ask the Colonial Secretary to hint to the Dominions that it would
be agreeable to us if for the next twelve months they reduced their borrowings
in London to a minimum. I am inclined to believe that we must trust to such
persuasion as the Governor can use in the City and to the repercussions on
brokers and issuing houses.
The dependent Empire was far more easily dealt with. On 19 May
Niemeyer told Lambert at the Colonial Ofce that a rumoured issue for
East Africa was at the present time virtually impossible.
46
The Domin-
ions, however, remained Normans main worry. Here Lambert agreed
there was little to be done, telling himat a meeting arranged by Niemeyer
on 25 May that he did not think that any action by the Government would
do more than make a political question of what was already troublesome
enough as a nancial one.
47
Normans continuing anxieties about Londons ability to stay on gold
may have nally changed Niemeyers mind.
48
On the evening after meet-
ing Lambert, the latter persuaded Churchill to send a telegram to the
Dominion Prime Ministers drawing their attention to the strain on
London and welcoming any action you can take to diminish for the
present your demands . . . for loans.
49
This, however, had to be trans-
mitted by the Colonial Ofce whose Secretary of State, Amery, was
the Cabinets leading imperial visionary. Predictably, he was strongly
opposed to any restriction on borrowing, telling Lambert: we certainly
cannot let the whole development of the Empire be stopped.
50
Ultimately, the decision had to be made by Cabinet. At a meeting on
10 June, Churchill read a letter from Norman suggesting three options: a
rise in bank rate; an arrangement with the Dominions to reduce their bor-
rowing in London; and the diversion of empire demand to New York.
51
A rise in bank rate was the least desirable. The President of the Board of
Trade reported that industry leaders had been expressing considerable
46
Niemeyer to Lambert, 19 May 1925, CO 532/317/25692.
47
Ibid., Niemeyer to Lambert, 22 May 1925, and Lambert minute, 26 May 1925; Norman
diary, 25 May 1925.
48
For example, Norman to Strong, 26 May 1925, BoE G 35/5.
49
Niemeyer minute, 27 May 1925, T 176/17, part 1.
50
Amery minute, 4 June 1925, CO 532/317/25692; also see Amery to Baldwin, 6 June
1925, Cambridge University Library, Baldwin papers, 93/1368.
51
Norman to Churchill, 9 June 1925, T 176/17, part 1; Cabinet 28(25)6, 10 June 1925,
CAB 23/50.
apprehension . . . as to the probable effects of Dominion borrowing on
Bank Rate. After further discussion, ministers agreed that it was neces-
sary to warn the Dominions in regard to the effect of further borrowing
and authorised Churchill to send the Treasurys telegram. By now, how-
ever, Norman, had taken matters into his own hands. On 4 June, he told
Osborne Smith, the London manager of the Commonwealth Bank of
Australia, that too many Loans [were] being issued in London. Antici-
pating the Cabinets decision, he also asked the three brokers to call again
a temporary halt.
52
Finally, on the morning ministers met, he read Smith
his letter to the Chancellor, and the banker agreed to cable the key points
to Sydney.
53
The Treasury telegram was sent to the Dominions on 15 June. By the
end of the month, only Australia and South Africa had indicated that they
would need fresh money.
54
In July, Norman permitted an Australian issue
of 5 million. A larger loan was raised simultaneously in New York.
55
But
beyond a South African funding loan that month and a conversion opera-
tion to meet state government maturities in October, he would go no fur-
ther, despite considerable pressure from the Australian agents-general.
56
If the return to gold was to be credible, however, the embargo could only
ever be a temporary expedient.
57
On 16 October, a Whitehall commit-
tee on overseas loans (see below) recommended that it be lifted and, on
3 November, a cautious Churchill announced in Shefeld that the old
and full freedom of the market would be restored.
58
Moral suasion, 19251929
The restoration of free gold was the nal step in the Banks recovery
of control over monetary policy.
59
But the persistence of high unem-
ployment meant that Norman was now constrained by the political
consequences of changing interest rates.
60
Between December 1925
and February 1929, bank rate moved only once, and that was a step
downwards. Unable to operate according to recognised gold standard
rules, Norman sought alternatives to steady the exchanges and protect
52
Norman diary, 4, 10 June 1925.
53
Ibid., 10 June 1925.
54
Condential print no. 95, CO 886/11; Niemeyer minute, c. 30 June 1925, T 176/17,
part 1.
55
Attard, Financial diplomacy, p. 119.
56
Norman diary, 22 June, 9 Oct. 1925; Amery to Churchill, 16 Oct. 1925, T 176/17,
part 1.
57
Moggridge, British Monetary Policy, p. 208.
58
Overseas Loans Report, para. 40; Sayers, Bank of England, III, app. 30, no. 13.
59
60
Ibid., p. 203; Kynaston, City of London, III, pp. 27, 125, 12931, 174, 1778.
206 Bernard Attard
reserves.
61
Some of these expedients had been evident before April 1925.
What was striking afterwards were his efforts to extend them to empire
borrowers by attempting rst to divert some of their demand to NewYork
and then to tighten his control over the timing and terms of their new
issues.
At its meeting on 10 June 1925, Cabinet also agreed to ask the Com-
mittee of Civil Research to report on the countrys capacity to export
capital, having particular regard to the requirements of empire develop-
ment and the maintenance of our export trade.
62
The sub-committee
appointed to the task (including Norman and Niemeyer) concluded that
London would have to accept a diminished position as an international
lender. Overseas investment was exceeding the margin of domestic sav-
ings available for that purpose with the result that the market struggled to
absorb new issues, domestic borrowing costs rose, and it became difcult
to manage the national debt. Even if savings were available, the weakness
of the trade balance meant that heavy capital exports would have the same
result: gold losses inevitably must be followed by a higher bank rate.
63
In
these circumstances, no further imperial preference was justied beyond
that provided by the Colonial Stock Act.
64
Taking the longer view, the
committee anticipated:
It is not improbable that the requirements of Dominions and Colonies will con-
tinue to increase to such an extent that they cannot be satised in full by bor-
rowing in the United Kingdom. If this comes to pass, and if the appetite of
the American investor for foreign securities grows substantially, as would appear
probable, the time may come when the Dominions and Colonies can borrow in
the United States of America on terms as favourable as or more favourable than
those obtainable here.
65
By endorsing American capital in such clear terms, the committee also
provided retrospective cover for the position Norman had reluctantly
come to during the summer. Since the decades start, he had urged foreign
borrowers to nd money in New York while remaining less enthusiastic
about the Dominions taking a similar step, discouraging the Australian
Prime Minister as recently as December 1923.
66
Smith of the Com-
monwealth Bank apparently suggested the possibility again in June 1925
during a conversation about the need to slow down Australasian loans.
67
Norman recorded in his diary: I express no opinion as to Common-
wealth issues in N[ew] Y[ork] wh[ich] is politics, and stuck to this line
61
Ibid., p. 130; Sayers, Bank of England, I, chs. 9, 13; Moggridge, British Monetary Policy,
chs. 79.
62
Cabinet 28(25)6, 10 June 1925, CAB 23/50.
63
Overseas Loans Report, paras. 8, 14, 20, 3034.
64
Ibid., para. 44.
65
Ibid., para. 46.
66
Kynaston, City of London, III, pp. 59, 87.
67
Norman diary, 2 June 1925.
in all subsequent discussions.
68
He nevertheless told Sir Joseph Cook,
the Australian High Commissioner, that London could no longer afford
to nance the Dominions, and suggested amongst other options offered
to Churchill that empire borrowers be invited to raise the greater propor-
tion of their capital requirements in the United States through simulta-
neous issues on either side of the Atlantic.
69
This was to meet Australian
concerns that a failure in New York would make it difcult to get back
into London.
70
But it reected equally his own dilemma. While sterling
remained his rst priority, it was also important that the City contin-
ued to lend to the Empire. Even when Australias negotiations for an
American loan were well advanced, he told Smith it was essential . . . a
simultaneous issue should be made in London . . . Only by these means
was it possible . . . for London to maintain a hold over the issue of
Commonwealth Loans.
71
By the end of June, he had nally settled on
a policy: any New York loan should be accompanied by a smaller issue
in London and the same arrangements should apply to all subsequent
empire borrowing once the rst American issue had taken place.
72
Dur-
ing the summer, he still regarded these arrangements as temporary, but
in October the Overseas Loans Committee recommended them for all
future empire borrowing in the United States, rather than that some
Dominions or Colonies should sever their connection with the London
market altogether.
73
In the event, no general reorientation to New York occurred. Unsur-
prisingly, there were misgivings in both the City and government about
any ofcial encouragement to the Dominions to cross the Atlantic. Lord
Glendyne, senior partner of Nivison & Co. (whom Norman had asked
to nd American money for South Africa), objected point blank, regard-
ing the Governors proposals as unwise and unnecessary; Amery hoped
Australia would not make it a permanent practice; the Board of Trade
worried that any dependence nancially of Australia on America would
weaken commercial ties and the case for British preferences.
74
Finally,
only Australia raised large sums in America drawing one-third of new
overseas capital from that source during 1927 and 1928 but even
68
Ibid., 2, 11, 16 June 1925.
69
Ibid., 11 June 1925; Norman to Chancellor, 9 June 1925, T 176/17, part 1.
70
Norman diary, 11 June 1925; Cook to Prime Minister, telegram 12 June 1925, National
Archives of Australia (NAA) A1606, CP 17/1, part 3.
71
Harvey, record of conversation, 29 June 1925, BoE OV 13/32.
72
Ibid., Dominion and Colonial (Trustee) Loans, 29 June 1925 (copies were sent to
Niemeyer and Cook, the Australian High Commissioner); Norman diary, 29 June 1925;
Niemeyer to Chancellor, c. 30 June 1925, T 176/17, part 1.
73
Overseas Loans Report, para. 46.
74
Norman diary, 29 June, 8 July 1925; Casey to Bruce, telegram 15 June 1925, NAA
A1420/2; Chapman to Niemeyer, 24 June 1925, T 176/17 part 1; Boyce, British
Capitalism at the Crossroads, p. 97.
208 Bernard Attard
that Dominion continued to rely on the City for the greater part of its
requirements.
75
Having at least attempted to use New York as a safety valve, Norman
turned to the problem of new trustee issues in London. His immediate
task was to minimise the disturbance caused by the embargos removal,
although it soon became apparent that he would have to continue keeping
all borrowers on a tight rein. In November 1925, he echoed Churchill
that London was a free market, yet made it clear to all issuers that he
wanted them to go slow, underlining this on 3 December by raising
bank rate to 5 per cent.
76
He also ceased to make any practical distinc-
tion between empire and foreign borrowers. Amery noted in his diary
in June 1926 that at present the Treasury policy inspired by the Bank
of England is to discourage all empire loans. At the Western Australian
dinner Glendyne told me that Norman is working for all he is worth in
that direction.
77
To the Australians, he made it clear that he wanted
to slow down fresh issues here and warned that continued large-scale
borrowing might involve consequences detrimental to both borrowers
and lenders.
78
He also hoped that the Australian Loan Council, which
coordinated public borrowing in the Australian domestic capital market,
would slow the pace of state government issues in London.
79
In October
1925, he even agreed to a request by S. M. Bruce, the Australian Prime
Minister, to block New South Wales after the Labor state premier walked
out of the Loan Council insisting on his absolute freedom in raising
loans.
80
Overall, the proportion of overseas new issues in London did decline
after 1924, as to a lesser extent did the relative level of empire government
borrowing after 1925 (see Table 10.1). But both remained signicant
for the rest of the decade. With the Empire still making considerable
demands, Norman attempted to enlist ofcial support for greater co-
ordination and, where possible, widen his control over the terms and size
of new issues, explaining to Richard Casey, the Australian governments
liaison ofcer in Whitehall, in 1929:
75
Schedvin, Australia and the Great Depression, app. A, table A-1.
76
Norman diary, 5 November 1925; Sayers, Bank of England, I, p. 216.
77
J. Barnes and D. Nicholson (eds.), The Leo Amery Diaries, I: 18691929 (1980), p. 456
(1 June 1926).
78
Interview Cook, Smith and Norman, 11 Dec. 1925, BoE G 1/286; Norman to Garvan,
17 June 1926, BoE OV 13/32 (emphasis in the original).
79
Ibid.; Norman to Niemeyer, 12 Dec. 1925, T 176/25A.
80
Normans notes, 9 Oct. 1925 on a typed schedule Approximate loan requirements of
Australian states to 30th June 1926, BoE G1/386; GlendyneNorman interview, 4 Dec.
1925, BoE G 1/286; B. Nairn, The Big Fella (Melbourne, 1986), p. 99.
Before the War, London had what amounted to unlimited money to lend abroad.
This was no longer the case, and considerably more care had to be used in oating
loans here the price and time of the issue had to be right, and there had to
be proper co-ordination between borrowers to avoid clashing and spoiling each
others market.
81
The rst loan oated after the embargos removal happened to be
for the Crown Agents. Norman thought the price too high, but told
Scrimgeours senior partner that he & [the] Crown Agents must decide
in a free market.
82
Yet when the issue failed, he immediately complained
to Amery, regretting that there should be no co-operation as regards
urgency, price, &c., between at least those of your various borrowers who
may be called Imperial.
83
Amery no doubt relieved that British capital
was again owing to the Empire agreed to look into . . . the possi-
bility of co-ordinating Colonial loans with Dominion loans.
84
However
he had no power over the Dominions and, in December, his permanent
secretary, Sir Samuel Wilson, concluded a gentlemans agreement with
Norman that covered only colonial issues. The Crown Agents would in
every case consult the Bank through Scrimgeours and Mullens about
the terms and timing of new loans.
85
Unknown to the Colonial Ofce,
Norman also obtained a separate promise from Scrimgeour to consult
regularly & early & to cooperate so as to avoid troubles.
86
The arrange-
ment was an unhappy one. The Crown Agents regarded the Governors
judgement as poor and believed he was preventing the colonies from
borrowing on best terms.
87
In May 1928, Wilson was summoned to the
Treasury for a second meeting with Norman at which these grievances
were aired.
88
But this was simply an opportunity for the Governor to
tighten the screws. The day after, he called in Scrimgeour and Mullens
to tell them that the Trustee Loans (ex Corp[oratio]ns) for which they
are responsible & for which price is xed in London shall be priced in
agreement with me.
89
Norman had originally hoped to include dominion loans in any co-
operative arrangement with the Colonial Ofce, but failed to reach an
81
Casey to Bruce, 17 Jan. 1929, in W. J. Hudson and J. North (eds.), My Dear P. M.
(Canberra, 1980), no. 167; Norman diary, 15 Jan. 1929.
82
Ibid., 5 Nov. 1925.
83
Norman to Amery, 10 Nov. 1925, BoE G 1/386; Harding note [31 Dec. 1927], CO
323/1023/26.
84
Amery to Norman, 13 Nov. 1925, BoE G 1/386.
85
Draft, Wilson to Ormsby-Gore, c. 14 Dec. 1927; Wilson note, Raising of colonial loan,
27 July 1928, CO 323/1023/26; Norman diary, 14 Dec. 1925.
86
Ibid., 8 Dec. 1925.
87
Draft, Wilson to Ormsby-Gore, c. 14 Dec. 1927, CO 323/1023/26.
88
Ibid., Wilson, Raising of colonial loans, 27 July 1928; Norman diary, 31 May 1928.
89
Norman diary, 1 June 1928.
210 Bernard Attard
understanding with the Dominion that mattered most. According to
Wilson: the Australian Governments . . . had refused to consult the
Governor as regards the issue prices etc. of their Loans.
90
Norman
persisted, although, consistent with his general practice, preferred deal-
ing with another banker in this case the Commonwealth Banks
London manager than a political representative. During a visit to
Australia by the Banks Comptroller in 1927, the Federal Treasurer
agreed that the Commonwealth Bank would keep Norman advised.
91
But Australian ministers did not trust the Governor. A year earlier, the
Treasurer had sent his department head to London to take charge of
the borrowing programme.
92
At rst, this ofcial stayed in touch with
Norman.
93
But, ostensibly fearing leaks through the Banks Court of
Directors, he soon decided to keep the details of new issues secret until
underwriting contracts had been signed.
94
It became open knowledge
that the Australian Governments, which are much larger borrowers
than the Colonies, have refused to be trammelled by the advice of the
Governor.
95
Throughout 1928, the Bank pressed the Commonwealth Bank to have
its rights recognised.
96
In August Ernest Riddle, the Commonwealth
Bank Governor, explained to the Deputy-Governor: The Common-
wealth Government have not yet given way on the question of permitting
us to consult with you in regard to the issue of Overseas Loans, and
in fact we ourselves have been left in the dark regarding the Govern-
ments intentions respecting the last two loans.
97
The coincidence of
three large trustee issues at the end of the year underscored the Banks
inability to inuence the Australians. Between them, India, New Zealand
and Australia wished to raise 25 million. Norman agreed the order
and timing with the brokers, but the Australians refused to accept an
issue price of 97
1
/
2
because it was less than that of the New Zealand
loan.
98
Norman told a Nivison partner he sh[oul]d ght for 97
1
/
2
; sum-
moned the Commonwealth Banks London manager and repeated that
90
Ibid., 14 Dec. 1925; draft, Wilson to Ormsby-Gore, c. 14 Dec. 1927, CO 323/1023/26.
91
Harvey to Gibson, 24 Nov. 1927, BoE G 1/286.
92
B. Attard, The Bank of England and the origins of the Niemeyer mission, 19211930,
Australian Economic History Review 32 (1992), pp. 701.
93
Norman diary, 5 Oct., 1 Dec. 1926; 23 June 1927; 1 Feb. 1928.
94
Harvey to Gibson, 24 Nov. 1927; Riddle to Lubbock, 28 Aug. 1928. BoE G 1/286;
Attard, Origins of the Niemeyer mission, p. 70.
95
Draft, Wilson to Ormsby-Gore, c. 14 Dec. 1927, CO 323/1023/26.
96
Harvey to Gibson, 24 Nov. 1927; Normanto Riddle, 30 April 1928; notes of conversation
with Reading, 3 Dec. 1928, BoE G 1/286.
97
Ibid., Riddle to Lubbock, 28 Aug. 1928.
98
Norman diary, 27, 28 Dec. 1928; 11, 15 Jan. 1929.
he expect[ed] him in one way or another to get it; and cabled the
Banks head ofce in Sydney.
99
The Australians thought Norman was
trying to help foreign borrowers by moving their loan quickly off the
market and refused to accept anything less.
100
Eighty-four per cent of
the stock was left with the underwriters.
101
The day before the issue,
Norman tried to impress Casey (and thereby the Australian Prime Min-
ister) with the need for co-operation amongst empire borrowers.
102
Yet
ultimately all he and the Bank could do was admonish and murmur vague
warnings. If the Australian authorities continued to ignore their London
advisers, they must not be surprised if they nd their appearances in
this Market gradually come to be less welcome than we should wish
them to be.
103
Whether the Bank could actually stop them was another
matter.
Conclusion
This brief narrative of the Banks attempts to use moral suasion to regulate
empire borrowing is part of the wider history of the new issue market
during the 1920s. It also further illustrates the persistence of the belief
within ofcial and nancial circles that, in economic management, it was
still possible to retain separate spheres for government and the City, with
the former managing the political and scal side, while the latter retained
control of the technical and nancial side.
104
On the related issues of
monetary policy and capital market regulation, once the government had
satised its immediate postwar funding requirements, the Treasury left
the Bank to take charge. For his part, Norman did his utmost to manage
the capital market without outside support, restricting his contacts as far
as possible to bankers and the issuing brokers.
But the very need to dene distinct spheres was sufcient evidence
of the difculty in keeping them separate. Quite obviously, Normans
ability to control empire access to the capital market was politically con-
strained. As a consequence he had to seek co-operation outside the City
to make it effective. His circle of Whitehall contacts widened beyond
99
Ibid., 11, 12, 14 Jan. 1929; Schedvin, Australia and the Great Depression, pp. 1024.
100
Bruce to Casey, 18 Jan. 1929, NAA A1420/7.
101
Schedvin, Australia and the Great Depression, app. A, table A-1.
102
Casey to Bruce, 17 Jan. 1929, in Hudson and North, My Dear P. M., no. 167; Norman
diary, 15 Jan. 1929.
103
Harvey to Riddle, 24 Jan. 1929, BoE G 1/286.
104
See note of conversation with Snowden, 4 Sept. 1929, quoted in Kynaston, City of
London, III, p. 177; also Niemeyer, quoted p. 117, and the same distinction implicit in
Hopkins to Norman, 10 Oct. 1928, in Sayers, Bank of England, III, app. 30, no. 16.
212 Bernard Attard
the Treasury; he needed to use political leverage, either over a big issue
like the embargo or in connection with relatively minor matters like the
loans oated for the Crown Agents; and he came into increasing con-
tact with dominion representatives, some of which he actively solicited.
In each instance, however, it was not simply a question of imposing the
Banks moral authority in the same way as within the City. Browbeating
government departments was relatively easy, particularly with Treasury
support. The Bank could also obtain the governments co-operation over
larger questions when they could reasonably be viewed as pertaining to
its technical sphere as the monetary authority. Yet the Bank did not
automatically have its way. On the one occasion the Cabinet was asked
to adjudicate, the deciding factor was the political priority of domestic
economic interests, in the formof a moderate bank rate, over the empires
demand for capital. And on the fundamental issue of empire privilege in
London, not even the Treasury was prepared to follow Normans lead
in suggesting the repeal of the Colonial Stock Act. Empire development,
with its implicit assumption that the Empire would continue to draw on
British capital, remained government policy. Amery may have detected
some weakening in December 1928, believing that Cabinet was quite
prepared to throw out all Dominion securities from the trustee list, but
the Colonial Development Act a year later actually widened its cover-
age to include the loans of protectorates, protected states and mandated
territories.
105
If the Banks need to seek outside support was one constraint on its
ability to regulate the capital market, Normans preference with that
of ofcials like Niemeyer to leave it in the Citys hands was another,
particularly in dealing with dominion governments that considered them-
selves entitled to the same access as domestic borrowers. This had clearly
been evident in its relations with Australia. These had been marked in
no small measure on the Australian side by residual mistrust of the Citys
private interests. Just as importantly, like other empire governments, the
Australians refused to bow unquestioningly to the Banks wishes. The
New South Wales Agent-Generals comment to Amery in October 1925,
after Norman had refused to allow one of the Australian states to borrow,
is telling: It was of course assumed that the Governor was speaking on
behalf of the Treasury, otherwise no notice would have been taken of his
injunction.
106
As long as the market for their stocks remained relatively
buoyant, the Australians could afford to do so.
105
Amery Diaries, I, p. 574 (12 Dec. 1928); Constantine, British Colonial Development
Policy, p. 186.
106
Coghlan to Amery, 27 Oct. 1925, CO 532/325/49086.
A nal point can be made about capital exports to the Empire (at least,
when governments were borrowers) in the context of the Citys wider
efforts to rebuild its international inuence following the First World
War.
107
The Banks principal concern after 1919 was sterlings restora-
tion as an international currency at the prewar dollar parity. Londons
pre-eminence as a capital market was a secondary issue.
108
Even if
Norman had felt himself free to use bank rate, the weakness of the balance
of payments would have forced a decline in capital exports. In the event,
he improvised in ways that had the same result. His perspective on the
Empire was also probably dominated by sterling.
109
During the 1920s he
encouraged the creation of independent central banks in the Dominions
and India that would be based on the international principles agreed at
Genoa in 1922 and be bound in matrimony to the Bank of England.
110
By inducing empire governments to hand operational responsibility for
borrowing to these institutions, he also hoped he could manage their
demand for capital more effectively.
111
But while Norman may have
regarded the Citys monopoly of most empire loans as a legitimate British
interest, his immediate priorities were bank rate and the level of gold
reserves. When pressed, his rst choice was to restrain, diminish and, if
necessary, divert empire demand. The proceeds of dollar loans may have
been welcome additions to sterlings reserves, but it is more obvious that
Norman viewed empire borrowing in the United States as a regrettable
necessity.
As always, it is important to emphasise that the Citys interests were
not necessarily uniform nor synonymous with those of the Bank. That
said, the inner circle of accepting houses still depended on the provi-
sion of commercial credits as their staple business and regarded sterlings
recovery equally as the overriding priority.
112
They had never played any
signicant part in issuing colonial loans. From the 1890s, this had been
shared almost entirely by two broking rms Nivison and Scrimgeour
in association with a shifting, but small, group of banking agents.
113
By
107
P. J. Cain and A. G. Hopkins, British Imperialism: Crisis and Deconstruction 19141990
(1993), pp. 56.
108
Ibid., p. 45.
109
L. S. Pressnell, 1925: the burden of sterling, EcHR 2nd ser. 31 (1978), pp. 6785.
110
Sayers, Bank of England, I, pp. 20110; Cain and Hopkins, Crisis and Deconstruction,
pp. 656; for matrimony, e.g., Norman diary, 4 Dec. 1924.
111
For example, Trotter to Harvey, 25 March 1927, BoE G 1/289.
112
Kynaston, City of London, III, p. 74; Green, Inuence of the City, 199200, 209; Cain
and Hopkins, Crisis and Deconstruction, p. 48.
113
Theodor Schilling, London als Anleihemarkt der englischen Kolonien, M unchener Volks-
wirtschaftliche Studien (Stuttgart and Berlin, 1911), p. 46; R. S. Gilbert, London
nancial intermediaries and Australian overseas borrowing, 190029, Australian Eco-
nomic History Review 10 (1971), pp. 3947.
214 Bernard Attard
the 1920s, even the latter was largely out of purely private hands. It was
these brokers and the large list of underwriters behind themwho stood to
lose most from the decline of empire loans. The underwriters remained
invisible. The brokers generally submitted to Norman although were
never entirely his ciphers. Even taking these rms into account, despite
the Empires prominence as a borrower, by the 1920s there is no strong
evidence of an organised City interest that favoured it as a destination
for British capital over any other.
11 GovernmentCity of London relations under
the gold standard 19251931
Robert Boyce
Implicit in the decision to return to the gold standard at the exchange rate
of $4.86 in 1925 was the assumption that it would benet both the City
of London and the government. The City would again operate in a cur-
rency of unsurpassed prestige, backed by gold and unique among major
European currencies in retaining its prewar exchange rate. Holders of
sterling and sterling-denominated securities would know that under the
gold standard the Bank of England was obliged to exchange sterling for
gold at a statutory rate (one standard ounce of gold = 77s 10
1
/
2
d) and to
defend the rate through every means available to it, including adjustment
of bank rate and other interest rates. The gold standard also promised
to constrain politicians from interfering in the monetary and nancial
system, which under gold would operate according to supposedly auto-
matic rules. In the event that politicians succumbed to the temptation
to over-tax or over-spend, the gold standard would bring them up short
when their actions reduced the countrys international competitiveness,
weakened its balance of trade and forced the Bank of England to raise
interest rates. In fact, the gold standard had an even broader appeal to the
merchants, brokers, insurance underwriters, shipowners, nanciers and
bankers of the City, which was that, in theory at least, it made redundant
other restraints upon trade and nance. So long as the Bank of England,
a private institution, remained free from government interference and
responded in timely fashion to the changing demand for monetary gold,
there was no need for trade protection, lending controls or any other
interference in the free movement of capital, goods and services. Not
surprisingly, therefore, the City regarded the gold standard as an essen-
tial tool in its efforts to remain the greatest concentration of markets in
the world.
The City thus seemed certain to gain from the return to gold, but so
too did the government. By increasing condence in sterling, it promised
to reduce the cost of new borrowing as well as servicing the existing
national debt, which had been greatly inated by the recent world war.
It also promised to augment national revenue by increasing the Citys
215
216 Robert Boyce
earnings and strengthening the nancial foundations of British indus-
try and commerce. And if, as hoped, Britains return to gold prompted
other countries to follow suit, it would assist the recovery of world trade:
a particular benet, given that Britains postwar unemployment was con-
centrated largely in the staple export industries. More generally it could
be expected to restore national prestige, since the countrys reputation
included the principle that an Englishmans word is his bond, and in
turn that sterling was or should be as good as gold. On these advan-
tages politicians of all parties could agree, but to Conservatives and no
doubt many Liberals as well the gold standard had a partisan appeal.
For it was their Labour opponents, with their ambitious tax and spend-
ing plans, who seemed most likely to be constrained by the return to
gold.
1
These at least were the expectations. Remarkably, however, almost
none of the assumptions on which they were based proved well founded
during the six-and-a-half years of the interwar period that sterling
remained on gold. Citygovernment relations were not fundamentally
altered by the rapid failure of the project, in part because all three major
political parties had agreed in principle to the restoration of the gold stan-
dard before Baldwins second Conservative government took the deci-
sion to proceed. Disappointment nevertheless soon became evident on
both sides. The City grew impatient at the reluctance of the government
to assist in the downward adjustment of wage and price levels, which
seemed essential if the gold standard were to be given a chance to work.
In turn Baldwins government, which held ofce until May 1929, and
the subsequent Labour government grew frustrated by their decline in
popularity due to falling price levels, high unemployment and the need
to defend the gold standard with exceptionally high interest rates. Until
the nancial crisis of 1931 actually drove sterling off gold, neither the
Conservatives nor Labour were prepared to go back on the decision to
restore the gold standard, knowing that even to suggest such action might
provoke a run on the pound and the possible collapse of the currency.
Nevertheless monetary policy remained more politically charged than
anyone had anticipated. The difculty of maintaining the gold standard
in the deationary conditions after 1925 created a serious rift between
the bankers and nanciers of the City and manufacturers, trade union-
ists and other elements of the producing classes, which the politicians
1
Baldwin described the gold standard as knave-proof in (Conservative Party) Gleanings
and Memoranda, Dec. 1925; also National Union of Conservative and Unionist Associa-
tions, The Gold Standard, Unionist Workers Handbook no.26 (n.d. ?1925).
Relations under the gold standard 19251931 217
felt impelled to address. The Bank of England found its operations con-
strained, and in turn found it necessary to constrain the international
activities of the City. So far from removing the justication for interfering
in the movement of capital, goods and services, the return to gold thus
actually increased pressure for such interference. This became all too
clear once the National government, created in August 1931 to defend
the gold standard, abandoned this task the following month and swiftly
adopted policies at variance with the Citys interests.
Restoration and reaction
The ten years between Britains entry into the First World War in August
1914 and summer 1924 were a time of extreme adversity for the pound
sterling and the City. First came the temporary freezing of foreign assets,
the introduction of exchange, capital-lending and trade controls, and the
de facto suspension of the gold standard. Then, in the postwar boom that
followed the Armistice in November 1918, the gold standard was formally
suspended for ve years and sterling was allowed to depreciate from near
$4.86, where it had been pegged, to $3.20, barely two-thirds its prewar
value. The government sought to bring ination under control by reining
in public spending, and in April 1920 the Bank of England raised bank
rate to an almost unprecedented 7 per cent, where it remained for the
next twelve months. Exports were nevertheless slow to recover, and in
January 1924, with the Franco-Belgian occupation of the Ruhr still dis-
rupting trade, the Labour party took ofce for the rst time. Although
this was only a minority government dependent upon Liberal votes, and
was defeated within nine months, the spectre of Labour exercising real
power acutely disturbed the City and increased the appeal of the gold
standard. More than ever, a xed-rate r egime where interest-rate deci-
sions were taken by an independent central bank seemed essential to
safeguard sterling from political inuence and constrain politicians from
excessive taxation and spending. Mill, City editor of The Times, who fre-
quently acted as the mouthpiece of Norman, the Governor of the Bank of
England, made this the main objection to Keyness proposal for a more
exible basis of currency stabilisation:
A managed currency would be entirely at the mercy of politicians with big pro-
grammes . . . In these days of emancipation, and when the idea is widely current
that a standard of living can be enjoyed regardless of what is produced, the dangers
of a managed currency can hardly be exaggerated.
2
2
City Notes, The Times, 19 March 1925.
218 Robert Boyce
Brand of the merchant bank Lazard Brothers, writing after the rst
Labour government was defeated, stressed the importance of having the
gold standard in place before Labour could return to power:
It is a very different thing whether a Socialist Finance Minister, with extravagant
ideas as to the merits of Government expenditure or the blessings of increased
purchasing power, is free to inate under an inconvertible system or whether
he can act within the limits of the gold standard. In the latter case, he could
not disguise from the public the effects of his policy on the monetary standard,
whereas he might do much harm under existing conditions before his sins were
discovered.
3
Bradbury, the former permanent secretary of the Treasury, put the same
point more succinctly: the gold standard was knave-proof.
4
From a low of $4.26 when Labour took ofce in January 1924, ster-
ling rose to $4.40 on 28 October, the eve of the general election which
returned the Conservatives to ofce, and to $4.80
1
/
4
on 29 January 1925.
The ascent to within one per cent of the prewar parity, accomplished with-
out an increase in bank rate, appeared deceptively easy. In fact, it involved
the Bank of England hiding reserve assets to justify the existing bank rate
and quietly re-introducing the capital export embargo. Sterling was also
strengthened by several temporary factors, including mild ination in the
United States and the deliberately expansionary monetary policy of the
Federal Reserve Bank of New York; the stimulus to British exports, par-
ticularly coal, from the disruptive effect of the Ruhr crisis upon German
competitors; the ight of capital from the continent to the safety of ster-
ling balances in London; and the quite exceptional volume of American
lending since summer 1924. It should have been obvious that sterlings
recovery was a precarious feat and unlikely to last, and indeed behind the
closed doors of the Banks Court, several directors, including Addis of the
Hong Kong and Shanghai Banking Corporation, Revelstoke of Baring
Brothers, and Lubbock, the current Deputy-Governor, betrayed their
unease.
5
The chairmen of several clearing banks, including McKenna of
the Midland Bank and Goodenough of Barclays Bank, whose accounts
already contained non-performing loans to British manufacturing rms,
3
The gold standard, March 1925, Brand papers 83B, Bodleian Library, Oxford. The
essay appeared anonymously in The Round Table, March 1925.
4
P. J. Grigg, Prejudice and Judgment (1948), p. 183.
5
Sir Charles Addis diary, 8, 9, 21 Jan. 1925, School of Oriental and African Studies,
University of London (hereafter SOAS); Lubbock to Norman, no.54, 9 Jan. 1925, Bank
of England cables, Federal Reserve Bank of New York [FRBNY]; also P. Williamson,
Financiers, the gold standard and British politics, 19251931, in J. Turner (ed.), Busi-
nessmen and Politics. Studies of Business Activity in British Politics, 19001945 (1984),
pp. 78.
also privately deprecated returning to gold amidst the present uncertain-
ties.
6
But the only one to express his opposition in public was Needham
of the Manchester-based District Bank.
7
For the others, the ostensibly
natural recovery of sterling had created an opportunity that seemed too
good to pass up. The 1920 Act suspending the gold standard was due to
expire at the end of 1925. Putting off action beyond then would require its
renewal, which might well be construed as an admission of weakness and
undermine condence in sterling. Other countries, including Germany,
Austria and Sweden, had already returned to gold, and the unity of the
Empire was threatened by South Africas announcement of its intention
to return in July. Inaction also seemed likely to encourage the monetary
radicals such as the banker J. F. Darling, Keynes and supporters of Irving
Fishers Stable Money Association who advocated a managed currency.
Once the ChamberlainBradbury Committee reported on 5 February
in favour of an early return at the prewar parity,
8
opinion in the City
appeared almost unanimously favourable to this course.
9
In contrast to the City, industrial opinion was generally cool to early
action on gold. Scarcely any industrialist took issue with the gold stan-
dard itself before 1925. But as early as 1918, the Federation of British
Industries (FBI), in evidence to the Cunliffe committee on postwar cur-
rency and exchange policy, had argued that a strong trade balance should
be the engine for restoring sterling to its prewar parity, and that it would
be folly to rely upon monetary expedients.
10
The Cunliffe committee
virtually ignored the Federations submission. Nevertheless, when the
pounds slump substantially increased the wage and price adjustments
required to regain $4.86, the FBI executive repeatedly appealed to the
6
Goodenough strongly deprecated an early return to gold in his evidence to the
ChamberlainBradbury Committee on the amalgamation of the note issue: minutes
of evidence, 11 July 1924, T 160/F7528/02/3, pp. 5, 234. He repeated his reservations
to Churchill in early 1925: Churchill minute, 6 Feb. 1925, T 172/1499B. However, at
the annual general meeting of the bank in January 1925 he advocated early action: The
Bankers Magazine, March 1925, p. 435. McKenna acted likewise, offering reassurances
of a soft landing to the AGM of his bank and the commercial committee of the House
of Commons, while acknowledging privately to Churchill a fortnight later, There is no
escape; you have to go back; but it will be hell: March 1925, pp. 4606; Midland Bank
Monthly Review, Feb.March 1925, p. 3; Grigg, Prejudice and Judgment, p. 184.
7
Bankers Magazine, March 1925, pp. 4456.
8
Report of the Committee on the Currency and Bank of England Note Issues, Cmd. 2393, p. 4.
9
W. A. Brown Jr, England and the New Gold Standard, 19191926 (New Haven, 1929),
pp. 2216; R. H. Hawtrey, Monetary Reconstruction (2nd edn, 1926), p. 155; S. V. O.
Clarke, Central Bank Cooperation, 19241931 (New York, 1967), p. 71; R. S. Sayers, The
Bank of England, 18911944, 3 vols. (Cambridge, 1976), I, app. 30.
10
Foreign exchanges after the War, 19 July 1918, T 188/2. On the FBIs role in postwar
debate, see R. W. D. Boyce, Creating the myth of consensus: public opinion and Britains
return to the Gold Standard in 1925, in P. L. Cottrell and D. E. Moggridge (eds.), Money
and Power: Essays in Honour of L. S. Pressnell (1987), ch. 7.
220 Robert Boyce
Prime Minister for a new inquiry, this time with better representation
for industry. Again in 1924, with plans under way for the amalgamation
of the Treasury and Bank note issues, a generally recognised preliminary
to the return to gold, the executive wrote to Governor Norman, express-
ing their apprehension, and followed this with a memorandum setting
out the case against early action.
11
The Federations director, Nugent,
and its chief economist, Glenday, shared the view that returning to gold
in 1925 would be extremely hazardous, given that two of Britains main
industrial competitors, France and Belgium, retained oating currencies,
and sterling would be exposed to the United States notoriously unstable
price level.
12
At their instigation, the executive warned Churchill to stay
his hand.
13
Their warning was echoed by the National Union of Manu-
facturers, farmers representatives, and leading industrialists including
Mond and Stamp.
14
The newspaper publisher, Beaverbrook, also took
their side. An advocate of Imperial unity, he had made his fortune in
Canada, mobilising nance for industrial development, and disdained
the non-productive, cosmopolitan character of the City. On 28 January
he warned Churchill that returning to gold would mean handing control
of British monetary policy to America.
15
As events that spring demonstrated, the City exercised overwhelming
inuence over deliberations on the future of sterling. For twenty years
before the war Britain had managed to combine expanding overseas trade,
increasing capital exports and stable exchange rates. As a result, the Citys
prestige had reached new heights and monetary policy had come to be
regarded as an arcane subject, best left to experts in the City. The national
press reinforced this view by reserving comment for the City editor who
typically worked from separate premises near the Bank of England. Thus
even the Daily Mail, the Daily Express and the Morning Post, whose pub-
lishers or editors were openly suspicious of cosmopolitan nance, vig-
orously supported the gold standard in their City pages.
16
This was only one of the advantages the City enjoyed over producer
interests. Another was the concentration of mercantile-nancial activity
in the square mile of London, and the dispersal of manufacturing and
extractive industry throughout the country, which ensured that spokes-
men for the former were more readily available for interview by the
11
Minutes of Committee on the national debt, 23 July 1924, FBI/EA/Glenday/9, Federa-
tion of British Industries papers, Modern Records Centre, University of Warwick.
12
Glenday memorandum, 5 Feb. 1925, Nugent minute, n.d., FBI/EA/Glenday/19.
13
FBI letter to Churchill, 17 March 1925, T 172/1499B.
14
R. W. D. Boyce, British Capitalism at the Crossroads 19191932. A Study in Politics, Eco-
nomics and International Relations (Cambridge, 1987), pp. 735.
15
Ibid., pp. 74, 391 f.153.
16
Boyce, Creating the myth of consensus, pp. 1857.
national press and closer to the locus of political power. A third was
the more condent manner of City men, many of whom were required
to take a view on large issues of policy and to deal with a wealthy clien-
tele. Whereas industrialists frequently felt obliged to acknowledge their
uncertain grasp of monetary policy, bankers commonly encouraged the
opposite impression.
17
It no doubt helped that a much higher fraction
of them enjoyed the advantage of a major public school and Oxbridge
education, and relatively more belonged to the titled classes.
18
A fourth
advantage was the informal unity and hierarchical character of the City,
where directors of the private banks, discount houses and merchant banks
enjoyed the highest status and lled most of the places on the Bank of
Englands Court of directors. Not until 1928 was an industrialist (Stamp)
elected, and not until 1932 a clearing banker. The fth advantage was
the zealous leadership offered by the Bank in the person of Norman.
Until the recent war, the governorship of the Bank had been a two-
year, part-time post, held in rotation by senior directors on the Court.
However, with Normans election to the post in 1920 and subsequent
re-election, it became at least semi-permanent. Norman, a bachelor, had
severed links with his merchant bank before entering the Bank in 1914 to
assist the Deputy-Governor, and was thus able to devote himself wholly
to its affairs. As Governor, he demonstrated the Banks freedom from
political inuence by refusing publicly to explain his actions or meet the
press. But behind the scenes he attered City editors into believing they
had privileged access to him.
19
He also cultivated the friendship of sev-
eral leading politicians, notably Baldwin and Austen Chamberlain among
the Conservatives and Snowden, Chancellor of the Exchequer in the two
interwar Labour governments. The City regularly returned Conserva-
tives to its two parliamentary seats. While the evidence is fragmentary,
City men probably provided most of the nancial resources for Conser-
vative election campaigns.
20
Far more important, however, was the Citys
remarkable capacity to promote its own interests through the Governor
and its numerous articulate spokesmen.
But perhaps the greatest advantage the City enjoyed in its pursuit of
an early return to gold was the support given by the Treasury. Treasury
ofcials did not deliberately favour the City itself. Yet their responsibil-
ity for the national debt brought them into close contact with the Bank
17
This point is nicely developed in E. H. H. Green, The inuence of the City over British
economic policy, c.18801960, in Y. Cassis (ed.), Finance and Financiers in European
History, 18801960 (Cambridge, 1992), p. 202.
18
Y. Cassis, Les banquiers de la City ` a l epoque

Edouardienne 18901914 (Geneva, 1984).
19
Boyce, Creating the myth of consensus, pp. 1878.
20
Boyce, British Capitalism at the Crossroads, p. 21.
222 Robert Boyce
of England and obliged them to share the Citys preoccupation with the
health of the nancial markets. For them, the chief appeal of the gold
standard was its disciplinary function, together with the ease with which
it could be justied from a cursory knowledge of economics. Senior of-
cials in the Treasurys nance division had the reputation of being the
most formidable minds in Whitehall. But with the exception of Hawtrey,
a trained economist, they were generalists with degrees in classics or pure
mathematics, whose knowledge of economics had been acquired on the
job and was actually rather modest. It amounted in practice to a con-
ventional view of market relations, wherein factors of production would
be fully utilised at any given level of prices, so long as the price mecha-
nism was not impeded by articial obstacles and governments did not
attempt to do what markets could do better.
21
From this standpoint,
industrys objection to an immediate return to gold seemed unworthy of
consideration, for while it would undoubtedly involve rms in some wage
and price adjustment, this was only to be expected in a market economy.
The existence of friction in making these adjustments reected the short-
comings within industry, not a failure of the economic system. The gold
standard promised to keep British price levels internationally competi-
tive, to constrain public spending and taxation, and to ensure trust in the
currency, all of which would benet industry. If industry failed to seize
the opportunity, that was the fault of its management or labour relations.
This at least was the Treasury view. Devoted largely to nancial account-
ing and lacking rst-hand knowledge of the real economy, they largely
overlooked the difculty industry had already encountered in adjusting
to the decline in price levels since 1921. Niemeyer, head of the nance
division, knew that American price levels had ceased to rise and were on
a downward course before the decision was taken to return to gold.
22
He
played down the signicance of this trend and with Norman continued
to press the Chancellor to act.
Churchill, with no prior experience at the Treasury and not expecting
to receive the post in 1924, relied heavily upon his Treasury and Bank
advisers. The Cabinet left him the decision to return to gold, and formed
no committee to which he could refer the issue. Through McKenna,
Beaverbrook and Keyness journalistic writing, however, he soon recog-
nised the risks of precipitate action. In particular, he was impressed by the
likely impact upon the export industries, which were already struggling
and could not easily adjust to further deationary pressure. While the City
21
G. C. Peden, The Treasury and British Public Policy, 19061959 (Oxford, 2000), pp. 178
80 and passim.
22
Niemeyer to Churchill, 21 April 1925, T 172/1499B.
would obviously welcome the immediate return to gold, he feared it would
increase unemployment and create a dangerous gap between nance and
industry. Despite Niemeyers and Normans efforts to minimise these
risks, he was not convinced by their justication of postwar policy, which
had consistently favoured a strong exchange rate over a strong trade bal-
ance, and whose consequences he summed up in Keyness phrase, the
paradox of unemployment amidst dearth.
23
He held out until 17 March,
when a dinner was arranged with experts to debate the issue. But aside
from Keynes, the experts came exclusively from the City or the Trea-
sury, and when McKenna abandoned the struggle, the mercurial Keynes
was left to battle on alone.
24
Within three days Churchill surrendered,
and prepared to announce the return to gold in his forthcoming budget
speech.
25
As several historians have argued, Churchill enjoyed vigorous debate,
and may have sparred with Niemeyer and Norman in order to test the
case for restoration in preparation for its defence in Parliament.
26
But
there was evidently more to it than this. For one thing, since the great
preponderance of expert opinion favoured restoration, there is no obvious
reason why he should have gone to such lengths to set out the case against
action unless he personally identied with it. For another, even after
agreeing to act, he betrayed considerable misgivings. Thus, in the same
budget speech conrming the return to gold, he announced the reduction
of super-tax by an amount equal to the rise in Estate Duty, or 10 million
per annum. This, he indicated to the King, was intended to reward the
highly paid brain worker at the expense of the rentier who would be the
chief beneciary of the return to gold. By the same token, he introduced
import duties on silk and articial silk (rayon), which he described as a
tax on luxury, his target again being the rentier class.
27
In earlier days
Churchill had regarded the gold standard as a natural concomitant of
free trade.
28
In present circumstances he saw it as a reason for departing
somewhat from free trade. Thus from the very outset, the gold standard
tended to bring the government and City interests into conict.
Churchills announcement of the return to gold on 28 April was warmly
applauded in the City and by City editors of the national press, while
23
The exchanges between Churchill, Niemeyer and Norman are reprinted in D. E. Mog-
gridge, British Monetary Policy, 19241931: The Norman Conquest of $4.86 (Cambridge,
1972), app. 5, pp. 26076.
24
Grigg, Prejudice and Judgment, pp. 1824.
25
HC Deb 180, c. 58, 28 April 1925.
26
D. E. Moggridge letter, Times Business News, 24 March 1969; P. F. Clarke, Churchills
economic ideas, 19001930, in R. Blake and W. L. Louis (eds.), Churchill (Oxford,
1993), p. 82.
27
Churchill to King George V, 23 April 1924, GV K1296/18, Royal Archives.
28
Clarke, Churchills economic ideas, p. 82.
224 Robert Boyce
opponents offered only subdued criticism in face of this fait accompli.
Within a few weeks, however, the warnings he had received from Beaver-
brook and others appeared to be borne out when falling coal prices threat-
ened to result in a lock-out and possible general strike. As the crisis
unfolded in July, Beaverbrook reminded readers of his newspapers that
this was precisely the outcome he had predicted from a return to gold.
The FBI and the Liberal leader, Lloyd George, similarly pointed up the
connection. Churchill vigorously disputed their claims, but was further
embarrassed when Beaverbrook serialised Keyness Economic Conse-
quences of Mr Churchill in the Evening Standard.
29
Stamp drew the
connection with the overvalued exchange rate in his addendum to the
report of the ofcial inquiry into the coal dispute on 28 July.
30
Two days
later the FBI renewed its criticism of the gold standard decision.
31
In public, Churchill had no choice but to defend the restoration and
deny any connection between it and the industrial crisis, since to do
otherwise would stir doubts about the future of sterling and perhaps
trigger a run on the pound. But in private his conviction that he had
been drawn into the biggest blunder of [my] life, prompted him to
berate Niemeyer and Norman for allegedly leading him up the garden
path.
32
Norman, on his weekly visits to the Treasury, appears to have
been the frequent victim of Churchills withering sarcasm.
33
Niemeyer
had to endure similar attacks. Preparing his budget speech in April 1926
with the prospect of a general strike only days away, Churchill suggested
that Niemeyer might like to contribute a paragraph on the rst years
experience back on gold, perhaps on the lines, At any rate, our pros-
perity, such as it is, stands on an absolutely sound foundation. Having
deliberately jumped out of a top storey window, we have at least the assur-
ance that we can start fair again from the pavement.
34
But the sarcasm
stayed within the four walls of the Treasury. When Churchill delivered
his Budget speech, he once again spoke like a true believer, afrming that
the restoration of the gold standard had been all to the good. At any rate,
he concluded, we stand to-day on a basis of reality . . . We may not be
soaring in the clouds, but there is at least rm ground under our feet.
35
29
Daily Chronicle, 11 July 1925; The Times, 13, 16 July 1925.
30
Report by a Court of Inquiry concerning the Coal Mining Industry Dispute, 1925, Cmd. 2478,
pp. 214.
31
British Industries, 30 July 1925, Supplement, viii.
32
C. W. Moran, Winston Churchill: The Struggle for Survival, 19401966 (1966), p. 139.
33
Grigg, Prejudice and Judgment, p. 193.
34
M. Gilbert, Winston S. Churchill, Companion volume V, part 1, Documents, The Ex-
chequer Years, 19221929 (1980), pp. 685, also 13067; Niemeyer to Churchill, 28 April
1927, Churchill to Niemeyer, 9.4.27, 9 May 1927, T 175/11.
35
HC Deb 194, c. 16967, 26 April 1926.
In the wake of the general strike the next month, Amery, the Colonial
Secretary, urged Cabinet colleagues to support trade protection, with the
introduction of a gold exchange duty. As he explained, returning to gold
had handicapped British industry by increasing borrowing costs and real
wages as well as the burden of public and corporate debt, while raising
the price of exports and reducing the price of competing imports. A gold
export duty would go some way to offset these burdens.
36
Churchill, still
committed to free trade, refused to accept Amerys remedy, but found
his criticism unanswerable. Within the Treasury he paraphrased Amerys
argument in renewed debate with Niemeyer. Postwar governments, he
observed, had heeded their nancial advisers on a gold-standard policy.
The national credit had been improved and the cost of living reduced,
but the cost had been enormous:
bad trade, hard times, an immense increase in unemployment, involving costly
and unwise remedial measures, attempts to reduce wages in line with the cost of
living . . . [and] erce labour disputes arising therefrom, with expense to the State
and community measured by hundreds of millions . . . To sum up, the nancial
policy of Great Britain since the war has been directed by the Governor of the
Bank of England and distinguished permanent Treasury ofcials who, amid the
repeated changes of Government and of Chancellors, have pursued inexibly a
strict, rigid, highly particularist line of action, entirely satisfactory when judged
from within the sphere in which they move and for which they are responsible,
and almost entirely unsatisfactory in its reactions upon the wider social, industrial
and political spheres.
37
When, shortly after this exchange, Niemeyer announced he was leaving
the Treasury for a post at the Bank of England, Churchill regarded it
as a form of betrayal, perhaps part of a long-planned conspiracy.
38
His
resentment found expression in Cabinet in June 1928, when he surprised
colleagues by denouncing Norman.
39
Even years later, he referred to the
Governor with scorn.
40
Churchill was not a man who sought scapegoats
for his mistakes. In this case he was convinced he had been wilfully drawn
into a calamitous error.
So long as Britain remained on the gold standard, Churchills bark was
bound to be worse than his bite. Yet his bark was serious enough, for it
36
Amery to Churchill, 6 Dec. 1926, Amery to Baldwin and Churchill, 10 April 1927,
Baldwin papers 28, Cambridge University Library.
37
Niemeyer to Churchill, 9 May 1927, and Churchill to Niemeyer, 9 May 1927, T175/11.
38
A. Boyle, Montagu Norman: a Biography (1967), p. 230.
39
J. Barnes and D. Nicholson (eds.), The Leo Amery Diaries, I: 18691929 (1980), 27 June
1928.
40
See for instance, C. Hassell, Edward Marsh, Patron of the Arts (1959), p. 570; Moran,
Winston Churchill, p. 303; Boothby letter, Times Business News, 21 March 1969; Boyle,
Norman, pp. 190, 195.
226 Robert Boyce
intimidated Norman into constraining his operational decisions, which
in turn affected the activities of the City. It began in July 1925, when
Churchill requested Norman to reduce bank rate in order to assist in
relieving the industrial crisis.
41
Norman initially refused the request, but
at Churchills insistence he broke off his holiday to return to London and
against his better judgement he reduced bank rate on 6 August from 5 to
4
1
/
2
per cent.
42
This was not the rst time a Chancellor had exerted inu-
ence over the Banks interest-rate decisions, but it ew in the face of City
expectations that under the gold standard the government would respect
the Banks operational control of the monetary system.
43
Thereafter the
pressure continued unabated.
In September, with the industrial crisis still unresolved, Churchill again
pressed Norman to reduce bank rate. Norman anticipated a rise in New
York interest rates, and in any case wanted to maintain London rates
in order to strengthen the Banks gold reserves. But since reserves had
already risen considerably since April and the London money market had
ample short-term funds, he agreed to reduce bank rate on 1 October to
4 per cent.
44
The following month he secured the Chancellors agreement
to lift the embargo on foreign loans. Meanwhile, however, stock-market
speculation and higher interest rates in New York had begun to draw bal-
ances from London, driving sterling below gold export point and eventu-
ally draining 13 millionfromthe Banks reserves. WhenNormannotied
the Treasury on 2 December of his intention to raise bank rate 1 per cent
the following day, Churchill angrily reacted, telephoning the Bank and
threatening to denounce Norman in Parliament for acting without con-
sulting him and against his wishes.
45
In the event, Norman proceeded
with the rate rise and Churchill refrained from carrying out his threat.
Nevertheless, Norman subsequently betrayed the inuence of industrial
criticism and the Chancellors threats of intervention. On occasion he
hid assets rather than allowing them to appear in the Banks reserves,
in order to reduce pressure for lower interest rates. For much of the
41
Niemeyer to Norman, 21 July 1925, Norman to Niemeyer, 24 July 1925, T 176/13
Part 2.
42
Addis diary, 28 July 1925, SOAS; Strong to Case, 1 Aug. 1925, Strong papers, 1000.6,
FRBNY.
43
D. Kynaston, The Bank of England and the government, in R. Roberts and D. Kynaston
(eds.), The Bank of England. Money, Power, and Inuence, 16941994 (Oxford, 1995),
pp. 278, describes the signicance of Churchills intervention, but dates it only from
December rather than July 1925.
44
Norman to Niemeyer, 21 Sept. 1925, T 176/13 Part 2; Norman to Strong, no.18,
22 Sept. 1925, Bank of England cables, FRBNY.
45
Norman diary, 3 Dec. 1925, in BoE; Sir H. Clay, Lord Norman (1957), p. 292; Grigg,
Prejudice and Judgment, p. 193; F. W. Leith Ross minute, 3 Dec. 1925, T 176/13.
time he operated with currency reserves barely above the Cunliffe min-
imum of 150 million.
46
The case for re-imposing foreign lending con-
trols became harder to resist, and he was obliged to act in spring 1929, to
the great disappointment of the Citys issuing houses.
47
Enthusiasts for
the gold standard had assumed it would attract deposits to London and
expand the amount available for capital exports. After April 1925 British
short-term lending did indeed increase. But instead of a ourishing cap-
ital market, sterling limped along barely above gold export point, while
the Bank of England maintained interest rates at historically high
levels and the Governor applied moral suasion to discourage newoverseas
loans.
This was not the only unintended result of the restoration of gold.
Despite the hope that British industry would benet from the stimulus
to lending and greater market stability, industrialists remained frustrated
by the high interest rates and the sharply downward trend of whole-
sale price levels that coincided with its re-establishment. The result, as
Churchill had anticipated, was a steadily widening gulf between nance
and industry. The decision twice to reduce bank rate in 1925 deected
criticism from the Bank, and in the heightened tensions after the gen-
eral strike in May 1926 industrialists drew back from openly criticising
the monetary authorities. But towards the end of 1926 complaints began
to mount from the newer as well as older sectors of industry, and from
workers as well as employers, many of whom now believed their interests
had been sacriced for the benet of the City.
48
McKennas call for an
inquiry into monetary policy in January 1927 prompted a sharp increase
in industrial protests.
49
The president of the Bradford Textile Society
was prompted to write to Churchill, pointing out that he was an active
member of the Conservative party and urging him to heed McKennas
advice before the government broke on the rock of the gold standard.
50
Shortly afterwards, the Council of the British Engineers Association for-
mally welcomed McKennas courageous speech and endorsed his call
for an inquiry, including the position of the Bank of England as the cen-
tral institution and custodian of our monetary resources.
51
The FBIs
journal devoted the economic supplement to its spring 1927 issue to
46
Sayers, The Bank of England, I, pp. 21314.
47
Ibid., III, app. 30.
48
See for instance the British Electrical and Allied Manufacturers Association, Trade Sur-
vey 1/1 (Dec. 1926), pp. 56 and the petition from fty-one largely Labour-controlled
councils in the industrial north, in The New Leader, 17 Dec. 1926, p. 3; and similar
petitions in T 160/384/F9780/1.
49
Reginald McKenna, Post-War Banking Policy (1928), pp. 1325. The speech was repro-
duced in numerous journals during March 1927.
50
President, Bradford Textile Society to Churchill, 17 Feb. 1927, T 160/384/ F9780/1.
51
World Power 7 (1927), p. 167; Bremner to Churchill, 15 March1927, T160/384/F9780/1.
228 Robert Boyce
monetary policy and its adverse effect upon the British economy since
the war.
52
Criticism from agricultural and Lancashire industrial interests
became especially shrill, and eventually what The Times described as the
most important agricultural conference in recent memory was deliber-
ately convened in the City.
53
Critics hostile to the City on account of its suspect cosmopolitanism
had always existed. Their insinuations now received a new twist amidst
evidence that the gold standard had tied British interest rates to Amer-
ican monetary policy. Beaverbrook made this the source of his attack
on Norman and his City colleagues in the columns of the Daily Express
and Sunday Express. Maxse, editor of the right-wing National Review,
mounted an equally strident and occasionally anti-semitic campaign
against them.
54
Numerous voices on the left such as Mosley and Johnston
of the Scottish ILP also denounced the money power.
55
Lloyd George
spoke out against the gold standard and, remarkably for a Liberal leader,
disparaged a free-trade manifesto prepared in the City as a money-
lenders circular.
56
Even MacDonald, always a weathervane of politi-
cal fashion, warned of the growing concentration of power in the City
and the danger to industry.
57
Presently The Economist took up the issue,
asking Is the nancier a parasite? Predictably the journal answered in
the negative.
58
Yet the very fact that it should pose the question pointed
to the intensity of attacks upon the City for its alleged indifference to
British industry and public dissatisfaction with the consequences of the
gold standard.
The government found itself caught in a dilemma. Having gone down
to defeat on a protectionist platform in 1923, Baldwin saw no prospect
of successfully re-opening the tariff question when he formed his sec-
ond administration in November 1924. Nevertheless the Conservative
party relied heavily upon the support of the industrial regions, and could
scarcely ignore their mounting dissatisfaction. Since Baldwin and his col-
leagues were not prepared to contemplate a reversal of monetary policy,
they therefore found themselves turning back towards trade protection.
Safeguarding was the chief topic at the Conservative party conference in
October 1927, and the following month a campaign began for the safe-
guarding of iron and steel, supported by the Morning Post, the National
52
British Industries, Economic Supplement, 30 April, 30 July, 31 Oct. 1927.
53
Boyce, British Capitalism at the Crossroads, pp. 1513, 1734.
54
National Review, Feb. 1926, p. 800.
55
Oswald Mosley, The Labour partys nancial policy, Socialist Review, Sept. 1927,
pp. 1835.
56
The Liberal Magazine, Aug. 1925, p. 477; The Times, 1 Dec. 1926.
57
Manchester Guardian, 18 Feb. 1928.
58
14 July 1928, p. 61.
Union of Manufacturers, the Empire Industries Association, and even
elements of the trades union movement.
59
The Cabinet, however, com-
prised committed free traders as well as protectionists and sceptics such
as Baldwin, who inclined towards protection but doubted that the elec-
torate was yet ready for large-scale intervention. The result was near
immobility. On the one hand, the government drew back from substan-
tial concessions to industry: only nine of the forty-nine industries that
applied for safeguarding between 1925 and 1929 were successful, and as
late as 1929 only just over 8 per cent of British imports were subject to
import duties.
60
On the other hand, it refused to back City efforts to pro-
mote further trade liberalisation abroad. With the possibility that Britain
might abandon free trade and retreat into imperial protectionismincreas-
ingly recognised abroad, British delegates to the 1927 World Economic
Conference were able to use the threat to push through resolutions on
freer trade.
61
Notwithstanding their success, the government refused to
commit itself to the conference resolutions.
62
In 1928 ministers agreed
that after the next general election they would open the door wider to
safeguarding applications. But this still left them in the negative position
of favouring neither full free trade nor tariff reform. Lacking a convinc-
ing policy, they therefore based their electoral campaign on Baldwins re-
assuring image and imprecise appeal, You trusted me before, I ask you
to trust me again.
63
When this proved inadequate and the Labour party
regained ofce, the Conservative party faced intense turmoil over trade
policy. Beaverbrook led the way by re-opening the campaign for tariff
reform under the new banner, Empire Free Trade. Thus the gold stan-
dard once again confounded the expectations of its proponents. They had
condently anticipated that returning to gold would stimulate trade and
reduce if not remove altogether the appeal of other forms of economic
intervention. But in the event it had intensied pressure for government
action, if not to suspend the gold standard itself, then to relieve indus-
try, including agriculture, from the burden of adjustment that the gold
standard imposed upon it. When the government found itself unable to
respond decisively, it appeared ineffectual and paid the price in electoral
59
The Iron and Coal Trades Review, 10 Feb. 1928, p. 191; 6 April 1928, p. 502; 27 April
1928, pp. 6078; 18 May 1928, p. 762; 15 June 1928, p. 912; J. C. Carr and W. Taplin,
History of the British Steel Industry (Oxford, 1962), pp. 4667.
60
Royal Institute of International Affairs, Interim report on measures taken by the British
government to promote exports and protect the home market in force in March, 1932,
table I, p. 43.
61
League of Nations, Report and proceedings of the World Economic Conference held at
Geneva, 4 May23 July 1927, p. 48.
62
HC Deb 208, c.1827; 209, cc. 519, 521; The Free Trader, Aug.Sept. 1927, p. 166.
63
K. Middlemas and J. Barnes, Baldwin: a Biography (1969), p. 524.
230 Robert Boyce
defeat. This, however, did nothing to relieve the frustration of industri-
alists, which was soon to be intensied by the world slump.
Labour, the slump and the sterling crisis
The second Labour government, formed in June 1929, depended upon
Liberal votes to stay in ofce. But its leaders were in any case essentially
conservative men whose chief ambition was to demonstrate that, like their
political rivals, they could be trusted with the stewardship of the British
state and empire. As leaders of an insurgent party, they employed the
rhetoric of radical change. Yet their rst occasion in ofce in 1924 had
been sufcient to demonstrate that their talk of socialist transformation
was intended largely for their own supporters and not to be taken seri-
ously. Indeed, the Prime Minister, MacDonald, and the Chancellor of
the Exchequer, Snowden, nowmade no effort to hide their conservatism.
In December 1929 they received the freedom of the City in a ceremony
at the Guildhall, MacDonald for his restoration of friendly relations with
the United States, Snowden for vigorously defending British interests in
the recent reparation negotiations. Snowden spoke for both of themwhen
he afrmed that it was:
one of the greatest honours which could come to any man in recognition of
public work . . . The association of the City with our struggles for national liberty,
with the growth of our civic institutions, with the development of our trade and
commerce, and with the building up of our world Empire, had given it a unique
place in British history, and to be a Freeman of the City . . . made one feel a
part of that great City and gave one a more denite share in its traditions and its
glories. (Cheers.)
64
Like ministers in the preceding government, however, they were already
nding that the gold standard was proving a false friend.
Within three months of taking ofce, the government faced intense
pressure from supporters to intervene with the Bank of England, when
the bull market on Wall Street weakened the sterling exchanges and forced
Norman to raise bank rate to 6
1
/
2
per cent. Snowdens response was
to temporise. Speaking at the Labour party conference in October, he
announced plans for a wide-ranging inquiry into all aspects of banking,
nancial and credit policy.
65
The ostensible purpose was the ambitious
one of determining if the monetary and nancial system met the needs of
industry and what, if any, improvements were required. But as the Daily
Telegraph sagely put it, it gets [the Chancellor] out of a very awkward
64
New Freemen of London, The Times, 20 Dec. 1929.
65
Labour Party Annual Conference Report, 1929, p. 230.
hole, for while this inquiry is in progress the wild men of the ILP and
others can be held at arms length.
66
Lord Macmillan, the distinguished
judge who chaired the enquiry, implied something similar to committee
members at a private meeting before the public hearings:
It is obviously undesirable that anything that this Committee does should disturb
the status quo . . . we do not want to reopen any topics which may be considered
for the moment closed. One of the things we all want to do is to maintain the
stability and condence of the nancial world . . . I think what we say in our
Report about the gold standard might be very brief indeed.
67
Besides Macmillan, the committee comprised thirteen members, of
whom ve were prominent bankers, one a City-based company direc-
tor, and one, Gregory, a staunchly conservative economist. The others
included an industrialist, a trade unionist, a leading member of the co-
operative movement, a northern coal merchant, an eccentric former
Communist and the radical economist, Keynes.
68
In view of its hetero-
geneity and wide mandate, the government could be condent that the
committee would deect criticism from the gold standard and the City
for eighteen months or more. This gave it time to cast about for economic
initiatives compatible with Snowdens orthodox nancial and free-trade
principles.
Snowden himself took one initiative in summer 1929, when he
attempted to revise the terms of the Young plan at the diplomatic confer-
ence at the Hague, in order to secure a larger share of German reparations
for Britain. While his abrasive manner and stonewalling tactics earned
him plaudits from a now thoroughly frustrated City of London, the con-
cessions he obtained were in fact negligible if not actually negative.
69
A second initiative came in September when Graham, the President of
the Board of Trade, seized upon a Belgian proposal and persuaded the
League of Nations to promote a two- or three-year tariff truce, as the
prelude to renewed efforts at trade liberalisation. The rst tariff truce
conference was duly convened in February 1930, but neither the United
States nor any other overseas country sent a plenipotentiary and the
European countries refused to tie their hands on trade policy. With hopes
fading for a liberal free-trade solution to Britains slide into depression,
ministers turned not once but several times to protectionist measures.
MacDonald, who held no xed views on economic policy, indicated his
willingness to act, so long as it could be presented as an emergency
measure.
70
But Snowden proved as dogmatic in his defence of free trade
66
Daily Telegraph, 4 Oct. 1929.
67
Minutes, 10 Jan. 1930, Brand papers, 27.
68
Boyce, British Capitalism at the Crossroads, pp. 2801.
69
Ibid., pp. 21011.
70
Ibid., pp. 2735, 311 and passim.
232 Robert Boyce
as of the gold standard, and threatened to resign rather than give way.
Lacking a solution of their own, ministers relied upon Norman for help.
He in turn encouraged hope in initiatives of two sorts. The rst were
schemes for rationalising struggling sectors of industry, such as cot-
ton textiles and steel-making, which he began in 1929. Ministers were as
pleased to be relieved of responsibility for industrial assistance as Norman
was to keep the government from interfering in private sector affairs.
But in fact he could do little aside from accelerating the closure of non-
performing factories and rms, thus adding to the already embarrassing
unemployment problem.
71
The second sphere of initiative was central
banking co-operation. Here, too, his contribution proved to be wholly
inadequate to Britains problems.
Since becoming Governor of the Bank in 1920, Norman had looked
forward to the day when, with the gold standard in place, leading central
bankers would effectively control the international monetary and pay-
ments system and become the stewards of the world economy. This had
proven as optimistic as his dream of autonomy within Britain. Even-
tually, as part of the reparation settlement, the Bank for International
Settlements was formed: a sort of club for central bankers in Basel, where
they could meet for private discussion. Norman assiduously attended its
monthly meetings. But by the time it opened its doors in May 1930 the
world slump was already in full swing. Without large-scale resources or
new ideas, it could contribute almost nothing to Britains relief.
But if Snowden merely folded his arms, his Treasury advisers did not.
From spring 1930 the pound sterling remained at or below gold export
point against the French franc for weeks on end, causing howls of outrage
fromCity editors.
72
The French government, anxious for the future of the
entente with Britain, especially after the spectacular gains by the Nazis in
the September Reichstag elections, signalled its desire to address British
complaints over gold movements.
73
The British Treasury immediately
proposed parallel conversations between the treasuries and the central
banks. Norman however refused to participate, perhaps on account of
his deep-seated francophobia, but more likely because he wished to offer
the British government no excuse for putting off the retrenchment he
71
Clay, Norman, pp. 32835, 358; S. Tolliday, Business, Banking and Politics. The Case
of British Steel, 19181939 (Cambridge, Mass., 1987), pp. 201, 208; Kynaston, City of
London, III, pp. 132, 1902.
72
See for instance, George Glascow, Foreign affairs, Contemporary Review, June 1930,
p. 783; The Observer, 20 July 1930; The Nation and Athenaeum, Aug. 1930, pp. 3944;
Chamber of Commerce Journal, 8 Aug. 1930, p. 116; Daily Mail, 16 Aug. 1930.
73
Leith Ross to Hopkins, 17 Nov. 1930, and to Hopkins and Pethick-Lawrence, 2 Dec.
1930, T 160/430/F12317/1; Vansittart minute, 24 Nov. 1930, FO 371/14919/W12605/
12605/17.
believed was urgently necessary to retain condence in public nances
and the pound.
74
Treasury ofcials therefore proceeded alone, setting
out proposals for monetary and nancial reforms to their French coun-
terparts.
75
The practical result was modest. The meetings nonetheless
marked the rst time since the return to gold that Whitehall took a direct
role in monetary policy. Shortly afterwards, the Treasury also took up
the question of tying foreign lending to British exports. Two years earlier
the Foreign Ofce had attempted to raise the issue in Cabinet, hoping
it would assist both domestic industry and British diplomatic inuence
abroad. The Treasury had blocked their path, insisting that City bankers
must be allowed to arrange foreign loans without interference fromindus-
try or the state.
76
But now, two years later with the economy in crisis, the
Treasury too was prepared to encroach upon the Citys prerogatives.
77
By and large, even in the midst of the slump dissatisfaction with the gold
standard and demands for trade protection still found separate expres-
sion. Thus, for instance, Beaverbrook remained hostile to Norman and
the internationalists of the City, yet he made no mention of this in his cam-
paign for Empire Free Trade. The link nonetheless was always present,
and by 1930 there was growing acceptance even in the City that Britain
could hope to maintain free trade or the gold standard, but not both. This
was acknowledged by the prominent City men who gathered at Hambros
Bank in July 1930 to draft a manifesto calling for the introduction of
tariff protection with reciprocal preferences if not complete free trade
within the British empire, at least for the duration of the crisis.
78
By now,
with free trade collapsing even in Manchester,
79
the Conservative party
was ready to adopt a broad policy of imperial protectionism if returned
to ofce.
80
Yet the manifesto drawn up at Hambros Bank was never-
theless a remarkable document, coming from directors of many of the
leading merchant banks, shipping and insurance companies in the City,
and including three directors of the Bank of England who had hitherto
been rm adherents of free trade.
81
74
Waley minute, 30 January 1931, T 160/430/F12317/2.
75
Boyce, British Capitalism at the Crossroads, pp. 2949.
76
A. Chamberlain memo., 16 Feb. 1929, and Sargent minute, 18 Mar. 1929, FO 371/
14094/W1846/50.
77
Leith Ross to Sargent, 24 Feb. 1931, FO 371/15675/W2222/50; Leith Ross to Harvey,
20 April 1931, T 160/394/F11324.
78
Bankers Magazine, Aug. 1930, pp. 1759; The Times, 10 July 1930.
79
A poll of members of the Manchester Chamber of Commerce showed a three-to-one
rejection of free trade: Chamber of Commerce Journal 6 June 1930, p. 674.
80
Sir K. Feiling, The Life of Neville Chamberlain (1946), p. 181.
81
Bankers Magazine, Aug. 1930, pp. 17585. Amery described this as the biggest leg up
since 1903: Amery to Baldwin, 4 July 1930, Baldwin papers 31.
234 Robert Boyce
Labour ministers were now as frustrated as Conservatives ministers
had been a few years before, but like them too divided to act. One junior
minister, Mosley, resigned rather than cling to scal and nancial ortho-
doxy in face of soaring unemployment. But since MacDonald was not
prepared to take a lead and Snowden remained adamantly opposed to
any departure from orthodox principles, the government took almost no
practical action until the run on the pound in summer 1931 confronted
it with the choice of severe retrenchment or allowing the currency cri-
sis to get out of hand. With the Cabinet reluctant to accept spending
reductions sufcient to stem the crisis, MacDonald resigned to allow a
National government to attempt to restore condence in the pound.
The circumstances surrounding the downfall of the second Labour
government led supporters to claim that it had been confronted by a
bankers ramp, which dictatedthe terms of retrenchment andensuredits
defeat when it failed to yield the concessions the bankers demanded. The
claims are not wholly without substance. Thus, for instance, the Commit-
tee on National Expenditure, chaired by the City insurance executive, Sir
George May, exaggerated the size of the prospective budget decit. Thus,
too, in the midst of the crisis City bankers pressured the government to
balance the budget, and to do so mainly by reducing social expenditure
rather than raising tax revenue. British bankers also sought to draw their
American colleagues into the campaign for retrenchment. Norman, recu-
perating in Quebec from a nervous breakdown, went so far as to discour-
age the Federal Reserve Bank of NewYork fromassisting the government
until it agreed to swingeing budget cuts.
82
This was a remarkable initiative
which, had it become publicly known in Britain, might have had serious
consequences for Norman and the Bank of England. In the event, the
American bankers wisely left it to their British counterparts to determine
what economies were needed. But the fact remains that the pressure on
the government was largely self-inicted, since it remained committed
to the gold standard and hence needed to maintain public condence in
sterling by a demonstrated commitment to sound nance.
83
The more important point is that for most of the period under the gold
standard the pressure came from the other direction, that is from govern-
ment to the City. In early September the National government introduced
a retrenchment programme that seemed capable of balancing the budget
82
Diary of events, 23 Aug. 1931, bundle Gold Standard, Morgan Grenfell papers;
Thompson-McCausland memo., p. 35, BoE ATM14/10; minute and memo., 24 Aug.
1931, Harrison papers 3115.2, FRBNY.
83
Boyce, British Capitalism at the Crossroads, pp. 33955; P. Williamson, A bankers
ramp? Financiers and the British political crisis of August 1931, English Historical
Review 99 (1984), 770806.
and restoring condence in sterling. But by now the gold standard had
placed acute strain on relations between the City and producer interests
in manufacturing, mining, agriculture and labour. And when the pound
was shaken by news of a mutiny in the North Sea eet, brought on by
the announcement of pay cuts, the government drew back from further
retrenchment. It was in any case too late, for the Banks reserves had
already reached danger level and condence in sterling showed no signs
of recovery. The suspension of the gold standard was therefore announced
on 21 September 1931. In theory, leaving the gold standard should have
made it possible to maintain policies of free trade and free capital move-
ments, with only limited derogations during the crisis. Leading Liberals
argued the case once sterling began to oat. But such was frustration of
six years on gold that the demand to be done with economic interna-
tionalism became overwhelming. Thus strict lending controls became a
permanent feature of the 1930s, and emergency trade restrictions were
followed by a permanent import tariff and imperial preferences, for which
the National government could claim to have received a strong mandate
in the general election in November 1931. Norman made no secret of
his extreme disappointment at this sea change in economic policy, but
by and large the City seemed resigned to it and made no protest. While
the City continued to exercise some inuence over public policy after the
abandonment of the gold standard, its ascendancy was ended and for the
next twenty-ve years it was obliged to accept severe constraints on its
international activity.
12 The City, British policy and the rise of the
Third Reich 19311937
Neil Forbes
The study of Britains external nancial and economic relations in the
twentieth century provides a variety of insights into the nature of the
relationship between the City and government. This chapter focuses on
an aspect of that relationship which remains highly controversial: the
part played by the City in the formulation and conduct of British policy
towards Germany in the 1930s.
Historians must of course guard against the tendency to regard the
City as some kind of homogeneous entity or single interest group. In
this respect, even persuasive arguments based on the concept of gen-
tlemanly capitalism, like those advanced by Peter Cain and Anthony
Hopkins, remain open to criticism.
1
Dumett, for example, has warned
against any analysis of causation which allows the inference to be drawn
that City and Whitehall elites were united by likemindedness and a
common view of the world. Instead, the investigation of foreign-policy
formulation should seek to identify the conicts and tensions within
the decision-making process.
2
Michie, similarly, has pointed to the dif-
culties involved in dening the City: its very diversity suggests that
it was incapable of speaking with one voice.
3
Individual parts of the
City, on the other hand, were able to develop their own voice: tightly
organised banking committees, for example, were well placed to repre-
sent the respective interests of their constituent members. As E. H. H.
Green argues, this institutional structure allowed bankers, at least, to
develop a degree of cohesion far in advance of anything seen elsewhere
in the British economy. Yet, if the City has continuously enjoyed a priv-
ileged position in terms of inuence, the value of any analysis based on
The author is grateful to the British Academy for the award of a grant which facilitated
the research for this chapter.
1
P. J. Cain and A. G. Hopkins, British Imperialism, II: Crisis and Deconstruction 19141990,
(1993).
2
R. E. Dumett (ed.), Gentlemanly Capitalism and British Imperialism. The New Debate on
Empire (1999), p. 11.
3
R. C. Michie, The City of London. Continuity and Change Since 1850 (1992), p. 10.
236
The City and the Third Reich 19311937 237
interest groups is relegated by Green in favour of, among other things,
a crucial ideological dimension the debate over British external pol-
icy and a bias in strategy towards sustaining an internationally oriented
economy.
4
Government, too, comprises a variety of interests, and in the interwar
years this sometimes took the form of intense rivalries between depart-
ments of state. After the First World War economic and nancial issues
assumed a pre-eminent place in foreign policy-making, but the Foreign
Ofce clashed with the Board of Trade over the supervision of the newly
established Department of Overseas Trade and resented the degree of
control exercised by the Treasury over the reparations question. One
study of diplomacy even suggests that the Foreign Ofce was unable to
defend its administrative domain against the inroads made by a suspi-
cious Treasury because of a lack of necessary expertise.
5
Indeed, while
the Treasury was closely connected to the City,
6
the Foreign Ofces
relations with the nancial authorities were anything but harmonious.
Through criticisms voiced to other government departments, Foreign
Ofce ofcials launched, in 19334, what can only be described as a
hostile campaign against the Citys position over German credits and
the tendency of Norman, Governor of the Bank of England, to conduct
foreign policy on his own.
7
Born out of frustration over the inability to
coordinate nancial and economic policies which might have helped to
prevent the collapse of the Weimar Republic, the substantive charges
made by the Foreign Ofce against Norman and City bankers were strik-
ingly similar to the more ideologically based critique developed by the
Labour Party.
8
The inseparability of domestic, especially economic, determinants and
international factors, and the signicance of the part played by non-state
actors in international affairs, are now prominent features in studies of
the origins of the Second World War.
9
Yet, it is hardly surprising that
much of the historical literature should have followed in the tradition of
condemning City bankers as the enthusiastic instigators and supporters
4
E. H. H. Green, The inuence of the City over British economic policy, c. 18801960,
in Y. Cassis (ed.), Finance and Financiers in European History, 18801960 (Cambridge,
1992), pp. 1978, 213.
5
K. Hamilton and R. Langhorne, The Practice of Diplomacy: its Evolution, Theory, and
Administration (1995), p. 170.
6
G. Ingham, Capitalism Divided? The City and Industry in British Social Development
(Basingstoke, 1984).
7
For a fuller analysis see N. Forbes, Doing Business with the Nazis. Britains Economic and
Financial Relations with Germany, 19311939 (2000).
8
E. Durbin, New Jerusalems. The Labour Party and the Economics of Democratic Socialism
(1985), pp. 812, 205.
9
P. Finney (ed.), The Origins of the Second World War (1997), p. 283.
238 Neil Forbes
of appeasement policies, and even as facilitators of Nazi rearmament.
10
There is an assumption that, at the very least, the City acted as a power-
ful pressure group in order to inuence the policy of governments in the
1930s.
11
More recently, Kynaston has presented an alternative interpre-
tation in his authoritative and comprehensive survey of the City. One
of the themes underlying his analysis of the 1930s is that Londons
bankers reected the national mood in being pro-German rather than
pro-Nazi.
12
Yet this, in turn, assumes that there was a uniformCity view.
The intention in this chapter is, therefore, to show that however effec-
tive the City was in appearing to be united, in the case of policy to-
wards the Third Reich unity was little more than a fa cade behind which
lay deep divisions. At the same time, the criticisms emanating from the
Foreign Ofce indicate a surprising failure on the part of government to
comprehend the complexity of the structures that comprised City life in
the 1930s.
Britains nancial crisis and the German question
The question of how to satisfy Germanys demands for the revision of
the Versailles settlement and yet ensure a stable and peaceful future for
Europe was at the centre of international politics throughout the 1920s.
By 1931, as the Great Depression developed into the worldwide nancial
crisis, the very survival of capitalism seemed to rest upon nding a way
out of the interlocking problems of war debts and treaty revision. Indeed,
nancial and economic diplomacy remained a key aspect of international
relations for the rest of the decade.
13
With the crisis spreading from cen-
tral Europe to Germany in mid 1931, and thereby threatening to wreak
havoc on a whole swathe of American banks that had granted loans so
readily to German borrowers in the 1920s, President Hoover suddenly
announced a suspension of all intergovernmental payments for one year.
Statesmen were afforded an opportunity to seek a solution to the question
of reparations and war debts, but privately contracted obligations were
not covered. Consequently, the Hoover moratorium, which took effect
in early July 1931, did nothing to hold back the mounting tide of panic
among international investors; capital ight and bank closures interacted
10
Among the literature see A. D. Smith, Guilty Germans? (1942); B. J. Wendt, Eco-
nomic Appeasement: Handel und Finanz in der britischen Deutschland-politik 19331939
(D usseldorf, 1971); S. Newton, Prots of Peace. The Political Economy of Anglo-German
Appeasement (Oxford, 1996).
11
G. Schmidt, The Politics and Economics of Appeasement. British Foreign Policy in the 1930s
(Leamington Spa, 1986).
12
13
See, for example, P. Clavin, The Great Depression in Europe, 19291939 (2000).
to deepen the problems of the Weimar republic. With the awful prospect
of a total collapse in Germany looming, the seven-power London Con-
ference quickly convened later in July recommended that there should
be a six-month standstill on international credit to Germany. With the
renewal of the central bank credit to the Reichsbank, Germanys foreign
creditors undertook to maintain their short-term positions.
This was formalised when, on 19 September 1931, representatives
from the ten creditor nations signed the Standstill Agreement. Main-
taining this aspect of the international trading system was, in the Bank
of Englands view, of fundamental importance if global economic catas-
trophe was to be avoided. From its inception, therefore, the agreement
enjoyed a quasi-ofcial status. To the British creditors, this provided
the justication for arguing that government should compensate the
banks for any losses incurred on their credits. Yet, while Norman was
the moving spirit behind the Standstill, neither he nor the British Trea-
sury was ever prepared to offer any guarantees. Just after the agreement
came into effect, attempts to defend the gold standard were nally aban-
doned and sterling was devalued. Such were the fears among investors
over the stability of the nancial institutions involved in lending to
Germany that London, too, had been hit by the wave of capital with-
drawals during summer 1931. Condence had been so undermined by
the crash that no one could be sure that the capitalist system itself would
survive.
One might assume that in such circumstances creditors would concen-
trate on what united rather than divided them. There were, however, one
or two early indications of the troubles that lay ahead. For one thing, clear
differences existedbetweencreditor nations: Britishbankers, for example,
always believed that their lending had been qualitatively different to that
undertaken by their American counterparts. In December 1931, Hird,
of the Union Bank of Scotland in Glasgow, wrote to Bradburn, general
manager of Williams Deacons Bank at the head ofce in Manchester,
concerning the British Overseas Bank founded after the First World
War by eight banks including the Union Bank and Williams Deacons,
although these two and the Prudential Assurance Company had bought
out the other banks shareholdings in 1924. Hird thought that the British
Overseas Bank deserved to have no trouble in freeing-up its German posi-
tions because its credits were of the right kind self-liquidating. He won-
dered, however, whether the sheep and goats would go forward together
under the Standstill. Hird took the line that legitimate business ought to
get preference over pure nance but, as that would land our American
cousins rather badly, he doubted whether it would be possible to carry
such views. He continued:
240 Neil Forbes
As to the future, it is, of course impossible to speak regarding any institution,
so much depends for all of us on the bigger political matters of international
importance being faced honestly and dealt with on sound lines by the various
nations involved. It looks like being either the start of better things or a pretty
complete smash of the credit system.
14
Hidden frompublic scrutiny but no less signicant were the differences
between the British creditors themselves. In general, the joint-stock banks
(commercial banks) did not build up a large volume of acceptance credits;
instead, a limited amount of money was advanced to German banks. By
1937, the British Overseas Bank still had over 1.5 million outstanding in
credit lines to both German banks and industry. Yet Williams Deacons,
one of the British Overseas Banks parents, advanced just 42,000 to the
Commerz- und Privat-bank and 6,000 to the Dresdner Bank.
15
Conse-
quently, one of the problems inherent in the Standstill structure was that
frozen within it were various types of credits involving a range of different
types of creditors and debtors.
Thus, while the Standstill was taken as an emergency and temporary
measure in order to try to prevent the economic collapse of Germany, the
ulterior purpose was to offer thereby some means of protection for the
British merchant banks dangerously exposed by their German credits.
In spring 1932 Norman continued to iterate, in the privacy of banking
parlours, that it was of utmost importance that the position of Londons
accepting houses be protected. He intimated that there were four or ve
houses which were being assisted and that the joint-stock banks were
loyally helping in this respect.
16
If anything, this understated the extent
of the problem. The Bank itself was supporting the virtually bankrupt
Lazard Brothers & Co.
17
Those houses most closely connected to Germany such as Kleinwort &
Co. and J. Henry Schroder & Co. were among the hardest hit, while
Frederick Huth & Co., which combined merchant banking and trading,
was also dangerously exposed. The Bank of England calculated that the
acceptance credits advanced by Huths stood at 853,000 for Germany,
235,000 for Hungary and 132,000 for Austria.
18
Unfortunately, these
frozen credits taken together amounted to approximately one-half of the
14
Hird (Union Bank of Scotland Ltd.) to Bradburn (Head Ofce, Manchester), 11 Dec.
1931, The Royal Bank of Scotland Group Archives, London (hereafter RBOS), GB
1502/WD/349/4.
15
RBOS GB 1502/WD/50/6.
16
Memo. of interviews, Glyn, Mills & Co., 6 April 1932, RBOS GB 1502/GM/368.
17
R. W. D. Boyce, British Capitalism at the Crossroads 19191932. A Study in Politics, Eco-
nomics and International Relations (Cambridge, 1987), p. 344.
18
Peppiat (Chief Cashier, Bank of England) to Maxwell (Glyn, Mills), 17 March 1932,
RBOS GB 1502/GM/368.
rms total acceptance business. Although given help, Huths was not able
to survive beyond 1936.
In the immediate aftermath of the 1931 crisis the joint-stock banks
certainly did show loyal support to the houses in trouble. Westminster
Bank was active in a number of cases; one notable casualty it quietly saved
from insolvency was Kleinworts.
19
As Ackrill and Hannah noted in their
history of Barclays, the Citys code of secrecy ensured that the existence
of the rescue operations did not become public knowledge. Throughout
the crisis British banks, unlike many elsewhere in the world, were able
thereby to preserve their reputation for reliability and solvency.
20
Yet,
just how willingly the lifelines were thrown out remains something of an
open question.
21
All City institutions had a stake in trying to ensure that
Britains nancial structures were not further undermined, but that did
not necessarily bring to an end competitive rivalry between individual
rms.
Evidence of this condition is provided by the operation of the Joint
Committee of British Short-TermCreditors from1932. This was formed
out of the British Creditors Committee when the Standstill Agreement
was rst renewed in January 1932, in order to maintain a leading role
for the City in the continuing multilateral and international negotiations
with Germany. For that purpose, the Creditors Committee (hastily ass-
embled the previous summer by the clearing banks and accepting houses)
wanted to enlarge its membership by creating sub-committees to deal
with German short-dated state and municipal obligations outside the
Standstill and Hungarian short-dated obligations. Beaumont Pease of
Lloyds Bank invited, for example, a representative from the Prudential
to serve on the Joint Committee, and its joint secretary Ernest Lever was
duly nominated.
22
In creating an over-arching committee the bankers had
another purpose in mind too. Progress towards nding an internationally
agreed solution, before the end of the Hoover moratorium, to the debacle
of reparations and war debts was painfully slow. In a world in which
nancial diplomacy had become so important, the different short-term
creditors understood the importance of creating a body able to speak to
the British government with a single, powerful voice.
It was precisely the effect of City inuence on foreign policy that
Vansittart, Permanent Under-Secretary at the Foreign Ofce, found so
19
J. Wake, Kleinwort Benson. The History of Two Families in Banking (Oxford, 1997),
pp. 2434.
20
M. Ackrill and L. Hannah, Barclays. The Business of Banking, 16901996 (Cambridge,
2001), pp. 1067.
21
Kynaston, City of London, III, p. 229.
22
Beaumont Pease to Lever, 5 Jan. 1932, British Creditors Committee, Prudential
Archives, London, 2276.
242 Neil Forbes
disturbing. ForeignOfce ofcials wantedto consider howeconomic con-
cessions to the Weimar republic might be used as a weapon a political
truce whereby, for example, reparations would be abolished in exchange
for a halt to further German rearmament. In maintaining that Germany
should not get something for nothing, ofcials believed they were in tune
with British public opinion. Norman, on the other hand, Vansittart com-
plained in July 1931 to MacDonald, the Prime Minister, was conducting
his own diplomacy and advocating a policy of unilateral concessions.
23
Naturally, differences of opinion between the bankers were expressed
behind the scenes. But it seems likely that the degree of discord has
been signicantly underestimated. For the Joint Committee was, from
its inception, split down the middle over the problem of the Standstill.
Tensions had already been generated, of course, between some of the
nance houses and the clearing banks when the latter, with the Midland
Bank in the lead, began to compete for acceptance business in the second
half of the 1920s.
24
Given the rates of commission available, the temp-
tation for the joint-stock banks to try to exploit their foreign contacts for
this purpose must have been irresistible. Sir Edward Reid, looking back
at his long career with Barings Bank, wrote that the German commercial
credits were the most protable business of this kind that the City had
ever seen.
25
By creating the Joint Committee, an impression of unity between the
different member-institutions was successfully conveyed to the outside
world. Yet however grateful the City had cause to be to Frank Tiarks
of Schroders, the virtual inventor of the Standstill, when it came to the
question of howthe agreement should be renewed, some clearing bankers
did not take kindly to being effectively ignored by the very houses that
they were being asked to save from insolvency. This dissatisfaction rst
revealed itself in June 1932, on the eve of the Lausanne Conference
where reparations were effectively brought to an end. Lidbury, the ener-
getic chief general manager of the Westminster Bank, prepared a brieng
note for when his chairman attended a meeting of the London Clearing
Bankers on 2 June. Lidbury was annoyed that the accepting houses had
agreed to a rate of 5 per cent on cash advances to German banks, when
they had very little or nothing of this character themselves and while
they still continued to receive 6 per cent. To make matters worse, the
clearing banks which had made advances to the big German banks and
23
D. Carlton, MacDonald versus Henderson. The Foreign Policy of the Second Labour Govern-
ment (1970), p. 203.
24
25
Sir Edward Reid memoirs, p. 26, INGBank NV, London, The Baring Archive (hereafter
Barings), DEP 22. xxiii. Reid was a grandson of the rst Baron Revelstoke.
Westminster had no desire to appear before the clearing house as the bank
who had made a lot were not seeing any reduction in their cash advances.
On the other hand, through the provisions of one of the original clauses
of the agreement, which Lidbury had always found objectionable, the
accepting houses secured material reductions with the cash debtors of
commercial houses. Lidbury was completely against allowing a reduced
rate on what he termed these absolutely dead Standstill debts which not
only had not been shifted by one penny but which the German banks
were not showing the slightest intention of shifting. He concluded with a
rhetorical ourish: Why therefore should we add, by sacrice of interest
which in fact we may take as a reduction of principal debt, to the fund of
exchange available for the Accepting Houses to rob us by?
26
At the beginning of 1933 the Weimar republic collapsed. In Britain, the
Foreign Ofce struggled to understand the nature and signicance of the
Nazi revolution.
27
But in the search for some kind of general settlement,
the omens were not propitious: in October 1933 Hitler took Germany out
of the Disarmament Conference and the League of Nations. Vansittarts
reaction expressed to Fisher, his opposite number at the Treasury
was unequivocal: I have always thought that nancial stringency in
Germany was going to be our principal safeguard against wholesale
German rearmament, and that we should do all we can to keep Germany
lean, even at a cost to certain people here.
28
Not unexpectedly, the City,
on the whole, took the contrary view, namely, that a return to prosperity
in Germany would help to emasculate the forces of political extremism.
But it would be necessary to allow time for this process to work. Indeed,
if British bankers assumed that economic and nancial factors were of
paramount importance in determining the prospects for Germany and
the stability of Europe, there were some grounds for optimism in 1933.
It was possible that the worst of the nancial storm had been weath-
ered.
29
The corner of the depression had been turned and the German
economy, seemingly in response to the inuence of National Socialism,
appeared to be reinvigorated.
30
The Citys stance on the potential mili-
tary threat posed by the Third Reich was in accord with the reaction of
business interests to the issue of British rearmament. With a tentative
26
Note for Chairman for Clearing House meeting, 2 June 1932: German Stand-
still rates on cash advances, Committee of London Clearing Bankers, RBOS GB
1502/WES/867/1.
27
See, for example, Ralph Wigram minute, Foreign Ofce papers FO 371/16695/C4949.
Wigram became Head of the Central Department in 1933.
28
FO 371/17675/C76, minute (undated) Dec. 1933, to Fisher.
29
See, for example, W. Lionel Fraser, All to the Good (1963), p. 109. Fraser worked for
Helbert, Wagg & Co.
30
R. J. Overy, War and Economy in the Third Reich (Oxford, 1994), p. 37.
244 Neil Forbes
economic recovery underway by 1934, the Treasury was keenly aware
that any increase in taxation required to pay for rearmament could have
severe political repercussions. Similarly, in 1936, the City was worried
that a defence loan would be inationary and hence drive up interest
rates.
31
The view expressed in May 1933 by Williams Deacons principal
London ofce at Birchin Lane was that
in general our feeling is still, as it has always been, that we are very unlikely to make
a loss upon our German bank business unless the whole of Germany collapses
economically and politically. It is true that political developments in Germany
have recently given more grounds for doubt about this . . .
32
But underlying economic structures had not changed. Like Britain,
Germany was an industrial nation with a great, if under-utilized, manu-
facturing capacity and an appetite for natural resources that domestic
sources alone could not hope to satisfy. Williams Deacons believed that
people like themselves doing reimbursement business ought to be in a
strong position because Germany was only too anxious for that kind of
business to go on. As the Bank put it, it would be madness for them to
deprive themselves of the credit necessary to obtain essential raw mate-
rials abroad.
33
Yet the brutal consolidation of power by the Nazis in the course of
1933 and 1934 clearly demonstrated to the world that violence and ter-
ror would be the hallmarks of the new Germany.
34
Among the victims
were, of course, the Jews. Especially vulnerable was the Rothschild fam-
ily, whose name was almost synonymous with international nance: their
properties and foundations were attacked from the outset of the Third
Reich.
35
From the 1920s N. M. Rothschild & Sons, the London house,
had forged the closest possible alliance with Barings and Schroders. The
three banks had together formed a powerful cartel which acted as a com-
petitive unit, each taking the lead in a particular country while pro-
ts and liabilities were split between them.
36
Whatever their Standstill
commitments were, the Rothschilds decided, in 1933, to accept pay-
ment in Register marks from their German debtors. Register marks one
of the several categories of blocked mark accounts that were to oper-
ate under the system of exchange controls in the Third Reich could
be traded on the international market but only at heavy discounts of
31
R. P. Shay, British Rearmament in the Thirties (Princeton, 1977), pp. 42, 145.
32
Memo., 29 May 1933, RBOS GB 1502/WD/50/6.
33
Ibid.
34
P. Brendon, The Dark Valley. A Panorama of the 1930s (2000), pp. 2434.
35
N. Fergusson, The Worlds Banker. The History of the House of Rothschild (1998), p. 999.
36
P. Ziegler, The Sixth Great Power. Barings 17621929 (1988), p. 351.
30 per cent or more. Yet the loss suffered was the price the Rothschilds
were prepared to pay in order to have nothing more to do with Germany
at all.
37
This action appears to have been unique: no other British bank broke
ranks and withdrew from Germany. Yet there were those who publicly
urged them to do just that. One of the most persistent critics of pol-
icy towards Germany was Einzig, the nancial journalist. Writing in The
Banker in early 1934, he reminded readers of a simple truth: credits were
frozen from the Citys, rather than the debtors, point of view. Every
three months new import transactions could be nanced with the aid
of a new batch of bills sent by the debtors. Einzig argued that the con-
tinuation of the Standstill was no longer a vital issue for London, and
that Germany should be warned that Britain would not suffer if it came
to an end.
38
Private warnings also reached the Foreign Ofce about the
dangers ahead. In late 1934 Christie, who was a source of much secret
intelligence, informed Vansittart that German industrial reinvigoration
was self-evidently based on rearmament orders.
39
Bonds and bondholders
Germanys international debts comprised a variety of different types of
obligation. However, in contrast to the Standstill the part played by
Britains other commitments in Germany the long- and medium-term
debts has received little attention from historians. As far as Britain
was concerned, this class of securities was, collectively, bigger than the
Standstill debt. In mid 1934, long-term debt amounted to more than
60 million whereas the total volume of Standstill bills on the London
market represented, at that point, 34 million of British capital.
40
There
were two categories of long-term debt: the Reich loans, principally the
Dawes and Young Loans, and the non-Reich loans oated by German
cities, municipalities and utilities. While individual investors and institu-
tions around the world subscribed to both kinds of issues, they differed
in one fundamental respect: only the Reich loans were guaranteed by the
participating states. Bonds for the Dawes and Young Loans, for exam-
ple, were issued by the Bank of England; Niemeyer, an adviser to the
Governors, was a member of the Council of the Corporation of Foreign
37
Reid memoirs, p. 14, Barings.
38
P. Einzig, Germanys default, The Banker 29 (1934), 122.
39
T. P. Conwell-Evans, None So Blind. A Study of the Crisis Years, 19301939 (1947), p. 25.
40
Waley and Leith-Ross minutes, 23 June 1934, T 160/534/13460/08. See also memo. by
Lever (Prudential), 18 Mar. 1937, BoE OV9/100. By adding in the Potash Loan, the
total long-term gure was increased by some 12 million.
246 Neil Forbes
Bondholders.
41
Non-Reich loans, on the other hand, enjoyed no such
protection.
All international creditors of Germany were confronted with a choice:
either to liquidate holdings and accept the big losses involved, or to try
to work within the constraints imposed by Germanys exchange con-
trols. There was nothing new about the latter; creditors had to contend
with the interruption to the free ow of international payments once
they were introduced as an emergency measure in 1931. Under Hitler,
however, the system not only became progressively tighter; it also pro-
vided a means to exploit and manipulate foreign creditors. More worry-
ingly still, it became clear that exchange controls were being used as
an important device for restructuring the German economy in prepara-
tion for war: in allocating scarce resources of Devisen (foreign exchange)
to pay for imports, raw materials required for rearmament were given
priority.
On 9 June 1933 the Hitler government proclaimed a law which
announced a moratorium on all public and private long-term debts con-
tracted before July 1931. By means of this law a Konversionskasse was
created into which the debts were to be paid. Foreign creditors were to
receive scrip, or coupons, as part of their interest quotas. This, in turn,
they could sell at a 50 per cent discount to the Golddiskontbank for for-
eign exchange. The creditor countries quickly secured the exclusion of
the Dawes and Young Loans from the moratorium, although the threat
was renewed the following year.
Like the short-term creditors before them, the bondholders were con-
fronted with the need to coordinate action at an international level. With
the announcement of the transfer moratorium, the Committee of British
Long-Term and Medium-Term Creditors of Germany was hastily set up.
Worley of the British Insurance Association served as chairman of the
new body. From the start, however, the lead in negotiations was taken
by Lever of the Prudential, who replaced Worley in March 1937 when ill
health forced the latters resignation.
The Treasury reacted in a depressed and resigned manner. The
German moratorium appeared part of a continuum: rstly a freeze of
short-termdebts was secured, then reparations payments were ended and
now a default on long-term debt was threatened. But, given the Citys
assumption that the Reichsbanks intention was to rebuild resources, the
Treasury remained quiescent.
42
But the Foreign Ofce desired action,
and not just against Germany. The hostile criticism directed against the
41
The Councils Annual Reports are in Guildhall Library.
42
S. D. Waley memo., 19 June 1933, T 160/465/8797/01.
City focused, in part, on the comparative status of the two newly formed
bodies concerned with the German debts. The bondholders, the Foreign
Ofce assumed, were made up of a mass of private investors; no one
could expect them, therefore, to be as effectively organised or to put up
as good a ght as the short-term creditors with their inuential connec-
tions in both Britain and Germany. More than this, by acquiescing in
the tactics practised by Hjalmar Schacht President of the Reichsbank
of discriminating between creditors, British bankers stood accused of
ignoring the plight of their fellow, but ordinary, compatriots.
43
That, Reid recalled, was precisely what prompted him to become
involved in representing the bondholders. Barings had relatively small
Standstill commitments and were thus free from the suspicion that in
the event of a conict between the short-term creditors and the investors
the latter might be regarded as less important. Tiarks was nominated
as the other British representative because Schroders was more intimately
acquainted with Germany than any other merchant bank.
44
What Reid
could not have foreseen was just how much time he would be spending,
in London and Berlin, on the affairs of the bondholders.
In response to the unwelcome utterances emanating from the Reichs-
bank, the issuing houses for the London oatations of the German loans
held a meeting in late July at Barings. The purpose was to consider the
questions arising from the creation of the Konversionskasse. Peacock, a
Bank of England director and, like Reid, one of the managing direc-
tors of Barings, presided over the meeting. Others present were Robert
Brand (Lazards), Anthony de Rothschild (Rothschilds), Henry Tiarks
(Schroders), Olaf Hambro (Hambros Bank Limited) and H. F. H. Guin-
ness (Guinness, Mahon & Company). The operation of the Konversions-
kasse did at least present a new business opportunity for the merchant
banks to make a small amount of money. Any British or foreign credi-
tor holding scrip could offer it for sale through the issuing houses and
each house would receive 2.5 per cent commission on the scrip bought
through it. Schroders was to act on behalf of the houses and keep the
Golddiskontbank informed of the amounts of scrip lodged in London
awaiting sale. At a subsequent meeting the following month, the decision
was taken to send Frank Tiarks and Reid to Berlin. The objective was, as
with the Standstill, to try to secure a united front of all the creditor coun-
tries, preferably under the Citys leadership. Consequently, what really
upset the British bankers was the news that the Reichsbank appeared to be
43
Sargent minute, FO 371/16697/C6025. Sargent was made Assistant Under-Secretary
in 1933.
44
248 Neil Forbes
offering the Swiss special terms (based on so-called additional exports
from Germany) and that the latter appeared intent on accepting them.
45
Puhl made a director of the Reichsbank in 1934 and then managing
vice-president from 1940 until the end of the war
46
wrote to Tiarks
stating that it was open to Britain to decide whether to negotiate on
a similar basis to that of the Swiss. But throughout the 1930s British
bankers vigorously opposed this option. Tariffs and the departure from
the gold standard were the price the City had been prepared to pay in
order to try to repair some of the damage wreaked by the depression and
nancial crisis. But any additional intervention at governmental level,
by encroaching on what little economic liberalism was left, might have
caused irreparable harm to the Citys prospects for recovery. Reid wrote
to Millis, his colleague in Barings that it is so easy for people like Lever
and the Board of Trade and the City Editor of The Times to boil with
anger; it was better, rather, for the bondholders to accept 50 per cent
than for the country to take the path of the Swiss and plunge deeper
into the mire of licensing imports and clearing arrangements.
47
If British
bondholders seemed reluctant to put pressure on their government to
bring trade matters into the negotiations with Germany it was not because
they were a poorly organized group of individual investors but because
their representatives were of the same stamp as the short-term creditors.
The Foreign Ofce was right to point to the importance of the long-
term debts. Excluding the Dawes and Young Loans, the long-term debt
held by Britain in 1934 was approximately 32 million not far short
of Standstill debt of which one half comprised bonds issued on the
London Stock Exchange. However, ofcials seemed unable to under-
stand the structure of holdings. When Reich and non-Reich loans were
taken together, British investment trust and insurance companies held
about 70 per cent of the total debt.
48
Indeed, long-term securities were
held by a cross-section of City institutions; joint-stock and merchant
banks both subscribed to the various issues. The City of Hamburg Loan
of 1926, for example, raised 2 million in London. In February 1939
Schroders received a list from the Hamburg authorities of the banks
holding their treasury bills; included were the Hong Kong and Shanghai
Banking Corporation, the Royal Bank of Scotland, Barings, the Midland,
Westminster and Barclays.
49
45
Memo. of meetings, 28 July, 23 Aug. 1933, Barings 200575.
46
D. Marsh, The Bundesbank. The Bank that Rules Europe (1992), p. 131.
47
Puhl to Tiarks, 29 Sept. 1933, and Reid to Millis, 21 Oct.1933, Barings 200575.
48
Reid to Dean (Bank of England), 16 Aug. 1934, Barings 200582.
49
Gemeinderverwaltung der Hansestadt Hamburg to Schroders (London), 23 Feb. 1939,
Barings 200806. Barclays holding, at 175,000, was the largest.
It should also have been obvious why the British insurance industry
wished to be in the forefront of British efforts to defend bondhold-
ers. As the tension between Britain and Germany mounted in autumn
1933, Lever wrote to Barings concerning the Prudential and the German
coupons. What he had in mind was the operation of large institutions
such as ours which by virtue of the nature of their investments in Germany
will have large amounts of scrip paid to them direct and which obviously
could, if desired, be negotiated direct in Germany.
50
A temporary agreement was reached with the Reichsbank on
31 January 1934, but only after Britain had threatened to impose a pay-
ments clearing mechanismon German imports. The creditor representa-
tives, meeting in Berlin, agreed to end discrimination in the second half of
the year. Interest payments were to be transferred in the proportion of 30
per cent cash and 70 per cent scrip, but redemption by the Golddiskont-
bank was increased from 50 to 67 per cent of face value. To the Foreign
Ofce, the moratorium affair was yet another appalling demonstration of
the failure to coordinate policy with the City authorities. The Governors
independent interventions were to blame; Vansittart wished the country
were well rid of him though I suppose that such sentiments are heresy
in his City Cenaculum.
51
Afurther transfer conference was held in May and the provisions which
emerged were nally conrmed, after more British threats, by the Anglo-
German Transfer Agreement of 4 July 1934. This operated until, in 1938,
the Anschluss made revision necessary. Sterling was provided for the
purchase of Dawes and Young coupons; interest on loans other than
these was paid by means of funding bonds (4 per cent interest, a sinking
fund of 3 per cent and a nal repayment period of ten years).
52
Curiously, while it was Leith-Ross, Chief Economic Adviser to the
British government, who made the agreement, it was not the Treasury but
Reid who oversaw the implementation in the following years. Still, as one
historian of Barings suggests, the bank had frequently been called upon to
act almost as an armof British foreign policy.
53
Reid felt that the job fell to
himbecause there was no one else prepared to do it. In an atmosphere that
was full of mistrust, negotiating with the obstructive Germans was never
easy. But engaging in the intellectual exercise of translating texts helped
to improve matters because, he believed, it appealed to the German
mentality.
54
50
Lever to Millis, 1 Nov. 1933, Barings 200576.
51
FO 371/17676/C749, minutes, 1/2 Feb. 1934.
52
For details, see E. V. Francis, Britains Economic Strategy (1939).
53
Ziegler, Sixth Great Power, p. 354.
54
Reid memoirs, pp. 1718, Barings.
250 Neil Forbes
In May 1934 Arthur Villiers, a managing director of Barings, consid-
ered that the bank had done its share for the common good by letting
Reid go to Berlin, although it hardly seemed fair to the bank or to Reid
that he should have to be troubled with all the detail without professional
assistance. While in Berlin Reid had, however, found new work for his
bank. On the instructions of the Golddiskontbank, Barings bought bonds
to the value of 12,000. The issue was the City of Cologne Sterling Loan
(6 per cent) 1928 and the bonds were sent round to Higginson & Co.,
the issuing house, for cancellation. The Golddiskontbank had bought
scrip and various kinds of blocked marks before, yet up to that point
it had always been the German exporter who bought bonds. However,
from the point of view of facilitating additional exports, the purchase of
the Cologne bonds had been a very protable transaction for the Gold-
diskontbank. From Berlin Reid wrote
To the extent to which they buy bonds in London, they propose to use Barings. I
have said that we should be glad to do the business for them. If it goes on it might
mean a reasonable amount of Stock Exchange orders for us, and no publicity or
objection in that way to our doing it.
Reid felt that Barings could not go far wrong in doing this particular
business. The Golddiskontbank was 95 per cent owned by the Reichsbank
and the two institutions were the only banks specically excluded from
the transfer-moratorium law. But Reid ended his letter on a far more
sombre note: The outlook is rather murky today, and the difculties
great. The man in the street seems very depressed and unhappy and
uncertain about the situation in general.
55
Reid continued to hope for orders for bond purchases. Writing from
Riga in May 1935, he asked Barings to send bond prices to the Konver-
sionskasse once a week. Reid added wryly that as they were not in the same
building as the Reichsbank they did not see the latters Times and could
not afford one themselves.
56
The practice, engineered by Schacht, of pur-
chasing bonds at depressed prices did not escape from harsh criticism.
Reids defence was a version of the one mounted by many of Germanys
creditors. He argued that the Golddiskontbank had to be allowed to make
a prot on bond re-purchases. The prot enabled the German author-
ities to subsidise exports and it was the foreign exchange provided by
exports which enabled the bonds to be purchased. Reid considered that
if the Golddiskontbank received only the equivalent of the external market
price it would not be able to purchase any bonds.
57
55
Villiers (London) to Reid (Berlin), 16 May 1934, and Reid (Berlin) to Millis, 8 May
1934, Barings 200581.
56
Letter from Reid (Riga) to A. H. Carnworth (Barings), 30 May 1935, Barings 200608.
57
Reid (Aberdeenshire) to Millis, 13 Oct. 1934, Barings 200582.
But the threat posed by the Third Reich was growing all the time.
British bankers struggled to nd an answer to two related puzzles: was
Schacht, clearly a nationalist and conservative but seemingly not a Nazi
fanatic, likely to remain inuential in the Third Reich and how could the
Standstill debt be signicantly reduced without suffering severe losses?
On the question of Schachts position a clear lead was given by Norman
and Tiarks. The Bank clung to the ideal that central bankers repre-
sented an international, professional elite able to communicate at a level
above that of national politics. Hopes continued to rest on what might be
achieved through the agency of the Bank for International Settlements
based in Basel. But such convictions only served to expose the contra-
dictions inherent in Normans position. He constantly emphasized how
important it was for central banks to remain free fromgovernmental con-
trol. At the same time, at Basel, politics and international nance were
interwoven.
58
Norman, writing to Addis, his friend and former colleague, described
Schacht as my regular stimulant at Basel but to others an irritant.
59
In December 1935 Tiarks, in Berlin, wrote to Brand that he had found
Schacht in great form, full of health and condence, and that his posi-
tion was stronger than ever.
60
The following March Schacht attended
an Anglo-German Fellowship dinner in London. Cobbold, an adviser at
the Bank, heard that Tiarks had performed much publicity for Schacht
along the lines that the excellent relations between the City and Germany
depended entirely on the presence of the Reichsbank president. Indeed,
the Bank of England itself did all it could, through staff-exchange visits
for example, to foster close relations with the Reichsbank and its ofcials.
On 22 January 1936 Schacht reached the age of sixty. To celebrate the
occasion the Bank sent him a clock dated 1815 a reminder, perhaps, of
what Anglo-Prussian alliances could achieve.
61
At a meeting of the London clearing bankers in May 1936, Norman
opined that Schacht was a barrier between the London banks and the loss
of their Standstill money because his departure from nancial control
in Germany would be likely to lead to chaos. However convincing that
58
P. Geddes, Inside the Bank of England (1987), p. 61; P. L. Cottrell, The Bank of England
in its international setting, 19181972, in R. Roberts and D. Kynaston (eds.), The Bank
of England. Money, Power, and Inuence, 16941994 (Oxford, 1995), p. 95.
59
Norman to Addis, 14 April 1935, Sir Charles Addis papers, School of Oriental and
African Studies Library, London, PP MS 14/459.
60
Tiarks to Brand, 2 Dec. 1935, Brand papers (uncatalogued), 191, Bodleian Library,
Oxford.
61
Cobbold note, 20 Mar. 1936, and note, Reichsbank personalities, 30 July 1936, BoE
OV34/85. Eventually, ofcials once warmly regarded in London, such as Puhl, were to
become estranged as the effects of Gleichschaltung ineluctably changed the character of
the Reichsbank.
252 Neil Forbes
particular argument might have sounded to his fellow bankers, Norman
was also capable of being misguided to the point of perversity. For he
went on to assert that the new arrangement by which G oring made
Plenipotentiary of the Four Year Plan was put over Schacht had in fact
been intended to strengthen the latters hands.
62
By late 1937 Schacht himself appeared concerned to point out the
reality of certain aspects of life under the Third Reich. On returning from
Berlin Tiarks reported to a meeting of the Joint Committee at Martins
Bank on 5 October that he had asked Schacht for a reduction in Standstill
debt. In turn, the Reichsbank president had enquired whether Tiarks
knew G oring, because he was the man who had to be tackled if any
pressure was to be exerted. Schacht also mockingly asked Tiarks whether
he thought it likely that even a single penny would be found for the
reduction of any external debt at a time when German bread was being
adulterated owing to the shortage of Devisen.
63
In spite of this, Tiarks still
felt able, one month later, to inform the Accepting Houses Committee
that he thought Schachts position in Germany was better than it had ever
been.
64
The debate over repayment of Standstill capital began in earnest in
October 1936. Lidbury was the leading proponent of repayment.
65
His
frustration over the direction of the Standstill negotiations reached new
heights. He angrily contrasted the two months enjoyed by the accepting
houses to consider Standstill matters with the single week afforded the
clearing banks because of a delay in notifying the Committee of London
Clearing Bankers.
66
By 1937 Lidbury and McKenna, chairman of the
Midland Bank, were no longer prepared to leave the negotiations for
the continuation of the Standstill simply in the hands of the accepting
houses.
67
The City and the coming of war
Little was achieved, however, in securing greater Standstill repayments
before the outbreak of the war. In June 1940, with Britain facing the
prospect of invasion, the clearing bankers met to ponder the future of the
62
Scott (Manager, Williams Deacons Bank, London ofce, Birchin Lane) to H. Bradburn
(Head Ofce, Manchester), 7 May 1936, RBOS GB 1502/WD/50/6.
63
Ibid., Scott to Thomson (Head Ofce, Manchester), 5 Oct. 1937.
64
Note of meeting, 4 Nov. 1937, Brand papers 193.
65
Joint Committee minutes, 14 Oct. 1936, Brand papers 192.
66
Lidbury undated notes on Joint Committee letter, 19 Nov. 1936, RBOS GB 1502/
WES/867/3.
67
Forbes, Doing Business with the Nazis, p. 183; note of Joint Committee meeting, 20 Oct.
1937, BoE OV34/138; Kynaston, City of London, III, p. 439.
Standstill in the context of collecting debts from neutral countries. The
suggestion of Beaumont Pease (nowLord Wardington) to revive the Joint
Committee because, as the last chairman, he had been left with Tiarks
to carry on with most of the work, was turned down. Private notes by
Williams Deacons captured the mood of the meetings: It seems that the
revival of Tiarks was not considered desirable; the banks could not do
very much for the moment: Still, we shall always keep in the back of our
minds that certain German Banks owe us some money although that is
not likely to be the hardest thought we shall harbour against the whole
crowd of them.
68
Throughout the decade, the British government accepted the conven-
tional view maintained by the Treasury that the administration of ofcial
or semi-ofcial nancial agreements should be left as far as possible in
the hands of those interests directly involved. Early in 1938 Blessing, the
future president of the Bundesbank,
69
conrmed to the Bank of England
that Britain was the only country where Germany negotiated directly with
the creditors; in all other countries, the Reich government negotiated with
the government of the creditor country.
70
Such arrangements left leading
City gures in extremely responsible positions and helped to create the
impression that bankers were secretively exercising great inuence over
the government. To suspicious minds in the Foreign Ofce, greedy and
selsh British nancial interests were being allowed to take precedence
over the pressing and vital needs of the nations foreign policy. Yet, even
if British bankers occupied inuential positions, such criticism neglected
to take into account that the City was itself divided over policy towards
the Third Reich.
Moreover, representing Britains external nancial interests could be
said to involve rather more than the exploitation of short-term oppor-
tunities to make money. During the discussions to revise the Transfer
Agreement in the aftermath of the Anschluss, Reid wrote to Cobbold,
at the Bank of England, to ensure that the principle was upheld that all
bonds of an issue made in London by a British issuing house were treated
alike; any foreign investor who sent his money to London would obtain,
therefore, the same protection as a British holder. Acting on behalf of the
nine issuing houses Reid regarded it as important for the good name of
the houses and of the City that there should not be any discrimination
on account of nationality.
71
68
Notes, 6, 7 June 1940, RBOS GB 1502/WD/50/6.
69
On Blessings career see Marsh, Bundesbank, pp. 506.
70
Gunston memo., German long-term debt negotiations, 7 Jan. 1938, BoE OV9/100.
71
Reid (Barings) to Cobbold, 20 June 1938, BoE OV6/291.
254 Neil Forbes
As the threat posed by the Third Reich grew ever greater, Britains
preparations for war came to depend in no small measure on the fourth
arm of defence: the nations nancial and economic reserves and the
ability to husband those reserves during the course of a long conict.
Undeniably, therefore, the preservation of the Citys institutional base
contributed to rather than detracted from those preparations and
enhanced the likelihood of national survival. In analysing Britains
defence and deterrence policies in the mid 1930s, one historian has
pointed to a strategic dilemma: while the Foreign Ofce was concerned
with how to prevent the next war, the worry for the Treasury was how
much to pay for its prevention while maintaining normal trade.
72
Con-
fronted by an age of economic nationalism, the City struggled to preserve
something at least of the cosmopolitan role that it had once enjoyed. In
this sense, maintaining commitments outside the Empire held an almost
symbolic signicance after 1931. Nowhere was this more so than in the
case of Germany where so much British capital was tied up as a result of
the long-standing and close nancial relationship that had evolved. With
the rise of the Third Reich, however, the political costs of maintaining
those commitments had to be added to the purely nancial ones. Unlike
other international agreements, the Hitler dictatorship did not resile from
the Standstill Agreement. It is questionable, therefore, whether on bal-
ance its operation favoured the interests of the Third Reich more than
those of Britain. For, as Reid was to conclude after the war, there was
no doubt that the Standstill and the moratorium on long-term debt had
facilitated German rearmament.
73
By being pro-German the City, just
like the rest of British society, could not avoid being to some degree also
pro-Nazi.
72
G. Post, Jr, Dilemmas of Appeasement. British Deterrence and Defense, 19341937 (Ithaca,
1993), p. 21.
73
Part V
19452000
13 Keynesianism, sterling convertibility, and
British reconstruction 19401952
Scott Newton
Those who believe that British economic policy in the twentieth century
reveals a rift between commercial and industrial capital have pointed to
the commonplace view in the City of London, the Bank of England and
the Treasury that international nancial commitments should take prece-
dence over policies of national economic development.
1
Both the return
to the gold standard in 1925, on the grounds that this would bring valu-
able business back to the City after wartime disruption, and the creation
of the Sterling Area in the 1930s have been taken as examples of how pol-
icy has followed this priority. Another case study cited in recent years has
been the attempt to reassert the pound as an internationally convertible
trading and reserve currency in the early 1950s, notwithstanding the con-
sequences of this for post-1945 reconstruction with its own imperatives
of full employment and economic expansion.
Some commentators, notably Middlemas and also Bulpitt and
Burnham,
2
have challenged this interpretation of external policy in the
1950s, arguing that the sterling liberalisation moves were in fact attempts
to galvanise an over-protected, corporatist economy with the discipline
of the market. There is no doubt that the Conservative government
which came to power at the end of October 1951 was committed to the
steady removal of the controls and regulations which had been custom-
ary throughout the years since 1940. Yet the performance of the postwar
British economy was respectable by comparison with the advanced indus-
trial societies of western Europe. It is maintained here, on the basis of
1
See, for example, R. W. D. Boyce, Capitalism at the Crossroads 19191932. A Study in
Politics, Economics and International Relations (Cambridge, 1987); P. J. Cain and A. G.
Hopkins, British Imperialism, 2 vols. (1993); W. Hutton, The State Were In (1995); G.
Ingham, Capitalism Divided? The City and Industry in British Social Development (1984);
F. Longstreth, The City, industry and the state, in C. Crouch (ed.) State and Economy
in Contemporary Capitalism (1978), pp. 15790; S. Newton and D. Porter, Modernization
Frustrated. The Politics of Industrial Decline in Britain Since 1900 (1988).
2
K. Middlemas, Power, Competion and the State, II: Threats to the Postwar Settlement: Britain,
196174 (1986), pp. 196204; J. Bulpitt and P. Burnham, Operation Robot and British
political economy in the early 1950s: the politics of market strategies, Contemporary
British History 13/1 (1999), 131.
257
258 Scott Newton
evidence fromthe Bank of England and especially the Treasury, that there
were other motives for the turn to economic freedom associated with
changes to external policy after 1951. These can be found in a growing
anxiety that the future of sterling as an international currency was incom-
patible with the politico-economic direction taken by Britain during the
1940s.
However, the newinitiative met stubborn resistance within government
and the civil service fromthose for whomthe commitment to full employ-
ment took precedence over the restoration of sterling to its prewar emi-
nence. The result was a stalemate, and for a brief time in 1952 the British
state hovered between two radically different policy choices. Finally it
chose a compromise which was politically acceptable even though it was
based on the fantasy of aid fromthe United States. The battles over exter-
nal policy discussed here and the method of their resolution in 19523
revealed the fragility of the reconstruction consensus in Britain, and pos-
sibly entailed serious long-term economic consequences.
Keynes and British reconstruction within
an international context
The collection of social and economic objectives which during the Sec-
ond World War became grouped under the heading of reconstruction
had been constructed by many hands.
3
One foundation had been laid
by Keynes in his General Theory, published in 1936. He argued that if
capitalism were to regain public legitimacy after the depression it had
to guarantee full employment of resources and an equitable distribution
of wealth, and that these objectives could only be achieved by conscious
state action.
There was however no compatibility between the national economic
autonomy required for the pursuit of Keyness socialised capitalism, and
membership of an international economic order based on gold-standard
rules. These rules required adjustment to external disequilibrium via
deation of the home market, so reducing the volume of imports while
resources of capital and labour owed into the export sector whose growth
would be stimulated by a fall in domestic prices relative to overseas
prices. Even after the forced departure fromgold in 1931, the fundamen-
tals of policy had remained unchanged: although the attempt to restore
the City to its pre-1914 position had failed, it was replaced by a new
role in which Britain dominated a regional economic bloc, based on the
3
See, for example, P. Addison, The Road to 1945 (1975); and Newton and Porter, Mod-
ernization Frustrated, chs. 34.
Keynesianism 19401952 259
Commonwealth and Empire, whose members continued to use sterling
as a trading and reserve currency.
Keynes believed that the pursuit of deationary measures by the British
government and by governments worldwide which were suffering from
external dis-equilibria was a cause of the depressions persistence and
severity. He called instead for
the policy of an autonomous rate of interest, unimpeded by international pre-
occupations, and of a national investment programme directed to an optimum
level of domestic employment which is twice blessed in that it helps us and our
neighbours at the same time.
4
It followed that governments committed to Keynesianism had either to
establish an international economic order where deation did not fol-
low from external imbalance, or to opt for self-sufciency, with trade
restricted to bilateral, barter arrangements designed to secure commodi-
ties which could not be produced or made at home (or if they could, only
at very great cost).
Although the Treasury had moved towards Keynesian economics by
1939, it had not by any means fully embraced the equilibrium analysis
of the General Theory.
5
Its qualications could not survive the coming
of the Churchill wartime coalition government and the commitment to
a total war which required the full employment of capital and labour.
In order to sustain this in the face of inevitable pressures on the foreign
exchange reserves, the government introduced measures to tighten of-
cial control over the external sector. Sterling convertibility was suspended
for the rst time since the Napoleonic wars while foreign sterling balances
were blocked and bilateral trade and payments arrangements introduced
to cover economic relations with neutral states and non-Sterling-Area
allies. The Citys merchant banks were no longer able to provide over-
seas credits and short-term nance for trade. The discount houses found
themselves unable to make money fromthe acceptance business. Between
the wars these institutions had helped to maintain Londons role as an
international nancial centre (albeit second to Wall Street). Now they
were driven to dealing in short-term gilt-edged stock and Treasury bills
issued to mop up savings.
6
It all meant an unprecedented level of state intervention in the Citys
activities and their subordination to the demands of the national economy.
4
J. M. Keynes, General Theory of Employment, Interest and Money (1936; 1973), p. 349.
5
S. Newton, Prots of Peace. The Political Economy of Anglo-German Appeasement (Oxford,
1996), pp. 701.
6
R. Roberts, The City of London as a nancial centre in the years of depression, the
Second World War, and postwar ofcial controls, 193161, in A. Gorst, L. Johnman and
W. Scott Lucas (eds.), Contemporary British History 193161 (1991), p. 70.
260 Scott Newton
No such steps had been taken in the First World War. Yet the new mea-
sures to insulate domestic production from external nancial crisis did
not stop Britain from nishing the war as the worlds greatest debtor.
Total war generated an unprecedented demand for imports, which were
supplied via an increasing reliance on Lend-Lease aid from the United
States and through extensive borrowing fromthe Sterling Area, leading to
the accumulation of over 3 billion-worth of sterling balances by 1945. It
was obvious that the ambitious reconstruction programmes, with which
by 1943 all major political parties were identied to a greater or lesser
extent, would maintain this dependence: they needed external supplies
of capital goods, raw materials and foodstuffs which Britain would not
immediately be able to nance through exports. Indeed at the start of
1945 exports were less than a third of their level in 1938, a year when
there were still 1.6 million unemployed.
7
How could a national invest-
ment programme directed to an optimum level of domestic employment
be continued in these circumstances?
Keynes, by this time the dominant inuence in macroeconomic policy,
argued that there were two approaches to the problem. The rst involved
the maintenance after the war of bilateral trade and payments agreements
and retention of the wartime machinery to protect external nances. The
second centred on a search for external support from the United States
in return for concessions to Washingtons determination to build a world
economic order characterised by non-discrimination in trade and pay-
ments (which meant sterling convertibility for current transactions at
least). Not without some misgivings Keynes recommended the latter on
the grounds that it would avoid probable reductions in living standards
as well as international economic rivalry with the USA. But the results
were disappointing.
What nally emerged from Anglo-American negotiations in 1944 were
the Bretton Woods institutions, the International Monetary Fund (IMF)
and the International Bank.
8
Fromthe British perspective the key organi-
sation was the IMF, but this was to be largely inactive in the postwar tran-
sition period to normal economic relations. Ultimately the best Keynes
was able to manage was a loan of $3.75 billion from the United States,
plus $650 million as a nal settlement of Lend-Lease, and a further
loan of $1.25 billion from Canada. In return, Britain agreed to embrace
the Bretton Woods obligations of sterling convertibility at a xed rate of
exchange as early as 15 July 1947.
7
S. Newton, A visionary hope frustrated: J. M. Keynes and the origins of the postwar
international monetary order, Diplomacy and Statecraft 11 (2000), 197.
8
For a full recent account see R. Skidelsky, John Maynard Keynes, 3 vols. (19832000), III:
Fighting for Britain 193746, chs. 67, 910.
Both Keynes and Attlees Labour government have been criticised for
accepting the commitment of convertibility.
9
Given the postwar inter-
national shortage of dollars, it enabled Britains creditors to abandon
sterling for dollars rather than hang on to a currency which could not buy
them more than a small proportion of their requirements. The resulting
dollar drain was so severe that the government suspended convertibil-
ity after only ve weeks, thereby bringing down the Anglo-American
effort to reconstruct the international economy on the basis of Bret-
ton Woods rules. It has been alleged that both Keynes and the govern-
ment acted irresponsibly, and that events proved correct those in the
Bank of England and the Treasury who had shown increasing unhap-
piness with the direction of foreign economic policy during the war
years.
10
Supercially the positions taken by the parties to this disagreement are
surprising. Against Keynes and his supporters within both the Churchill
and Attlee governments there stood a strange coalition uniting the Bank
of England, senior members of the Treasury and some old die-hard imp-
erialists centred on Lord Beaverbrook. Beaverbrook argued that commit-
ment to Bretton Woods would repeat the errors of the gold standard:
reconstruction would once again be sacriced for the sake of external
nancial probity.
11
Meanwhile the Bank produced, with some support
in the Treasury, its own design for the organisation of postwar trade and
payments. This actually envisaged a continuation of the wartime sterling
arrangements; a common, dollar-saving, import policy on the part of all
Sterling-Area members; and controls on the movement of capital from
the area to the rest of the world.
12
The Bank believed it would be possible
to keep this group in one piece by threatening to block the balances of
members who liberalised their exchange controls and failed to discrim-
inate against dollar goods. Its bilateralist strategy was virtually identical
to the one seen by Keynes himself as the only alternative to his search for
American support which was compatible with salvaging some at least of
the reconstruction agenda.
In fact the apparent heterodoxy of the Bank should not be taken as a
sign that it had abandoned its old commitment to sterling, any more than
Keyness willingness to establish a newinternational nancial architecture
9
E. Dell, The Chancellors. A History of the Chancellors of the Exchequer 19451990 (1996),
p. 54.
10
See Sir Richard Clarke, Anglo-American Economic Collaboration in War and Peace, ed. A.
Cairncross (Oxford, 1982), ch. 3; and J. Fforde, The Bank of England and Public Policy,
19411958 (Cambridge, 1992), ch. 2.
11
D. E. Moggridge, Maynard Keynes. An Economists Biography (1992), p. 732.
12
Notes by Robbins and Eady on Banks proposal, 26 Feb. 1944, T 273/336.
262 Scott Newton
in concert with the USA should be taken as a return to the neoclas-
sical economics of his youth. The Bank was aware that in the circum-
stances of the 1940s maximising sterlings international role could not
be achieved if Britain were simultaneously to embrace both convertibil-
ity and the funding of sterling balances. As far as senior executives like
Cobbold (executive director 19429) and Siepmann (an adviser 19425)
were concerned, the controlled currency bloc they advocated involved
a domestic economic policy which postponed reconstruction plans and
put external probity rst. This meant, rst, no postwar dependence on
US credit, and secondly, running down the sterling balances, starting
with those belonging to non-Sterling-Area countries (worth 632 million
by the close of hostilities) and then those of the larger sterling creditors
such as India and Egypt. Informal agreements would be negotiated with
the other holders so that they restricted drawings on accumulated bal-
ances, tempering domestic policy commitments with this in mind, and
held them either in bank accounts at low rates of interest or in the form
of Treasury bills. In return there would be a promise to reject formal
blocking of balances. The aims were, to start with, the restoration of ster-
lings worldwide creditworthiness; in the medium term, the achievement
of sterling transferability throughout the non-dollar world; and nally,
in a rather remote future, full-scale convertibility.
13
The end of the war
had brought the City to what Kynaston calls the square miles lowest
peacetime ebb in living memory.
14
Its domestic orientation, both with
the system of exchange control and with maintenance by the government
of a rm grip over new issues to guarantee priority to its own borrowing,
was set to continue. There was no prospect that London would be able to
compete with New York as an international nancial centre in the short
or medium term.
15
But the Banks plan for the rehabilitation of sterling
was a road-map for reaching such a destination, fully in keeping with
the Citys traditional role in the world economy, even if the journey took
years.
Commitment to this long-term strategy for the reassertion of sterling
led to widespread distrust within the Bank and even parts of the Trea-
sury for Keynes and his supporters in the government and the economic
section of the Cabinet Ofce, such as Robbins. Eady, the Treasurys
joint second secretary from 1942 to 1945, accused them of a dispar-
agement of the Sterling Area and consequently a disparagement of ster-
ling.
16
Keynes, however, argued that the Banks policy was conceived in
13
Fforde, Bank of England, pp. 502.
14
Kynaston, City of London, III p. 510.
15
R. C. Michie, Introduction, in R. C. Michie (ed.), The Development of London as a
Financial Centre, 4 vols. (2000), IV, p. viii.
16
Memo. by Eady, 26 Feb. 1944, T 273/336.
the interests of the old nancial traditions, which pays no regard to the
inescapable requirements of domestic politics.
17
He maintained that it
was not himself but the Bank which in prioritising international obliga-
tions over commitments to build a fairer society at home was repeating
the error of 1925.
18
There was never much doubt that the Banks alternative would be
rejected. First, leaving aside its implications for postwar relations with
the United States, the policy would require not just the indenite exten-
sion of wartime austerity into peacetime but even, given the inevitable
scarcity of hard currency in the absence of US aid, its intensication.
This was politically unpopular with the leaderships of both the Conser-
vative and Labour parties, aware that a general election was approaching.
Secondly, the leading proponents of the reconstruction project not just
Keynes and Beveridge but the most senior gures in the Labour govern-
ment elected in July 1945 were what the economist James Meade called
liberal socialists. The category included Attlee and Bevin, the Foreign
Secretary (despite some anxieties about Bretton Woods), as well as the
two key cabinet ministers responsible for economic policy Dalton as
Chancellor of the Exchequer, and Morrison as Lord President responsi-
ble for economic planning.
19
They looked not to the establishment of a
completely socialised economy but to one characterised by a mixture of
public and private ownership, progressive taxation and generous expendi-
ture on housing and social services. The external economic policy which
followed from this was therefore incompatible with the bilateralism of
the Bank let alone with Beaverbrooks enthusiasm for imperial and Com-
monwealth unity. It accepted that there was a place for freedom of choice
and that this implied that British costs and prices would have to compete
with those prevailing in overseas markets.
20
In the circumstances of the
time it was believed that the most signicant of these was the market
in the United States which had been hedged around with tariff barriers
prior to the Second World War. In order for these to be removed or at
least reduced Britain had to offer something in return, and it therefore
seemed to be in the interests of its exporters for government to opt for
non-discrimination, provided that mechanisms could be established to
guarantee full employment at all times.
21
17
Quoted in Moggridge, Keynes, p. 734.
18
Keynes to Beaverbrook, 27 April 1944, T 247/40; Fforde, Bank of England, pp. 601,
quoting Keynes to Beaverbrook, 8 March 1944.
19
James Meade diary, 26 Aug. 1945, Meade papers, British Library of Political and Eco-
nomic Science.
20
Ibid.
21
This was the view of Cripps, President of the Board of Trade in 1945: see 3 Sept. 1945,
FO 371/45698/UE4353/1094/53.
264 Scott Newton
This was the thinking which led the Labour government to support
the loan package that Keynes negotiated at the end of 1945, despite its
considerable unpopularity in all political parties as well as in the Bank of
England and the Treasury. Keynes himself admitted that the agreement
fell a long way short of expectations, but defended it on the basis that
it was an attempt to bring closer his goal of international order amidst
national diversities of policies.
22
He also understood that if the loan
agreement, centred as it was on the convertibility provision, was to work
there would have to be some radical alterations to British foreign eco-
nomic policy designed to guarantee the insulation of the reconstruction
programme from external disequilibrium. He proposed substantial cuts
in overseas military expenditure in order to conserve foreign exchange,
and the blocking for ve years of all sterling balances accumulated prior
to 31 December 1946.
23
The attempt to block the sterling balances failed. First, the campaign
took a heavy blow with the sudden death of Keynes in April 1946. Sec-
ondly, as far as the Bank was concerned, blocking was incompatible with
the restoration of sterling to its prewar international role, and instead of
taking unilateral steps it negotiated with creditors on scaling down the
balances.
24
There was an agreement with Argentina, while Australia and
New Zealand each made small gifts equal to a write-off of 15 per cent of
their balances. However, both Dominion governments told British Trea-
sury and Bank ofcials that they would go no further. Larger balance
holders were even less willing to make concessions, and the Bank was
only able to achieve a series of gentlemanly agreements with them by
which accumulated balances were not supposed to be subject to con-
vertibility (to be restricted to the current transactions of residents) after
15 July 1947. The net result of the Banks efforts was that the balances
were actually higher at the end of June 1947 than they were two years
before 3,557 million against 3,136 million.
25
The prevailing worldwide dollar shortage made convertibility in 1947
a gamble anyway, but it is arguable that the Banks refusal to compro-
mise on sterling balances doomed the enterprise. Some of the sterling
creditors did not make even a formal pretence of honouring the under-
standings they had concluded with the Bank. During the brief period of
convertibility from 15 July to 20 August 1947, India, Iraq and Egypt,
out of total balances of 1,576 million, released 112 million.
26
Belgium,
22
Newton, A visionary hope frustrated, p. 201.
23
Ibid.
24
Hugh-Ellis Rees, The convertibility crisis of 1947, Treasury historical memo., 1961,
pp. 12, 30ff., T 267/3.
25
See Fforde, Bank of England, pp. 1018; Rees, Convertibility crisis, 12.
26
D. Wightman, The Sterling Area, Banca Nazionale del Lavoro 4 (1951), 152.
although not a member of the Sterling Area, had increased its sterling
balances by 21.6 million between 1 January and 30 June 1947 before
running them down by 23.2 million between 1 July and 20 August. The
Loan Agreement had calculated that the annual rate of release should not
exceed more than 43.75 million, and clearly this outow was a major
contributor to the nancial crisis which saw net drawings on the gold
and dollar reserves rise from $94.6 million in the week ending 5 July to
$175.9 million in the ve days ending on 15 August.
27
To cover the drain
Britain drew down the American credit by $450 million during the rst
two weeks of August. The situation became unsustainable, and it proved
necessary to reintroduce the wartime Sterling-Area arrangements to pre-
vent the rapid exhaustion of the entire credit. The failure of convertibility
meant the collapse of Keyness efforts to establish an international con-
text which would support British reconstruction. The Bank of England,
whose priorities and actions had indicated continuing dissent from the
reconstruction consensus and preoccupation with the external status of
sterling, had played its own part in this asco.
Sterling inconvertibility, 19471951
The return to inconvertible sterling and bilateralism was supported by
both the Keynesians and those in the Bank and the Treasury who put ster-
ling rst. The differences between the two groups were obscured because
each had good reasons for supporting the reconstructed wartime foreign
exchange regime. As it had during the war the Bank took the view that
bilateralism was an improvement on default, while the Keynesians sup-
ported the controls because they insulated the domestic economy from
the dollar shortage. However, as sterling once again came under pressure
in 1949 this rather supercial consensus started to weaken, until by 1952
it had largely dissolved.
British reconstruction made steady progress under the regime of con-
trols. Full employment was maintained and by 1949 exports were nanc-
ing 85 per cent of imports as opposed to 33 per cent four years earlier.
28
But all this was threatened by a new sterling crisis whose origins lay in
a short, sharp American inventory recession. This developed in the last
quarter of 1948 and lasted until October 1949. The downturn had seri-
ous external consequences for the overseas Sterling Area, whose dollar
income declined by 21 per cent in the second quarter of 1949, and by
41 per cent in the third quarter. Meanwhile British exports to the
27
Dalton memo., CP(47)233, 16 Aug. 1947, CAB 129/20.
28
P. Williams, Hugh Gaitskell (1979), p. 195.
266 Scott Newton
American market slumped, and by 1 July the dollar decit was running
at an annual rate of $2,900 million (720 million). In the absence of
corrective action the reserves would last just six months.
29
The growing crisis left its mark on economic policy. As the amount
of hard currency owing into the Sterling Area declined, so members
were forced to reduce imports from the dollar area, by 25 per cent, in
July 1949. At the same time the Cabinet embarked on a serious exami-
nation of what was called a two-world strategy. This was the reverse of
the non-discriminatory one-world strategy to which the government had
reluctantly committed itself when it signed the Anglo-American Finan-
cial Agreement, and which was still its ofcial objective. Two-worldism
was an alternative by which Britain would retreat into a fortress sterling
bloc supported by bilateralism in foreign trade and payments, and inter-
nally by direction of labour and an intensication of rationing. It might
offer some security for full employment in Britain against the impact of
cyclical recessions in the American economy even though it would have
led to the division of the non-communist world into two major trading
blocs and to a deterioration of living standards at home.
The two-world strategy had little support in the Bank or the Treasury,
where the resolution of the crisis was at rst seen to lie in deationary
measures. Indeed the consensus around bilateralism which had lasted
since 1947 began to break down as the Bank began a reconsideration of
the policy. It was troubled by black-market speculation against sterling.
The deteriorating external position encouraged this activity, but there was
an additional cause for it in releases of sterling balances from accounts
which, by agreement with the holders, were not supposed to be used
for current transactions. In a growing number of international nancial
centres, these were in fact being exchanged for dollars at a rate well below
the ofcial level. By summer 1949 it became possible to buy dollars even
from reputable Wall Street banks at just $3.25 to the pound (the ofcial
rate was 1 = $4.03). This cheap sterling could then be used for the
purchase of British goods, via a European intermediary, at a discount.
H. J. Isner of Ullman and Co. suggested that as much as 33 per cent of
all British exports to the United States were being nanced this way.
30
It
was a trade which undermined the status of sterling and diverted business
away from the international markets in London. On both counts it was
alarming to the Bank, and its initial response to these cheap sterling
transactions had been to extend controls on its use by non-residents. But
it began to appear to some of the Banks ofcials that the only sure way of
29
Economic Policy Committee (EPC) (49)24, 1 July 1949, CAB 134/22.
30
See Fforde, Bank of England, pp. 2345.
halting the speculative activity was by blocking all balances and restricting
the use of the pound to the domestic market. Sterlings international
career would be over. If this was where bilateralism was leading, then, as
far as the Bank was concerned, there had to be an alternative.
This came from Bolton, a long-serving member of the Bank who
had become by 1948 executive director. Bolton and his colleagues now
believed that it would not be possible for much longer to preside over
both blocked balances and an inconvertible currency. Aware that the
government was due to approach the USA for assistance, Bolton argued
that there were only two viable options, both pointing in a one-worldist
direction. The rst, based on nancial support from Washington beyond
Britains Marshall Aid allocation, would allow for substantial releases
of sterling balances and moving to sterling convertibility at a xed rate.
The other, to be followed if no help was forthcoming, embraced drastic
domestic action and a return to the 19319 era when sterling had been
convertible at a oating rate of exchange.
31
The US Treasury was reluctant to part with dollars. It argued that the
dollar drain was a function of excessive demand generated by Labours
reconstruction programme: a shift towards the market was required so
that British costs would fall and dollar earnings increase.
32
In theory this
still left a choice between pure two-worldism and Boltons alternative of
revisiting 19319. But fear of the strategic and economic consequences
owing froma breach with the United States made the rst of these unac-
ceptable, while on the other hand the Attlee government was never going
to resort to measures which brought back memories of the last Labour
governments collapse in 1931. Instead it opted for what Cripps called
a compromise between the one- and two-world strategies.
33
Deation
would be avoided but there was to be a review of public spending and
a reassertion of the commitment to sterling convertibility. At the same
time the Cabinet devalued to 1 = $2.80, intending to demonstrate its
willingness to fall back on the price mechanism rather than the extension
of controls as a means of restoring equilibrium to the countrys external
nances. This package was put together in the hope that it would placate
the US Treasury and unlock nancial aid which would swell the Sterling
Area reserves to 1 billion, a gure considered to be large enough to sup-
port convertibility. But it was not simply a piece of economic pragmatism.
The attempt to pursue a middle way between one- and two-worldism
also involved choosing to stick by liberal socialism and the Keynesian
31
Ibid., pp. 2956.
32
Snyder to Acheson, 10 July 1949, Foreign Relations of the United States, 1949, III,
pp. 8012.
33
EPC (49)73, 4 July 1949, CAB 134/222.
268 Scott Newton
project to locate British reconstruction in an international economic con-
text which always sustained domestic full employment policy.
The British attempt to prise extra dollars from the United States did
meet with modest success. The Truman government committed itself
to a raw-material stockpiling programme which was likely to reverse
the decline in dollar income suffered by Sterling-Area members such
as Malaya. It also agreed to reduce tariffs and increase foreign invest-
ment, as well as to measures designed to stimulate domestic demand.
In 1950 Washington guaranteed Britain reimbursement of gold and
dollars lost as a result of the use of sterling balances by continental
states to reduce debts with the new European Payments Union.
34
The
British believed that these steps signalled a resumption of wartime Anglo-
American co-operation.
35
But in fact the sterling-dollar diplomacy of
194950 drew a line under the era which had opened with Lend-Lease.
The US concessions had only been produced out of anxiety, felt most
strongly in the State Department, that the British economic crisis would
lead to a division of the non-Soviet world into two blocs and the frus-
tration of its hopes for a non-discriminatory world. They were not to be
repeated.
The Bank was not comfortable with the outcome of the 1949 crisis
despite good economic progress in 1950, which ended with the Sterling
Area as a whole in surplus for the rst time since the end of the war. Eco-
nomic growth had been running at slightly over 3 per cent since 1948
36
while industrial production was rising at an annual rate of 7.5 per cent, a
gure not reached in France, Belgium or Sweden, and on a par with the
level achieved in the Netherlands at the time.
37
Until 1951 ination was
contained at 3 per cent and it is not evident that the progress of British
reconstruction was being held back by suffocating corporatism.
38
But
these successes in the real economy did not outweigh the Banks unhap-
piness with the governments reliance on continuing physical controls.
In 194951 especially it continued to make the case against bilateral-
ism and inconvertibility, and argued in favour of decontrol with greater
use of monetary policy in the regulation of demand. The controls were
however regarded by senior government gures as an essential feature
of economic policy. In their absence (said Crippss deputy Gaitskell) it
would be impossible to hold the balance of payments position without
34
S. Newton, Britain, the Sterling Area and European integration, 194550, Journal of
Imperial and Commonwealth History 13 (1985), 176.
35
Franks to Bevin, 19 Sept. 1949, FO 371/75590/UE5984/150/53.
36
R. Middleton, The British Economy since 1945. Engaging with the Debate (2000), pp. 146
7, table 11.1.
37
S. Lieberman, The Growth of European Mixed Economies (New York, 1977), p. 24,
table 1.6.
38
This is the accusation of Bulpitt and Burnham in Operation Robot, p. 22.
unemployment in excess of 1 million.
39
After becoming Chancellor of
the Exchequer himself Gaitskell was increasingly preoccupied with re-
armament and the external difculties which had started to develop as a
result of this, and his ideological commitment to controls was reinforced
by the objective position of the economy as it lurched back into the red
during the course of 1951. Not surprisingly the alternative strategy for
sterling advanced by Bank of England staff made little headway while
Labour remained in power.
The Robot war
It was not until the arrival of Churchills Conservative government in
October 1951 that the advocates of a new external policy were granted
a serious political opportunity. The background to the general election
had been one of mounting economic crisis. The rearmament programme,
which saw defence expenditure rise from 6 per cent to 10 per cent of the
national product between 1950 and 1952, diverted production away from
exports and stimulated demand for imports at the same time. Sterling-
Area members which had hitherto looked to Britain for capital goods
now turned to the United States, and ran down gold and dollar reserves
which had been accumulated during the stockpiling boom. The Sterling-
Area reserves plummeted from$3.8 billion in June 1951 to $1.8 billion by
February 1952 and cheap sterling operations, which had fallen away dur-
ing the course of 1950, resumed.
40
These difculties were compounded
by a leap in the retail price index to just over 10 per cent,
41
largely a
function of the deteriorating terms of trade provoked by the international
demand for raw materials.
During the election campaign the Conservatives had made much of a
desire to set the people free. This slogan, which in policy terms implied a
retreat fromLabours reliance on physical controls to regulate the volume
of imports and the level of demand in the economy, was not only attractive
to middle-class voters weary of rationing and businesses anxious about
red tape and trade union power. It squared with the Bank of Englands
enthusiasm for liberalisation of foreign-exchange policy, which had been
reinforced by the reappearance of the cheap sterling transactions.
42
The
new Chancellor, Butler, followed up the rhetoric with the rst increase
39
EPC (50)10, 7 Jan. 1950, CAB 134/225; see also S. Kelly, Ministers matter: Gaitskell
and Butler at odds over convertibility, Contemporary British History 14 (2000), 2637.
40
S. Newton, Operation Robot and the Political Economy of Sterling Convertibility, 19511952
(Florence: European University Institute Working Paper no. 86/256, 1986), pp. 13.
41
Middleton, The British Economy since 1945, p. 149, table 11.2.
42
Thompson-McCausland memo., Lessons of the past ve years, 31 Oct. 1951, BoE
ADM 14/30.
270 Scott Newton
in the bank rate for twelve years (from 2 per cent to 2.5 per cent) and
indicated that public spending cuts were to be expected. This willing-
ness to use monetary policy and internal measures was encouraging to
Bolton, who advised Butler to embark on a policy of progressive con-
vertibility accompanied by a fairly rapid discard of much of the methods
and practices of the past 12 [sic] years.
43
Bolton advocated as a rst
step the introduction of convertibility into the raw-materials trade. This
could be followed by measures to bring to an end the era of bilateral pay-
ments arrangements. To this end Bolton suggested the provision of gold
purchased at the current price on the London bullion market to foreign
central banks with sterling balances. Clearly the new policy would put
the hard-currency reserves under pressure, and to avert this it would be
necessary for Butler to try and negotiate a stabilisation credit, possibly as
much as $1 billion, from the USA.
44
The problem with this strategy was US refusal to produce more assis-
tance for Britain. The Truman government did not consider sterling con-
vertibility a priority: it was more preoccupied with European integration,
rearmament and the Korean war, while the US press made no secret of its
frustration with continuing British requests for special treatment.
45
Butler
failed to secure the credit, and the only further assistance to become avail-
able during the course of 1952 was an allocation of $340 million to assist
with the defence programme.
The absence of signicant US aid was not to be a deterrent for the
advocates of convertibility. Early in 1952 Bolton, building on his 1949
suggestions about unilateral action in the event of no American support,
proposed the introduction of convertibility at a oating rate, with the
safeguard of blocked balances to prevent a re-run of 1947, along with
spending cuts and increases in the bank rate. This plan received the sup-
port of the Bank and of the Overseas Finance Section in the Treasury, and
was dubbed Robot, possibly after the names of its key sponsors (apart
from Bolton there were Sir Leslie Rowan and Otto Clarke from Overseas
Finance). The Roboteers, having rened the plan so that it rested on a
managed oat (Bolton suggested between 1 = $2.40 at the lower end
and 1 = $3.20 at the upper end),
46
non-resident convertibility, and the
blocking of 90 per cent of foreign-held and 80 per cent of Sterling-Area
sterling balances held on 1 February with funding of the rest, managed
to persuade Butler and the Treasury that it should become government
policy.
43
Ibid., Bolton memo., External economic policy, 16 Nov. 1951.
44
Ibid.
45
Report of 16 July 1949, FO 371/75580/UE4539/150/53.
46
Bolton memo., External action, 16 Feb. 1952, T 236/3240.
The Treasurys support for Robot led to a erce battle inside the new
government. The Robot war is a familiar tale, but some points need to
be made. First, the history of the Banks attitude to overseas nancial
policy related here clearly demonstrates the Banks long-term commit-
ment to maintenance of sterlings international role above all else. Robot
came out of a genuine worry that this was in jeopardy and could only
be salvaged by radical action. The Treasury shared this anxiety: it was
suggested that it must be in our interest to have sterling convertible for
we cannot possibly trade and ship and insure and all the other things we
do unless sterling is convertible.
47
The Citys future as a global nancial
centre, together with the invisible earnings this brought the UK, was tied
to the prospects for sterling. Indeed the stakes were now high enough
for Bolton to accept that the oating rate and blocked balances might
disrupt the Sterling Area and result in the departure from it of Pakistan,
Burma and Cyprus.
48
Secondly, Robot was not compatible with the post-
1944 policy consensus. Although its advocates, and Butler in Cabinet,
spoke mollifyingly of letting the exchange rate and not the reserves take
the strain of an external crisis, there was little doubt that the introduc-
tion of the Robot plan would have been accompanied by sharp deation.
There was no question of permitting a free oat: given the decit this
could only be sharply downwards and thus likely to generate a massive
move out of the currency by the very foreign holders Robot was supposed
to attract.
49
It followed that given the considerable balance-of-payments
decit Robot would not be an alternative to but would be complemented
by the tighter monetary policy and spending cuts which Rowan, with
Bridges and Brittain in the Treasury, had been proposing since the end
of November.
50
Indeed the plan was sold as a strategy which would end
the tendency to suffer from the recurring postwar sterling crises gen-
erated by excessive demand. Instead of resorting to tighter import and
exchange controls the economy would have to adjust to external dis-
equilibrium via reductions in demand: the basic idea of internal stability
of prices and employment which has dominated economic policy for so
long . . . will not be maintainable . . . it will not be possible to avoid
unemployment.
51
The unleashing of Robot revealed a schism between those who sup-
ported the aims of postwar reconstruction and those who did not. Within
the civil service the battle-lines set the in-house Treasury and Bank staff,
47
Memo. by Clarke, Convertibility, 25 Jan. 1952, T 236/3240.
48
Ibid., para. 21.
49
Memo. to the Chancellor, Floating Rates, 24 Feb. 1952, T 236/3240.
50
Minutes of 27 Nov. 1951 meeting, T 236/3240; Newton, Operation Robot, p. 12.
51
Draft memo. 20 Feb. 1952, T 236/3240.
272 Scott Newton
fewof whomhad received any formal training in economics,
52
against the
signicant number of professional economists in government service who
followed the model developed by Keynes in The General Theory. These
included Plowden from the Central Economic Planning Staff, and Hall,
director of the Economic Section of the Cabinet Ofce, along with his col-
leagues there. Support came fromMacDougall, adviser to Churchills old
friend, the Paymaster-General Lord Cherwell. They opposed Robot on
the grounds that it would return macroeconomic policy to the prewar,
pre-Keynesian era.
53
The introduction of convertibility would also be
likely to set off a downward spiral of international trade as countries which
were short of dollars focused their trade on earning hard currency and
therefore reduced imports from non-dollar countries.
54
These criticisms
were fed into the ministerial debates through Cherwell and Macmillan,
then Minister of Housing, who called Robot a bankers ramp.
55
They
frightened Churchill and in the end the plan was shelved, although it
continued to be discussed in the Treasury and the Bank through spring
and summer 1952.
Compromise
The opponents of Robot were themselves divided, between those who
argued that the external crisis could be managed via dis-ination and
an intensication of import restrictions (Plowden) and those who sup-
ported a radical approach of their own (Hall and the Economic Sec-
tion). The latter argued that the government should seek to insulate the
domestic economy with a new version of the two-world strategy. First,
the Sterling-Area gold and dollar reserves should be divided between
independent members so that balancing with the dollar bloc could be
conducted on a bilateral not on an area-wide basis. Second, import con-
trols on dollar goods should be tightened and gold payments eliminated
from intra-European payments settlements, currently being conducted
through the European Payments Union. The effect would be to stimu-
late trade between non-dollar countries, a development more feasible in
1952 than in 1949, given the rapid increase in west European and espe-
cially German output in the intervening period.
56
It was a package which
offered a way out of external crisis which was consistent with domestic
52
G. C. Peden, The Treasury and Public Policy 19061959 (Oxford, 2000), p. 438.
53
Hall memo., External action, 23 Feb. 1952, T 236/3240.
54
Hall memo., The future of sterling, 24 Mar. 1952, T 236/3243.
55
Macmillan memo., The great debate: nancial and economic policy, CP226(52),
4 July 1952, CAB 129/52.
56
See A. S. Milward, The European Rescue of the Nation-State (1994), pp. 1269.
expansion. But the plan was shot down. The Bank and the Treasury
argued that it would have rendered sterling virtually unacceptable as a
means of international payment.
57
The failure to take emergency action did not however prevent an
improvement in the reserves during summer 1952. Over the year as a
whole the reserves dropped by 175 million, most of which owed out in
the rst quarter before the import cuts agreed in the winter began to bite.
The passing of the crisis atmosphere indicated that Robot was at root a
political plan designed to pitch the country into a one-world policy by
taking advantage of a favourable moment namely the third major ster-
ling crisis since the war. However Robot could not make headway against
those forces within government committed to sustaining the 1945 con-
sensus, either from ideological conviction or out of political expediency.
At the same time the alternative to Robot which claimed to offer an escape
fromrepeated sterling crises without risking internal instability was unac-
ceptable to the interests aiming to reassert Britains standing as a global
nancial power.
The failure of Robot did not mean the abandonment of attempts
to rehabilitate sterling as an international currency, but it did lead to
the adoption of a new plan which was designed to secure convertibility
without jeopardising full employment at home. This was the Collective
Approach, drafted by a working party composed of a mixture of Trea-
sury regulars and Keynesians including Hall and MacDougall.
58
Neither
of these two were happy with the scheme, which incorporated elements
of Robot (the oating rate) but assumed that convertibility would be con-
ditional upon a $2 billion stabilisation credit from the USA to the IMF.
It was agreed by Commonwealth prime ministers in December 1952 that
Butler would approach the newEisenhower government with this agenda
in March 1953. The initiative was similar to the compromise outlined
by Cripps in 1949. But it was another non-starter since the United States
once again made clear its lack of interest in providing nancial support
for sterling.
The question is: why did London pursue what was really a will o
the wisp? It was true that a new United States government was now
coming into power, but there was no reason to suppose that the Republi-
cans, traditionally less enthusiastic about foreign aid than the Democrats,
would introduce a note of change favourable to the British. The prob-
lem was the political unacceptability of the alternatives to the Collective
Approach which in itself was uncontroversial in the context of the balance
of forces within the government, the civil service, the Bank of England,
57
Fforde, Bank of England, p. 489.
58
274 Scott Newton
and perhaps the electorate. Rather like the neo-classical synthesis which
became fashionable at about the same time,
59
it was a radically awed
compromise between Keynesian and liberal economics or even between
industrial and commercial capital. The respective strengths of the two tra-
ditions and of their supporters led to a stalemate whose expression was
a variety of international Keynesianism for which no objective basis in
fact existed. Thus the failure of the Collective Approach did not stop the
British fromtaking progressive steps towards convertibility, taking care to
ensure that these did not upset domestic full employment.
60
This proved
feasible in the short term thanks to favourable terms of trade and to the
narrowing of the dollar gap which followed from the expansion both of
US overseas military expenditure and of US multinational corporations
in western Europe. Restrictions on the international use of sterling were
lifted, the bank rate being used to manipulate the ow of short-term
capital, until full convertibility for current transactions was resumed in
1958.
In the end one-worldism and reconstruction did prove to be uncom-
fortable bedfellows. Many historians have argued that there was a connec-
tion between Britains relatively sluggish growth rates of the late 1950s
and into the 1960s, and the efforts of successive governments to pro-
tect the international reserve currency status of the pound sterling.
61
It
is suggested that, at times of external decit, only deationary measures
would reassure holders of sterling that their assets would not fall in value.
More radical steps which in prioritising expansion might have sacriced
Britains lingering aspirations to run a global currency were avoided.
Yet it may not be enough to invoke the familiar stop-go argument
in order to explain the chequered economic history of postwar British
reconstruction. By holding on to the global vision, the Treasury and the
Bank of England steered the British economy away from participation in
the European Common Market on the grounds that this was a regional,
discriminatory bloc. Their enduring one-worldism could not be squared
with the main point of the Treaty of Rome to entrench a system of
intra-European trade, pivoting on the new West German state, which
had brought increasing prosperity to its six signatories over the years
since 1951.
62
Determination to reassert sterling and with it the Citys
international role may have excluded Britain from the benecial effects
59
The concept is discussed in R. Middleton, Charlatans or Saviours? Economists and the
British Economy from Marshall to Meade (Cheltenham, 1998).
60
Newton, Operation Robot, pp. 356.
61
See Middleton, The British Economy since 1945, pp. 102ff; Newton and Porter, Modern-
ization Frustrated, chs. 56; S. Pollard, The Wasting of the British Economy (1984).
62
See Milward, European Rescue of the Nation-State, ch. 4.
on domestic growth of the foreign trade multiplier, which, operating in the
context of a protected market, did much to generate mutually sustaining
economic miracles in postwar western Europe. E. H. H. Greens recent
argument that between 1880 and 1960 debates about the evolution of
the British economy tended to revolve around the choice between open-
ness and autarky
63
oversimplies the choice facing postwar governments.
Yet the Bank and Treasury battle for sterling, starting with opposition to
Keynes in 1944 and continuing throughout the period of reconstruction,
was an echo of earlier battles over tariff reform, imperial economic unity
and the gold standard. In the 1950s the balance of social and politi-
cal forces combined with the Keynesian revolution to prevent resolution
on terms wholly satisfying to the Bank and Treasury. But their struggle
for the rehabilitation of Britains traditional engagement with the inter-
national economy may have set back the cause of continuing domestic
modernisation.
63
E. H. H. Green, The inuence of the City over British economic policy, c. 18801960,
in Y. Cassis (ed.), Finance and Financiers in European History, 18801960 (Cambridge,
1992), p. 213.
14 Mind the gap: politics and nance
since 1950
Arthur Thomas
Harold Wilson once observed that a week is a long time in politics.
It can be equally telling in the world of nance. The most spectacular
stock-market collapse of the postwar period took place within the space
of the few days surrounding a weekend in late October 1987. By contrast
there are instances of institutional change being very gradual. For exam-
ple, a broker from the pre-First World War market transplanted to the
oor of the Stock Exchange in the early 1980s would have felt entirely
at home with the prevailing organisation and practices. Change here has
been concentrated into the last two decades, the 1986 Big Bang being fol-
lowed by further adjustments in response to internal and global nancial
developments. Changes in the role of the market in meeting the nanc-
ing needs of British industry over the past fty years have also been of an
evolutionary kind.
Before looking at these changes it might be useful to set the pattern
of investment nance in a more general framework. In promoting eco-
nomic growth one important role of the nancial system is to facilitate
the transfer of savings from surplus sectors of the economy, generally the
personal sector, to those in decit, usually the corporate and public sec-
tors. There are two ways in which funds can be channelled. First, there is
the direct route whereby decit units offer liabilities (bonds or equities)
in the primary market, and institutional mechanisms have evolved for this
purpose. This may be broadly termed the market model, and the United
States and Britain are frequently cited as examples. In this model the sec-
ondary market occupies a central role in arriving at prices and ensuring
the liquidity of assets taken up by surplus units.
The second model involves the indirect transfer of funds. Here, savings
are placed with deposit-taking institutions who then either take up lia-
bilities issued by decit units or make long-term loans. They perform an
intermediary function by pooling small savings and making large long-
term loans. They offer economies of scale, the transformation of matu-
rities, and risk reduction. This indirect model is usually referred to as
276
Mind the gap: politics and nance since 1950 277
the banking model of nancing, Germany and Japan being seen as the
obvious examples.
Authoritative views of the British market model appeared in two
reports, those of the Radcliffe Committee (1959) and the Wilson Com-
mittee (1980). As the full title of the former suggests Committee on
the Working of the Monetary System it was mainly concerned with the
banking systemand money markets, in particular the role of interest rates
and control of the money supply. The Committee heard evidence from
the Stock Exchange and other bodies and concluded that industrial rms
met most of their nancing needs from savings, while the new issue mar-
ket was seen as another important source but bank nance has played
little part.
1
The Wilson Committee the Committee to Review the Functioning
of Financial Institutions had a much wider remit. It examined the role
and functioning at home and abroad, of nancial institutions in Britain
and their value to the economy and also reviewed the provision of funds
for industry and trade.
2
The Committees verdict on the capital mar-
ket was generally favourable, but it noted certain problems and dangers.
In meeting the needs of both savers and borrowers it concluded that a
wide range of nancial investments is available . . . and that the system
has a good record in meeting new requirements. It examined the criti-
cism that real investment had been constrained by shortages of external
nance but found no evidence of this. As to the secondary market, it
felt that the pricing of securities in the market is fair and that differ-
ences between companies in expected returns and risks are reected in
prices. However, it warned that the market is not particularly successful
at predicting which companies will show substantial prot growth, and
concluded that the level of secondary market dealing may often be more
than is required to establish correct relative prices. It cautioned that high
levels of secondary market activity would foster a speculative psychol-
ogy, which would inevitably inate the prices at which new issues can
be made. Finally, the Committee conceded that the threat of takeovers
might prompt management to employ resources more efciently, but
added that most had not led to observable increases in efciency.
3
Not all contemporary observers of the City took such a generous view.
The TUCs evidence to the Wilson Committee struck a more critical
1
(Radcliffe) Committee on the Working of the Monetary System, Report (Cmd. 827, PP
19589, xvii. 389), p. 308.
2
(Wilson) Committee to Review the Functioning of Financial Institutions, Report (Cmd.
7937, PP 197980), p. 193.
3
Ibid., pp. 1934.
278 Arthur Thomas
note. Citing Keyness famous observation that investment should not be
the by-product of the activities of a casino, it went on to recommend
the creation of a central fund to boost investment and a minority on the
Committee supported this view. The proposed funds resources would
come from a levy on the inow of money to the long-term investing insti-
tutions, which would then be matched by Treasury funding.
4
A majority
on the Committee regarded this as far too drastic a suggestion, preferring
more practical approaches to improve nancing channels.
Others had more radical views. Some academic observers, such as
Lawrence Harris and Richard Minns, maintained that established meth-
ods had failed to boost investment levels, leaving industry unable to com-
pete effectively abroad. British industry had relied on internal savings
to nance investment, whereas continental and Japanese rms nanced
only a third of their investment frominternal sources with the rest coming
from the banking system.
5
The critics contended that the dependence of
British rms on internal funds arose from the conservatism of the British
nancial system. In particular, City institutions looked to liquidity and
short-termreturns rather than to companies long-termprospects.
6
Such
accusations persisted into the 1980s, and in recent years Hutton and
Mayer have voiced the same concerns.
7
Moreover, the critics claimed
that the supply of domestic savings was further restricted by the abolition
of exchange control in 1979. Institutional investors eagerly diversied
their portfolios by buying overseas equities, thereby depriving domestic
rms of nance and putting up the cost. One solution was to nation-
alise the banks and the major investing institutions, and ensure that there
was a systematic and comprehensive link between long term investment,
production and nancial strategies.
8
Sources of funds
There are obvious dangers in making comparisons over some fty years.
The economy has changed, the composition of the industrial and com-
mercial sector has altered (especially with the addition of privatised cor-
porations from1982 onwards), manufacturing has shrunk, nancial insti-
tutions have evolved, and the monetary and scal background has been
4
Ibid., pp. 2667.
5
J. Coakley and L. Harris, The City of Capital. Londons Role as a Financial Centre (Oxford,
1983), p. 226.
6
R. Minns, Pension Funds and British Capitalism (1980), p. 61.
7
W. Hutton, The State Were In (2nd edn, 1996), pp. 15465; C. Mayer, The assessment:
nancial systems and corporate investment, Oxford Review of Economic Policy 3/4 (1987),
116.
8
Coakley and Harris, The City of Capital, p. 227.
Table 14.1 Sources of funds as percentage (rounded) of total
sources: averages of periods
internal
gross trading prots
a
other current income
b
total external
c
19525 72 21 93 7
195660 69 21 90 10
19615 64 21 84 16
196670 59 22 81 19
19715 46 34 80 20
197680 61 21 82 18
19815 67 21 88 12
198690 51 21 73 27
19915 59 28 87 13
a
Net of stock appreciation, before capital depreciation
b
Rent and non-trading income in UK, plus current income from abroad
c
Capital grants, overseas investment in UK companies, borrowing less liquid
assets
Source: National Income and Expenditure Blue Books
constantly changing. The list is considerable. Nevertheless, it may be use-
ful to indicate the trends in the sources and uses of funds as a background
to the role of the stock market.
Table 14.1 provides an indication of the main sources of funds available
to industrial and commercial companies (ICCs), distinguishing between
internal and external funds. Internal funds consist of gross trading prots
(net of stock appreciation) together with other current income. Exter-
nal funds are derived mainly from the capital market and the banking
system.
Over the period companies depended mainly on their own funds.
Within internal funds two features may be noted. First, the decline of
gross trading prots as a proportion of total sources was arrested and
rebuilt to the 60 per cent level. The fall in the period to the mid 1970s
reected the smaller share of total domestic income taken by ICCs. The
counterpart to this squeeze on companies was the rise in the share of
income taken by employment. Companies share of total income fell from
16.6 per cent in the years 19525 to 10 per cent in the early 1970s. By
contrast, income from employment rose from 66 per cent to 68 per cent,
the switch reecting the change to more competitive conditions, added to
which periodic price restraint depressed companies share. By the early
280 Arthur Thomas
1990s the position had been reversed, income fromemployment standing
at 66 per cent and that of companies recovering to 13 per cent.
9
The second feature is the cyclical nature of gross trading prots. This
volatility stemmed from that of output. During the economys expan-
sionary phase output and selling prices tended to rise faster than costs,
especially labour costs, and prots grew apace. In recession, with falling
output and rising unit costs, prot margins declined and overall prots
fell. However, it was noticeable when prots rose rapidly that their con-
tribution to the supply of overall funds contracted. This was particularly
evident in the Lawson boom when the proportion fell to 46 per cent of
all sources in 1989. In this instance capital expenditure tended to outstrip
internal funds, forcing resort to external nance.
The fortunes of ICCs are also reected in the net rate of return on
capital employed, with capital measured on a replacement cost basis.
During the 1960s rates of return fell from 13.5 per cent to 10.1 per cent
by the end of the decade, and then in the rst major recession of the period
(19745) to just over 6 per cent. Recovery was frustrated by the 198081
recession but by the mid 1980s rates had recovered to 13 per cent by
1989, only to fall again to 9.3 per cent in the next recession in the early
1990s. Gradual economic recovery over the mid 1990s took the return
back to 12 per cent in 1999.
10
The variability of the returns and the failure
to attain levels recorded by Britains trading rivals stemmed from many
causes, the most cited reasons being uncertainty generated by successive
stop-go cycles and increased international competition especially after
entry to the EEC in 1972. Possibly the most important reason was the
failure to generate as much output per unit of input as Britains main
competitors, a failure to secure sustained increases in average productivity
caused by ingrained institutional inertia.
11
Uses of funds
Although there have been variations, current expenditure over the period
accounted for around half of total uses (see Table 14.2). The fall in the
proportion in the early postwar decades was linked to the declining share
of current expenditure absorbed by tax. This reected the slower rise
in internal income compared with increases in total sources, and that
companies distributed a large proportion of income thus transferring the
9
Calculated from factor income tables in the ofcial UK National Accounts published
annually.
10
R. Walton, Company protability and nance, Economic Trends (Dec. 1999), 378.
11
E. F. Denison, Economic growth, in R. E. Caves (ed.), Britains Economic Prospects
(1968), pp. 23178.
Table 14.2 Uses of funds as percentage (rounded) of total uses: averages
of periods
Current expenditure
dividends
other
interest
prots and
taxes due
abroad
UK
taxes
a
total
identied
capital
expenditure unidentied
19525 16 4 33
b
54 31 15
195660 17 5 26
b
49 44 7
19615 20 8 18
b
47 48 5
196670 17 12 11 11 51 43 6
19715 10 14 20 9 54 45 1
197680 9 16 15 10 49 49 2
19815 8 14 8 18 49 41 10
198690 11 13 5 12 44 46 10
19915 21 15 5 10 51 44 5
a
UK taxes on income
b
Prots and taxes due abroad plus UK taxes
tax liability to shareholders. More important was that tax rates fell and
successive governments attempted to stimulate investment through use of
investment allowances. During the 1980s the proportion absorbed by tax
uctuated as earlier concessions were withdrawn. The other component,
prots and taxes due abroad, absorbed a consistently smaller fraction of
total uses.
Other signicant items include the payment of dividends on ordinary
shares and interest payments on xed interest and bank borrowing. In
terms of the proportion of total uses there are interesting variations.
Immediately after the war the proportion rose gradually, partly reecting
changes in prots, but generally companies allowed dividend payments
to uctuate less than prots. The early caution deserted companies in
the 1960s as they realised that accumulations of liquid assets attracted
takeover bids. It was also the era of the cult of the equity, while com-
panies contemplating share issues sought to sweeten their offerings with
dividend rises. Further impetus came fromthe removal of tax discrimina-
tion against distributed prots in 1958. But tax policy in this period was
remarkably ckle. The introduction of corporation tax in 1965 brought a
tax structure that favoured retention. Macroeconomic policy added a fur-
ther twist in the 1970s with the use of dividend-limitation policies thereby
282 Arthur Thomas
keeping dividend levels down until the policy changed some years later.
12
The volume of dividend payments has, of course, been inuenced by
changes in the composition of the ICC sector following the privatisations
of the 1980s when some 60 billion of equity was added to the market.
Dividend payments as a percentage of total uses rose from8 per cent over
19815 to 21 per cent in the early 1990s.
13
Whereas borrowing fromthe market and banks remained in the shadow
of other capital sources during the 1950s and early 1960s, from the mid
1960s interest payments consistently absorbed around a third of current
expenditure. After the introduction of corporation tax xed-interest bor-
rowing surged and, together with more bank borrowing, produced an
increase in interest payments. The largest portion came from loan inter-
est as banks adjusted their lending practices to provide more medium-
to long-term lending. This arose partly in response to criticism from the
Wilson Committee but was also made possible by the adoption of lia-
bility management. As the banks increasingly accommodated company
needs the bond market remained little used. This also reected prevail-
ing high interest rates, high ination and large government debt issues
which crowded out industrial borrowing. In the mid 1990s, however,
the pattern of funding changed and was evident in the growth in interest
payments to around 22 billion annually in the early 1990s. With rising
protability and greater stability in interest rates, apart from the early
1990s recession, companies increased their levels of capital gearing by
more bond issues.
Investment and nance
Table 14.3 shows the component elements of capital expenditure and its
nancing. The investment record of Britain over the past ve decades
has been fairly consistent, ranging from 16 per cent of GDP in the late
1950s to 19 per cent in the boom years of the early 1970s and the Law-
son boom of the late 1980s. In international terms Britain devoted a low
ratio of national resources to investment. Over recent decades (197099)
the British investment/GDP ratio averaged 17 per cent, the US 18 per
cent, Germany 22 per cent and Japan displaying a ratio of 29 per cent.
14
If investment is one of the main determinants of growth then Britain has
certainly suffered fromthe relatively lowproportion of resources commit-
ted to investment. Looking at the period 1960 to 1989 one study found
12
E. T. Blackaby (ed.), British Economic Policy 196074 (Cambridge, 1979), pp. 399400.
13
P. Curwen and K. Hartley, Understanding the UK Economy (1997), pp. 4856.
14
OECD Economic Outlook, June 2000.
Table 14.3 Financing of capital expenditure as percentage (rounded) of total
capital expenditure: averages of periods
capital expenditure nanced by:
gross xed
investment
stock
building
a
other
identied
b
unidentied
c
savings
d
borrowing/
liquid
assets other
e
19525 45 8 14 33 86 10 4
195660 56 10 20 14 81 14 5
19615 60 9 19 12 71 24 5
196670 63 8 17 12 61 22 17
19715 72 1 24 3 56 23 21
197680 70 2 24 4 66 16 18
19815 58 1 22 21 69 16 15
198690 58 2 22 18 51 36 13
19915 68 1 21 10 71 22 7
a
value of physical increase in stocks and works in progress
b
investment abroad, purchases of UK company securities and changes in hire purchase
credit extended
c
treated as trade credit to personal sector, small businesses and export credits to the
overseas sector
d
net of stock appreciation
e
government grants and overseas investment in UK companies
that two factors explained recorded differences in the level of output per
head between countries, namely, the level of capital input and the qual-
ity of labour input.
15
As to the former, Britain had low levels of capital
per head compared to its rivals. The same conclusions emerged in a later
study which indicated that workers in manufacturing in Germany, France
and the US enjoyed the use of some 50 per cent more capital than British
workers.
16
The most notable feature of investment was its variability. Investment
tended to spurt in a boom as rms installed extra capacity, helped by
the stimulus of rising share prices and high prot expectations. In reces-
sions, with rising stock levels, falling prots and share prices, retrench-
ment followed. The picture was clouded until the mid 1980s by the
effects of frequent adjustments in investment allowances and grants, quite
apart from the impact of changes in interest rates. The most spectacular
15
C. Doughty and D. W. Jorgenson, There is no silver bullet: investment and growth in
the G7, National Institute Economic Review 162 (1997), 5774.
16
M. OMahoney and W. de Boer, Britains relative productivity performance: updates to
1999 (NIESR, March 2002), 9.
284 Arthur Thomas
instance of investment swings was seen in the recession induced by the
high interest rates needed to keep Britain in the Exchange Rate Mech-
anism during 19902. Over this brief span manufacturing investment
fell by 13 per cent. In the ensuing gradual recovery overall investment
rose strongly, encouraged by favourable prot expectations and advanc-
ing share prices. Within total investment, the services sector has taken
a larger share due to the greater capital intensity of service companies
associated with new technology and falling capital costs. Net average
capital employed in the service industries is estimated to have increased
by 64 per cent between 1990 and 1998. By contrast, the comparable
gure for manufacturing investment was 16 per cent, a level constrained
by more competitive trading conditions, the cost of capital and modest
growth in prots.
17
Three items make up other identied in Table 14.3. Net trade credit
is a comparatively small item but with cyclical characteristics, falling in
boom years and rising in recessions. The other items, investment abroad
and purchases of securities, are of greater interest in the present context.
From a few hundred million in the 1960s (some 10 per cent of capital
expenditure) investment abroad increased during the 1970s, prompted
by the international aspiration of companies, tariff avoidance, reduced
transport costs and the search for wider markets as international com-
petition grew more intense. The general removal of capital controls after
1979 greatly helped the process. Later, during the expansive years of the
Lawson boom, investment abroad averaged 14 billion for the years
198690, representing some 20 per cent of capital expenditure. In the
ensuing recession it reverted to the levels of the early 1980s at around
12 per cent.
In contrast to Germany and Japan, merger and takeover activity is
a prominent feature of the British industrial and commercial scene. It
was given considerable impetus in the 1950s when dividend control, a
remnant of wartime restraint, and other factors resulted in share prices
failing to reect asset values. This discrepancy produced the rst phase of
takeovers based on obtaining quick nancial pickings by acquiring com-
panies with liquid assets accumulated because of the tax discrimination
against distributed dividends, or where companies had built up assets
for future investment. Concern about these practices led to the adop-
tion of the Take-over Code in 1968 and the setting up of the Take-over
and Mergers Panel, at the instigation of the Stock Exchange, to admin-
ister and interpret the Code.
18
The motives for later waves of takeovers
17
Walton, Company protability, p. 41.
18
R. C. Michie, The London Stock Exchange. A History (Oxford, 1999), p. 428.
Table 14.4 Borrowing and liquid assets as percentage (rounded) of capital
expenditure: average of periods
capital issues
ordinary
xed
interest banks other
a
total
borrowing
net acquisition
of liquid assets
borrowing less
acquisition of
liquid assets
19525 10
b
0 3 13 3 10
195660 6 4 9 3 22 8 14
19615 5 6 13 3 27 3 24
196670 3 7 13 4 27 5 22
19715 5 2 37 2 46 22 23
197680 5 0 21 3 29 13 16
19815 6 2 15 6 29 16 16
198690 8 5 28 8 49 13 36
19915 16 9 2 4 31 9 22
a
from other nancial institutions and public sector
b
ordinary plus xed interest
and mergers, notably in 19679, 19714, 198790 and 19947, were
more varied, ranging from marketing considerations, the desire to
increase competitive strength, a search for economies of scale, the fear
of missing out on short-term valuation discrepancies on the market, and
the urge to boost managerial status.
Viewed over the half century the dependence on savings to nance
capital expenditure fell from over 80 per cent in the 1950s to around 70
per cent in the early 1990s. Such a generalisation, however, hides sig-
nicant variations induced by industrial and commercial activity during
successive booms and recession. The pattern is readily apparent in the
chart showing savings/capital expenditure ratios for the period 195295.
In boom years the contribution of internal funds falls sharply as expen-
diture outpaces available funds, thus forcing greater reliance on external
nancing. This came predominantly from the banking system and the
capital market (see Table 14.4). Such cyclical swings are readily apparent
in the numerous postwar booms. The slackening of investment activity
in the downswing re-asserts the dominance of internal funds.
Responding to the prevailing philosophy of the 1960s and 1970s, other
sources of funds increased in importance as the government offered
investment grants. It proved a short-lived inducement due to the cost
on the Exchequer and the criticism that money went to inefcient as
0
2
0
4
0
6
0
8
0
1
0
0
1
2
0
1 9 5 2
1 9 5 3
1 9 5 4
1 9 5 5
1 9 5 6
1 9 5 7
1 9 5 8
1 9 5 9
1 9 6 0
1 9 6 1
1 9 6 2
1 9 6 3
1 9 6 4
1 9 6 5
1 9 6 6
1 9 6 7
1 9 6 8
1 9 6 9
1 9 7 0
1 9 7 1
1 9 7 2
1 9 7 3
1 9 7 4
1 9 7 5
1 9 7 6
1 9 7 7
1 9 7 8
1 9 7 9
1 9 8 0
1 9 8 1
1 9 8 2
1 9 8 3
1 9 8 4
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
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e
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d
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r
a
t
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o
s
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o
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a
t
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e
B
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k
s
well as efcient rms.
19
The other component, overseas investment
in the UK, reected the growing importance of foreign subsidiaries
operating in Britain, particularly after it joined the European Economic
Community.
Looking at the banking sector, the frequent criticismof the banks will-
ingness to assist industry has been refuted by successive inquiries and by
the growing importance of bank nance as reected in the percentage of
capital expenditure represented by bank advances. The banks contribu-
tion changed slowly in the 1950s and 1960s, amounting to some 13 per
cent at the end of the latter decade (see Table 14.4). During this period the
banks gradually expanded their advances portfolio and readjusted their
assets after the effects of wartime distortion. While overdrafts continued
to be the main form of lending it was not unusual to roll-over short-term
loans. The Radcliffe Committee in 1959 commended the banks record,
even in the provision of small-rm nance.
Competition and Credit Control in 1971 ended the long era of quan-
titative and qualitative restraint on bank lending. In the new competitive
environment liability management replaced the traditional emphasis on
asset management. Banks extended the amount and nature of their lend-
ing by competing for xed-termdeposits in the money markets. As a result
the Wilson Committee reported that medium-termlending accounted for
about half of total non-personal advances. The newfreedomwas reected
in the sharp increase in bank nance in 19723 (the Barber boom),
taking the percentage of bank nance to capital expenditure to a heady
37 per cent.
After the expansive episode of the early 1970s bank lending settled at
around 20 per cent of capital expenditure. There were singular surges
once again, especially in the Lawson boom, but the trend had been set.
However, a marked contrast was presented by the negative gures for
the early 1990s, when companies reduced both their indebtedness to the
banks and acquisitions of liquid assets. Despite this, the overall judgement
must be that banks had become more accommodating in their lending
and took Britain nearer to the often admired German and Japanese model
of industrial nance.
As to the capital market the picture is not one that provides fulsome
support for the categorisation of the British system as being solidly mar-
ket based. Taking capital issues as a percentage of capital expenditure, the
gures in Table 14.4 suggest that both equity and xed-interest borrowing
provided a variable, but not large, proportion of funds for ICCs, except
in the early 1990s when the gures were skewed by the unprecedented
19
W. A. Thomas, The Finance of British Industry 19181976 (1978), pp. 2267.
288 Arthur Thomas
scale of loan repayment. From a tenth of funds in the 1960s the contri-
bution fell to half that level by the 1970s, when equity markets suffered
a collapse in 19745, and when interest rates reached double gures for
the rst time since 1914. The contribution of the capital market saw a
recovery in the late 1980s, stimulated by the equity market rise before
Big Bang and which continued until the correction of Black Monday in
late October 1987, when the market fell by 22 per cent in a few days.
The collapse was relatively short-lived and the early 1990s witnessed a
surge in equity and xed-interest borrowing. For the rst time in fty
years ICCs secured more funds from the capital market than from the
banking system.
In the context of government relations with the City there are some
interesting features in relation to market borrowing. From 1946 to 1959
access to the capital market was subject to ofcial control, exercised
for the Treasury by the Capital Issues Committee. This control dated
from 1936, originally as the Foreign Transactions Advisory Committee,
but thereafter control was based on the Borrowing (Control and Guar-
antees) Act 1946 and which applied to all borrowing over 50,000. It
proved useful in regulating overseas borrowing, but on the domestic front
the Radcliffe Committee found it impossible to resist the broad conclu-
sion that this control had no signicant impact on the pressure of total
demand, adding specically, or even upon the pressure on the new issue
market.
20
Its only lasting contribution was that it allowed the Bank of
England to regulate the queue of borrowers in the interests of government
issues and it helped in the timing of industrial issues.
Later criticisms of the market concerned its pricing practices, both
for initial offer prices and underwriting. Criticism of the practices of
the issuing houses came from academic inquiries into the total costs of
issue, this being measured as the conventional costs plus the introductory
discount (the excess of the market price over the issue price when dealings
began). A notable study, Equity Issues and the London Capital Market,
found that for the most frequently used methods of issue, offers for sale
and placings, the total costs of issue as a percentage of net issues over
the period 195963 was 23.3 per cent and 27.8 per cent respectively.
21
To remedy the high cost the study advocated greater use of tenders, thus
allowing the market to put a value on newly offered shares. A Bank of
England survey in 1986 reached broadly similar conclusions as to the
20
Radcliffe Committee, Report, pp. 1634.
21
A. J. Merrett, M. Howe and G. D. Newbould, Equity Issues and the London Capital Market
(1967), pp. 1803.
underpricing of new issues. A sample of over fty offers for sale during
19836 produced average total costs of 15.3 per cent compared with
conventional costs of 10.6 per cent.
22
It concluded that tenders produced
more accurate pricing of shares. Traditionally, however, the new issue
houses prided themselves on declaring an issue fully subscribed, and
regarded an introductory discount and a buoyant price in the after-market
as a vindication of their practices.
One feature of company issues in recent decades has been the increas-
ing dependence on raising capital fromexisting shareholders. The advan-
tages of rights issues are many: lowcost, existing shareholders can protect
their equity interest, and a demand from institutional shareholders eager
to expand their equity portfolio without pushing up market prices. Over
recent years new issue statistics indicate that the proportion of money
raised by rights issues has been around a third, testimony to the appeal
of this method. While the prominent role of rights issues was recognised
by the Wilson Committee, it criticised the use of xed underwriting fees
but nothing was done until the intervention of the Ofce of Fair Trading
in 1995. The Wilson Committee reported that of the underwriting fee of
2 per cent some 0.5 per cent went to the sub-underwriters. The Com-
mittee reected that the activity had been extremely protable for par-
ticipants, the fees probably standing at twice the level needed to ensure a
fair reward for the risks incurred.
23
Earlier Merret, Howe and Newbould
came to the same verdict about underwriting commissions generally,
concluding that underwriting was a highly remunerative activity . . .
and underwriting commissions, though supercially lowand substantially
below the maximum allowed by law, seem to have been far from justied
by the risks involved.
24
The fee took no account of the risks of individual
issues or the state of the market. An alternative approach would be to
use deep discounting of the share issue price, using a discount of 4050
per cent rather than the standard level of 1520 per cent. However, only
about 10 per cent of rights issues were made in this way in 1985.
25
Com-
panies, no doubt, preferred the prevailing practice, while its main bene-
ciaries, the institutions, were equally content. Following strictures from
the Ofce of Fair Trading the issuing houses have put sub-underwriting
out to tender and produced signicant cost reductions.
26
22
New issue costs and methods in the UK equity market, BEQB 26 (1986), 53245.
23
Wilson Committee, Report, p. 210.
24
Merrett, Howe and Newbould, Equity Issues, p. 126.
25
New issues cost and methods, p. 540.
26
Underwriting of Equity Issues: A Report by the Director General of Fair Trading (OFT, March
1995).
290 Arthur Thomas
Institutional dominance
While Big Bang and improvements in the operational efciency of the
stock market attracted a good deal of attention, another longer-termtrend
probably had more profound effects on the nance of industry. This was
the institutionalisation of the equity market that began in the 1950s.
The impact which the investment policies of the big four institutional
investors insurance companies, pension funds, investment trusts and
unit trusts had on share-ownership is evident in Table 14.5. Fromhold-
ing around 20 per cent of equity in the early 1960s institutions increased
their share to 60 per cent by the early 1990s, falling back to around half by
the end of the decade. The later reduction was largely due to the imposi-
tion of the MinimumFunding Requirement on pension funds in the early
1990s, following the Maxwell affair, and which directed investment into
less volatile asset categories. The increased ownership over the postwar
period was built up by switching fromxed-interest obligations, by taking
up new issues and absorbing personal sector sales of equities. While the
number of individual investors increased from around 3 million to some
15 million with successive privatisations and de-mutualisations, never-
theless the sectors share of market equity fell from about a half to one
sixth.
27
With the abolition of capital controls in the early 1980s and the
globalisation of markets, the share of overseas investors increased from
3 per cent in 1981 to nearly 30 per cent in 1999.
The reasons for the above changes are not difcult to discern. Insti-
tutional channels offered individuals the benets of specialised manage-
ment, pooling of risks and ination protection. But the main stimulant
was the attraction of a tax-efcient means of saving. Contributions to
pension funds were made out of pre-tax income, while pension funds
investments were free of capital gains tax. Up until the 1986 budget, life
insurance policies also beneted from tax privileges. The other collec-
tive investment vehicles, investment and unit trusts, also offered small
savers risk reduction and specialisation, but the latter could not lay claim
to attractive scal concessions until the introduction of Personal Equity
Plans and, in April 1999, Individual Saving Accounts.
The strong demand for old and new equities endowed the London
market with depth and liquidity, bringing gains to both shareholders
and rms. Certainly, until recently, savers and pension-fund beneciaries
proted from the cult of the equity. Between 1963 and 1998 pension
funds achieved average annual returns of 12.1 per cent, compared with
27
Ownership of UK quoted companies at the end of 1998, Economic Trends (April 2000),
857.
Table 14.5 Share ownership 19631999 end year (as percentage)
1963 1975 1981 1989 1999
pension funds 6.4 16.8 26.7 30.6 19.6
insurance companies 10.0 15.9 20.5 18.6 21.6
unit trusts, investment trusts and other 12.6 14.6 10.4 8.6 9.7
nancial institutions
banks 1.3 0.7 0.3 0.7 1.0
total UK institutions 30.3 48.0 57.9 58.5 51.9
individuals 54.0 37.5 28.2 20.6 15.3
other personal sector 2.1 2.3 2.2 2.3 1.3
public sector 1.5 3.6 3.0 2.0 0.1
industrial and commercial companies 5.1 3.0 3.1 3.8 2.2
overseas 7.0 5.6 3.6 12.8 29.3
overall total 100.0 100.0 100.0 100.0 100.0
Source: Institutional Investment in the United Kingdom: A Review
ination of 7.2 per cent over the period.
28
The general enthusiasm for
equities produced a major nancial sector in the form of specialised fund
management services, handling over 2,500 billion for home and overseas
clients.
29
The institutionalisation of the market produced general problems, as
well as specic criticisms. One of the earliest concerned the effect of
institutional deals on the traditional jobbing mechanism. The market
had always enjoyed a large number of two-way transactions from indi-
vidual investors, but by the 1970s the rise in the average bargain size
had induced dealers to seek refuge in various defensive practices such
as joint books and price-spread agreements. Equally problematical was
the accusation that institutional transactions tended to display follow
my leader behaviour. Indeed, the Stock Exchange in its evidence to the
Wilson Committee spoke of the emergence of an identity of view by the
institutions and that this had led to a diminution of the two-way nature
of the market.
30
Short termism is a more recent transgression and has attracted
widespread comment. When the Radcliffe Committee viewed the begin-
nings of the institutionalisation of the market it spoke eloquently of
matching assets and liabilities and of the attraction of equities for
28
Institutional Investment in the United Kingdom. A Review (Myners Review) (Treasury,
March 2001), p. 28.
29
Ibid., p. 77.
30
Wilson Committee, Evidence on the Financing of Industry and Trade, 8 vols. (London:
HMSO, 1977), III, 214.
292 Arthur Thomas
protecting the real purchasing power of future endowments. By the time
of the Wilson Committee the dominance of the institutions had been
established and while it expressed concern that the institutions them-
selves are not yet always sufciently active in exercising their responsibil-
ities as major shareholders, it did not criticise them on grounds of short
termism.
31
Returns on equities consist of two components, dividends
and capital gain. If dividends follow a steady path there is a tempta-
tion to take short-run capital gains, and increased share price volatility
may well have spurred on the practice. The more recent allegation is
that institutions and fund managers are inclined to sell for quick gains
rather than adopt a long-termviewof investment and growth. Fund man-
agers are regarded as the main offenders, indulging in churning of assets
to secure gains viewed as superior to those displayed by some market
benchmark. The practice is seen as the inevitable result of pension fund
trustees holding quarterly meetings to review returns. Whilst the Myners
Review of Institutional Investment in the United Kingdom (2001) did not
seek to ascertain the extent of an excessive focus on quarterly perfor-
mance, it acknowledged that the view existed among fund managers that
pension funds did look at short-term results. It recommended that pen-
sion trustees should provide fund managers with clear indications as to
the period over which their performance would be judged.
32
But fund
managers are not alone in being held to ransom by short-term reviews.
Investment and unit trusts are generally subject to even shorter horizons,
often in the form of monthly in-house reviews and external assessment
by the nancial press.
A further criticism concerns the reaction of institutions to takeovers.
Offered a price well above previous levels, shareholders nd a hefty gain
difcult to resist. While company management may be very competent,
with admirable long-term investment and growth objectives, such con-
siderations may not be sufcient to counter the appeal of quick gains.
But not all institutions behave so mechanically. A Bank of England sur-
vey in 1987 found that many institutions, especially life ofces, took a
long-term perspective during a takeover, listening to both sides but with
a preference towards well-proven management. However, some of the
smaller institutions were not so restrained.
33
With greater price volatility and falling transaction costs, together
with more emphasis on performance indicators, the level of institutional
turnover of UK equities has increased. Indicators of institutional activity
31
32
Institutional Investment, p. 89.
33
Management of equity portfolios, BEQB 27 (1987), 2589. See also Corporate gover-
nance and the market for companies: aspects of the shareholders role, Bank of England
Discussion Paper, no. 44, Nov. 1989.
produced by the Bank of England for the early 1980s suggested consider-
able increases on the part of the Big Four investing institutions.
34
While
overall activity had gone up differences existed in the turnover of the
main groups, with pension funds and insurance companies being more
passive. For 1985 the Bank of England estimated that the latter traded
shares on average once every ve years, whereas in the case of unit and
investment trusts, the gures were once every two years and three years
respectively. Given the relatively low activity of the former they cannot be
accused of an orgy of speculation, but there seems little doubt that in
the realms of fund management accusations of short termism have some
strength.
Institutional activism
In 1980 the Wilson Committee concluded that the institutions them-
selves are not yet always sufciently active in exercising their respon-
sibilities as shareholders and recommended greater use of collective
action where company performance fell below market expectations.
35
The arguments for intervention were that it would secure better returns
for shareholders, while the market and the economy would also benet.
To secure these gains the various Investment Protection Committees and
the Institutional Shareholders Committee, set up in 1973 at the initiative
of the Bank of England, should be used more vigorously. They should not
be involved in day-to-day management but they were urged to exercise
their collective inuence to secure changes in managerial policy or in the
management.
Not a great deal happened, but in the unsettling conditions of the
early 1980s and with the prevailing philosophy of non-intervention, this
was not surprising. The 1987 survey by the Bank of England found that
practices remained extremely varied. Disappointed expectations simply
induced some fund managers to sell shares, depressing the price and the
price/earnings ratio. In other cases institutions indicated their concern
to the companys broker, but they were reluctant to set up a shareholder
group. Only when a company ran into severe difculties did fund man-
agers consider taking steps to nudge the management towards a different
course. Others took the view that the benets did not justify the time
spent on intervention, particularly since there were plenty of alternative
investments available. Underlying the general inertia lay a widespread
view that it was difcult to shake up management which was off-track,
34
Management of equity portfolios, p. 256.
35
294 Arthur Thomas
especially when the majority of fund managers did not exercise their
votes as a matter of course.
36
The most recent survey of institutional involvement was undertaken by
the Myners Reviewof 2001 and it acknowledged that there had been con-
siderable movement in the 1990s inuenced by the succession of com-
mittees (Cadbury, Greenbury and Hampel) and which led in 1998 to the
Combined Code of the Committee on Corporate Governance, designed
to bring about a more activist approach by institutional investors.
37
While this would produce benets for shareholders and the economy, the
Myners Committee reluctantly concluded that concern about manage-
ment and strategy of major companies can persist among analysts and
fund managers for long periods of time before action is taken.
38
Continuing inertia, the Myners Review suggested, arises from a vari-
ety of reasons. First, short-termperformance measures in widespread use
militate against any intervention which is only likely to produce long-term
results. Second, there is a culture in the nancial community of want-
ing to avoid public confrontation with companies.
39
Third, conicts of
interest are present in that fund managers are often part of a nancial
conglomerate, largely a legacy of Big Bang, which may be seeking to
supply banking or insurance services to a faltering management. Finally,
there are concerns about the free rider issue of other investors beneting
from the exertions of an active institutional shareholder. The commend-
able verdict of the Myners Review was that appropriate attention was in
the best interest of beneciaries and the market generally, and that insti-
tutional investors by virtue of their dominant market position are able to
perform that monitoring function on behalf of their beneciaries.
40
Some microeconomic issues
The operational efciency of a stock market can be assessed by examining
the speed of execution and settlement of transactions, and by the levels
of commission and dealing spreads. Of course, the most signicant event
for the Stock Exchange in the postwar period was Big Bang in October
1986, an episode thoroughly chronicled elsewhere.
41
Attention here will
be conned to some micro issues, with political overtones, which affected
the market.
36
Management of UK equity portfolios, p. 257.
37
Committee on the Financial Aspects of Corporate Governance (Cadbury Report) (1992);
Study Group on Directors Remuneration (Greenbury Report) (1995); Committee on Cor-
porate Governance (Hampel Report) (1998).
38
Institutional Investment, p. 89.
39
Ibid., p. 91.
40
Ibid., p. 92.
41
Michie, London Stock Exchange, pp. 54395.
Stamp duty has been a long-standing irritant. A legacy of the Victorian
era, the market was greatly annoyed, but not surprised, when Dalton, the
Chancellor of the Exchequer, doubled stamp duty on share transfers in
1947. Already at a disadvantage compared to other international centres,
mainly New York in those years, the rise produced a 30 per cent drop
in transactions in the months after the change.
42
The Stock Exchange
lobbied persistently for a reduction but its annual pre-Budget submission
fell on deaf ears, whether Labour or Conservative. The rate was reduced
to 1 per cent in 1963, possibly to deect criticism of the introduction of
capital gains tax.
Throughout the 1960s and 1970s the personal sector was a persistent
net seller of equities and stamp duty on purchases was of little concern
to individual investors, and had no political implications. The incoming
Labour government in 1974 appreciated this and put the rate back to
2 per cent. A decade of lobbying was needed to reduce it to 1 per cent
in 1984. This was no softening of the Treasurys position but a sop to
soften the impact of the abolition of tax relief on life insurance premiums.
The government, eager to encourage wider share-ownership, regarded
such relief as unduly favouring institutional as against direct investment.
43
To help with Big Bang the Chancellor halved stamp duty in 1986, with
the promise that it would be removed if the Stock Exchange brought in
paperless settlement. That intention has now been partly fullled but the
tax remains and yields well over 3 billion a year.
Capital gains tax is a more recent imposition. Discussed by a Conserva-
tive government in 1961 it was introduced by the Labour administration
of 1964. The taxing of nominal gains had much political appeal, especially
with the market on a rising trend and displaying occasional speculative
surges. The government saw little difference between income and cap-
ital gain, although it was careful to exempt gains on gilt edged. After
taking ination into account real gains were modest, especially on a risk-
adjusted basis. In broad terms the nominal return (capital and dividends)
over the period 195069 averaged 14.3 per cent and adjusted for ina-
tion gave returns of 10 per cent.
44
The Stock Exchange viewed the tax as
likely to dampen interest in equities, and that it would lock investors into
their holdings thereby reducing switching and turnover. There was some
consolation in that losses could be offset against gains and the tax was
applied at a minimum threshold. But no element of price indexation was
introduced until 1982 and no tapering was allowed for the length of time
42
Ibid., p. 353.
43
N. Lawson, The View from No. 11. Memoirs of a Tory Radical (1992), p. 355.
44
E. Dimson, P. Marsh and M. Staunton, Millennium Book II: 101 Years of Investment
Returns (London Business School, 2001), pp. 2612.
296 Arthur Thomas
shares were held. Some alleviation was introduced in the 1988 budget
when the Chancellor brought forward the basic date for calculating tax
liability from 1965 to the more realistic base of 1982. The yield from this
tax is such that any lobbying, even for alleviation, falls on deaf Treasury
ears.
Reections
Over the past fty years industrial and commercial companies have relied
heavily on internal sources to nance investment. As to the main exter-
nal sources, there has been increased dependence on the banking system,
thus bringing Britain nearer to the continental model. The capital mar-
ket has continued to provide an important increment of funds depending
upon the state of the economic cycle. In the early postwar decades govern-
ment involvement in the markets activities, with respect to the nancing
of ICCs, was mainly conned to broad macroeconomic areas, largely
scal intervention through the tax mechanism and intended to induce
companies to plough back prots, coupled with an elaborate array of
sweeteners to stimulate investment. Not until the appointment of the
Wilson Committee, by the then Labour government, was there any sort
of ofcial inquest into whether the City was catering adequately for the
investment needs of British companies. The Committee found, to the
dismay of some City critics and the quiet satisfaction of the Square Mile,
that there was no great imbalance between the demand for funds and the
supply from the capital market. Certainly, the Wilson Committee shied
away from any suggestion that there should be a central fund to nance
manufacturing investment.
Over the years the ability of the capital market to supply funds became
dependent on the institutionalisation of the equity market, partly
encouraged by various scal inducements. This produced an under-
lying demand for equities, creating a sellers market for shares and a
steady demand for the share-issuing facilities of the City. However, if
there was no gap in the supply of funds there were other kinds of gap,
and in recent years a succession of inquiries have looked at institutional
involvement in the capital market and broader areas of corporate gover-
nance. One of the concerns was the charge that the main investing insti-
tutions were guilty of short termism, of looking for quick capital gains
and neglecting long-term investment and prot prospects. The second
was the other side of the same coin, that is, not taking an active interest
in the managerial competence of rms. While there have been improve-
ments the tendency remains to sell shares rather than seek to change
management.
The largely scal manipulations of earlier years were replaced in the
1980s by interventions that, broadly, may be given the label microeco-
nomic, and represented attempts to improve the operational efciency
of both the primary and secondary markets. In many ways these were
viewed as more intrusive since they were concerned with how the City
conducted its business rather than simply looking at broad effects. In fact,
they had started before the Thatcher era and culminated in Big Bang in
1986. In the secondary market this led to signicant changes in the struc-
ture of the market and to reductions in transaction costs. More recently
the primary market witnessed interventions designed to remove the old
practices of xed prices and the introduction of competitive practices
designed to lower new issue costs. All these developments undoubtedly
met with government approval but not to the extent that it is prepared
in the foreseeable future to assist the market in bringing about further
signicant cost reductions that would benet domestic and international
transactions. Irritating gaps will remain to dilute the markets opera-
tional efciency. For the average investor the reduction in stamp duty at
the time of Big Bang achieved more than the ending of xed commissions
and despite persistent pleas for its abolition the tax remains. Capital gains
tax, mooted in the 1920s but introduced in the 1960s, is a more com-
plicated issue involving questions of equity, but the government has held
back from giving due allowance for the length of time investments are
held, or removed the discrimination in favour of government stocks. The
price for the government of pleasing the City in these areas is too large.
15 Domestic monetary policy and the banking
system in Britain 19451971
Duncan M. Ross
There were three main phases of monetary policy in Britain in the period
between the end of the Second World War and the adoption of Compe-
tition and Credit Control in 1971. The rst was the era of cheap money,
during which the government tried to hold down interest rates in order
to encourage investment in reconstruction and enhancement of indus-
trial capacity. The second phase began in 1951 when an increase in bank
rate re-activated monetary policy as an instrument of domestic-demand
management, and a series of controls was exercised through the banking
system. The third phase of policy was in the 1960s. After a brief period
in which all constraints had been relaxed, there was a return to controls,
guidance and ofcial intervention. There developed in this decade, how-
ever, a realisation that targeting the British clearing banks alone was an
ineffective way to control domestic demand, but the inationary, balance-
of-payments and current-account pressures of the period were such
that the authorities were unable to think their way out of the problem.
Fromthe mid 1960s, the Bank of England in particular became convinced
that the policy of leaning into the wind (purchasing gilts in the securi-
ties market) allowed themto stabilise domestic monetary conditions. The
emergence of Competition and Credit Control in 1971 the new regime
which monitored the relationships not only between the banks but also
between the banks and the Bank of England greatly increased compe-
tition in the banking and credit market, created more equal competitive
This paper reports results from an ESRC-funded research project, no. R000236447, held
in collaboration with Forrest Capie and Michael Collins. We are grateful for the research
assistance of Miriam Silverman and, particularly for this chapter, Mark Billings. The Bank
of England and the major clearing banks, Lloyds-TSB, HSBC, Barclays and National
Westminster, and their archivists all provided generous access and assistance with their
records. An earlier version of this chapter appears as La politique mon etaire nationale et
le syst` eme bancaire en Grande-Bretagne, 19451971, in Mission Historique de la Banque
de France, Politiques et Pratiques des Banques dEmission en Europe (XVIIXX si` ecle): Le
Bicentenaire de la Banque de France dans le perspective de lidentit e mon etaire europ eenne (Paris,
2003), pp. 66788.
298
Domestic monetary policy 19451971 299
conditions among the various institutions and signalled the beginnings
of a move towards money-supply targeting.
In all these discussions, however, it is important to remember that
domestic monetary policy was never the key focus of government
attention in the period. That distinction belonged to the international
situation and in particular the relationship between the balance of pay-
ments and foreign reserves. Catherine Schenk has shown that explana-
tions of policy choices which are couched in terms of maintenance of the
international role of sterling and fears that the sterling balances (debts
denominated in that currency and built up by Commonwealth countries
during the war) would bankrupt the economy have greatly overstated the
case, but it remains true that the external situation continued to dominate
through the 1960s.
1
For those who understand the history of the British
economy as a series of set-piece conicts between nancial and produc-
tive capital, the 1950s and 1960s are ranked alongside the Bank Acts
of 1844 and the restoration of the gold standard in 1925 as vital pieces
of evidence.
2
In this reading, conict between the City and government
exists over relatively minor matters, such as how or how far policy is
to be implemented; there are no fundamental disagreements about the
direction of policy. It is a view which posits that the interests of nance
have essentially captured the policy-making process through a process
of inltration of government by the nancial elite. Policy conicts exist,
therefore, between industry on the one hand and the City and govern-
ment on the other.
3
With reference to this particular episode of policy, it
is argued that protection of the balance of payments, and maintenance of
the international prestige of sterling, contributed to a policy environment
dominated by short-term crisis management and deationary measures.
An expressed preference for low ination and high interest rates meant
that the external nancial environment dominated investment and pro-
duction, and that this was a locked-in feature of the institutional structure
of the British economy.
4
This view of the British economy in the post-
war years is not universally accepted, however, and Smiths review of
institutional explanations for decline has pointed to both the variety of
1
C. R. Schenk, Britain and the Sterling Area. From Devaluation to Convertibility in the 1950s
(1994).
2
The best review of this literature is G. Ingham, Capitalism Divided? The City and Industry
in British Social Development (Basingstoke, 1984); see also S. Newton and D. Porter,
Modernization Frustrated. The Politics of Industrial Decline in Britain Since 1900 (1988).
3
This is developed in P. Anderson, Origins of the present crisis, New Left Review 23
(1964), 2653, F. Longstreth, The City, industry and the state, in C. Crouch (ed.),
State and Economy in Contemporary Capitalism (1979), pp. 15790, and T. Nairn, The
Break Up of Britain (1981).
4
See for example W. Hutton, The State Were In (London, 1995), p. 22.
300 Duncan M. Ross
approaches to growth which were developed by governments in the 1950s
and 1960s, and the long-term dynamism and innovatory capacity of the
City of London.
5
It is clear, nonetheless, that external exigencies constrained the gov-
ernments ability to develop its supply-side reforms in the period, and
that conict between the government on the one hand and the nancial
sector on the other did at times arise. The main problem in the immedi-
ate postwar years was the urgent need to constrain domestic demand for
consumer goods while encouraging exports: bank credit was seen as the
main engine of the former and selective controls over the amount and
direction of bank credit, issued by the Treasury and administered by the
Bank of England, were used, with the exception of a brief period from
1958 to 1960, from 1946 until 1967. Roger Middleton has divided these
decades into three main sub-periods.
6
The rst, which he describes as a
period of consolidation of the postwar settlement, sawgeneral acceptance
of the need to respond to external difculties by constraining domestic
demand, but with occasional disputes between the government and the
City of London about the extent to which the former could exercise con-
trol or leverage over the latter and how this was to be done. The second
sub-period, from 1958 to 1966, he characterises as high Keynesianism,
and a period of deep frustration as rst Conservatives and then Labour
were unable to execute a modernising strategy, focused on the supply
side. Part of the explanation for this inability to address the supply-side
shortcomings of British industry whether through long-term planning,
the National Economic Development Council or the Department of Eco-
nomic Affairs lay in the continual need to exercise short-term demand
management as a result of chronic weakness in the balance of payments.
7
In particular, he suggests that disillusionment set in after 1966, when the
Labour partys more active agenda of industrial and regional policy had
to be abandoned in the face of a series of deationary budgets designed
to protect the external value of the pound. This unequal struggle was of
course abandoned with devaluation in November 1967.
The relationship between the government and the nancial sector
in this period needs, therefore, to be understood largely in terms of
the conict between internal and external policy goals. For Geoffrey
Ingham and Frank Longstreth the governments commitment to main-
taining Britains international position is evidence of its alignment with
5
M. Smith, Institutional approaches to Britains relative economic decline, in R. English
and M. Kenny (eds.), Rethinking British Decline (Basingstoke, 2000), pp. 184209.
6
R. Middleton, The British Economy Since 1945. Engaging with the Debate (Basingstoke,
2000), ch. 3.
7
Ibid., p. 87.
the interests of nancial capital and the competitiveness of the City of
London. For others, the various government-fostered attempts to gen-
erate industrial change and a higher rate of economic growth through
supply-side reforms (particularly those undertaken by the Labour party)
undermines this interpretation, and do suggest some conict with the
nancial system. Ultimately, however, external concerns did dominate
within the government, and the Treasury prevailed over the Department
of Economic Affairs.
This essay will examine some of these issues by considering the way in
which the government attempted to exercise control over domestic ina-
tionary demand by reining in monetary expansion through the banking
system. This did of course induce a number of conicts between the gov-
ernment and the banking system, as represented by the Bank of England,
and these will be alluded to. The peculiar position of the Bank of England
as both the banks representative when dealing with the government and
the governments in translating policy through the banking system, will at
various times be seen as uncomfortable. The chapter will rst consider the
chronology of the various policy measures through these decades. It will
then consider the impact of the particular policy choices on the operation
of the Bank of England and more importantly perhaps on the banking
system. It will present new data from the clearing banks archives which
allow a more accurate assessment of the position in this period than has
previously been possible. Lastly, it will suggest that this rather depress-
ing and unedifying period of demand management both damaged the
banking system and revealed the limits to the Bank of Englands (and by
extension the governments) ability to impose its will.
Chronology of monetary policy and restrictions
The chronology of policy in this period is fairly well known.
8
The rst
response from government in the postwar years was Daltons attempt, as
Chancellor of the Exchequer in the newly elected Labour government,
to force long-term interest rates down to 2.5 per cent.
9
This was done
for a number of reasons, and was a policy which faced little opposition at
8
See, for the earlier period, S. Howson, British Monetary Policy, 19451951 (1993). For the
1950s, the material is covered in D. M. Ross, British monetary policy and the banking
system in the 1950s, Business and Economic History 21 (1992), 14859, and J. S. Fforde,
The Bank of England and Public Policy, 19411958 (Cambridge, 1992). For the 1960s, the
best sources remain J. H. B. Tew, Monetary policy, Part 1 and M. J. Artis, Monetary
policy, Part 2 both in F. T. Blackaby (ed.), British Economic Policy, 19601974 (Cam-
bridge, 1978). See also A. Cairncross, Diaries of Sir Alec Cairncross 19611964 (London,
1999).
9
S. Howson, The origins of cheaper money 19457, EcHR 41 (1987), 43352; J. C. R.
Dow, The Management of the British Economy, 194560 (1964), pp. 1319; C. M. Kennedy,
302 Duncan M. Ross
the time.
10
The need to hold down the cost of capital and reduce obsta-
cles to investment, the desire to keep the burden of interest payments on
the national debt to a minimum, and the very high levels of government
debt contained in the nationalisation and social welfare policies pursued
by the government, all tended to nd supporters of cheap money. How-
ever, the balance-of-payments crisis and the rising level of demand in
the economy in the second half of 1947 showed that the straitjacket of
physical controls was insufcient to restrain the inationary pressures
inherent in this approach, and alternatives were necessary. One of Jays
rst acts on Crippss move to the chancellorship in place of Dalton in
November 1947, just before his own appointment as economic secretary
to the Treasury, was to draft a memorandumdealing with the inationary
situation, in which he argued that
on the governments side, there has perhaps been too much concentration on the
purely budgetary question of interest rates, important though it is, and too little
on the volume of bank deposits.
11
The Treasury and the Bank agreed upon two objectives in the domes-
tic ght against ination. In the rst place, a budgetary surplus was to
be pursued, which would allow the Treasury to repay some of the large
oating debt then outstanding. Combined with open-market operations
by the Bank to reduce the clearers cash reserves, this would reduce the
levels of deposits and give an indication that ination was under con-
trol. This policy was pursued vigorously and with some success; budget
surpluses were recognised as an essential component of the ght against
ination in these years.
12
The second objective, however, was much more contentious. Selective
restriction of bank advances had been a feature of wartime policy, and
this continued in the postwar years. A memorandum issued by Midland
Bank in December 1947 neatly encapsulated the thrust of policy and the
role of the clearing banks within it:
the responsibility lies upon the banks of reinforcing the discretion of business by
refusing to assist, with bank nance, projects which appear to them to contravene
the general indications of policy.
13
Monetary policy, in G. D. N. Worswick and P. H. Ady (eds.), The British Economy,
194550 (Oxford, 1952).
10
A. Cairncross, Years of Recovery. British Economic Policy 194551 (1985), pp. 42930.
11
Jay to Cripps, Interest rates, credit ination and budget surplus, 5 Nov. 1947,
T 233/481.
12
Cairncross, Years of Recovery, pp. 4214.
13
Midland Bank Board Circular, 22 Dec. 1947, HSBC: Midland Bank Archives (MBA),
Intelligence les, advances policy.
Jay, in particular, was not satised with this, and he continually pushed
for the imposition of a ceiling on the level of bank advances which the
clearing banks could offer their customers. Catto, Governor of the Bank
of England, reacted violently:
I view such a suggestion with the utmost alarm: it is not practical and would land
us in a mess of violent deation. It is contrary to two fundamental principles of
banking and nance:
(a) that money must never be made unobtainable. The banks must always be
willing lenders, and
(b) that disinationary pressure on the banking system can only be by pressure
on the borrower.
14
The Bank of England held sway in this policy disagreement, and at a
meeting between Cripps, Jay and Cobbold, Deputy Governor of the
Bank of England, six days later, it was agreed that restrictions would
not be imposed on the banks, but that they should have the gist of pol-
icy explained to them, in the hope that they would endeavour to keep
advances as low as they felt able without causing disturbance.
15
This set the timbre of policy on bank advances in the entire period up to
1951 and it is clear that despite pushing from the government, the Bank
held fast in its opposition to an imposed ceiling on lending.
16
Tomlinson
has argued that the attitude of the Labour government, in refusing to
re-activate other monetary weapons, particularly bank rate, can only be
properly understood by acknowledging the position of primacy which
the balance of payments held in the decision-making process.
17
Aban-
donment of the structure of low interest rates, which enabled the gov-
ernment to borrow cheaply, would have had disastrous implications for
the debt problem. Nevertheless, by the time of the 1951 general election,
government debt had increased greatly, balance-of-payments problems
were becoming steadily more acute, gold and dollar reserves were falling
rapidly and international condence in sterling was deteriorating.
18
Both
14
Catto to Cripps, 15 Dec. 1948, BoE C40/685 (emphasis in the original). Catto was
seriously ill at the time and marked this memo dictated from my bed to show his
strength of feeling on the issue.
15
Cobbold memo, 21 Dec. 1948, BoE C40/685.
16
In September 1949, Hall, director of the Economic Section, was clear that on this issue
we were defeated by the Bank; Gaitskell urged himto write a paper and if necessary . . .
have a clash with Cobbold [now Governor] and accept his resignation if he offered it:
The Robert Hall Diaries 194753, ed. A. Cairncross (1989), p. 88 (29 Sept. 1949). See
also Chancellors notes on economic policy, 6 Nov. 1950, T 171/403.
17
J. Tomlinson, Labours management of the national economy 194551, Economy and
Society 18 (1989), 124.
18
HC Deb 493, cc. 1913, 7 Nov. 1951.
304 Duncan M. Ross
The Economist
19
and The Banker
20
advocated the re-activation of mone-
tary policy, and attitudes within the Treasury had begun to change: one
ofcial noted in a memorandum prepared for the incoming Conservative
government that the point had been reached where technical measures
were needed to reinforce ofcial guidelines on bank advances.
21
The introduction of these measures marks the beginning of the second
phase of policy in the postwar years. These were introduced in packages
designed to work on the credit basis of the banks on a number of fronts
simultaneously.
22
Butler, the new Conservative Chancellor of the Exche-
quer, announced in November 1951 a rise in bank rate from 2 per cent
to 2.5 per cent; a short-term funding operation in an attempt to reduce
the oating debt in the hands of the clearing bankers; a strengthening
of the stringency to be applied by the Capital Issues Committee, which
had power to refuse permission to raise capital in the market; and the
introduction of a short-term rate of 2 per cent at which advances to the
discount market would be made against Treasury Bills.
23
This last act
effectively removed the tap of credit in the market which had existed as
a result of the Bank of Englands willingness to buy unlimited amounts
of Treasury Bills at 0.5 per cent. In addition to these technical measures,
the Chancellor requested that the banks should intensify their efforts to
restrict the granting of credit to essential purposes. In March 1952, bank
rate was raised to 4 per cent, other interest rates were also raised, hire-
purchase restrictions were imposed, and the requests to the banks were
renewed and strengthened. Throughout 1953 and the rst half of 1954, a
more relaxed attitude to the question of restrictions and demand restraint
prevailed and interest rates were reduced. In the latter half of 1954, how-
ever, the current surplus on the balance of payments started to deteriorate
and the reserves of gold and dollars went into decline.
24
Unemployment
fell and imports and prices began to rise sharply. In January 1955 bank
rate was raised to 3.5 per cent; four weeks later it was further raised
to 4.5 per cent. The Treasury Bill rate rose and it was announced that
the authorities would support the rate on transferable sterling. This was
19
The Economist, 5 May 1951, pp. 10534; 12 May 1951, pp. 111214; 19 May 1951,
pp. 11846.
20
The Banker, July 1951, pp. 7183.
21
Trend to Eady, Credit policy, 25 Oct. 1951, T 233/1684.
22
M. Collins, Money and Banking in the UK. A History (1998), p. 480; (Radcliffe) Com-
mittee on the Working of the Monetary System, Report (Cmd. 827, PP 19589, xvii.
389), para. 408.
23
HC Deb 493, cc. 2049, 7 Nov. 1951.
24
M. F. G. Scott, The balance of payments crises, in G. D. N. Worswick and P. H. Ady
(eds.), The British Economy in the Nineteen-Fifties (Oxford, 1962), p. 78; Dow, Manage-
ment, p. 78.
done for external reasons. Internally, hire-purchase restrictions were re-
imposed and both the Capital Issues Committee and the clearing banks
were asked for greater stringency. The Governor of the Bank impressed
on the clearing banks the need for a reversal in the trend of advances.
25
This was not achieved to the Treasurys satisfaction however, and in July
1955, Butler made explicit his expectation of assistance from the banks:
The essential need of the moment is for a reduction in the total demand on the
countrys resources. Only a part of that demand is nanced by bank advances,
but it is an important part and one which, with the cooperation of the banks,
can be readily affected by the granting or withholding of credit. I have no doubt
that the banks will agree that it is their duty to reduce the amount of bank credit
below what they would be glad to give in less difcult times.
26
Cobbold asked that considerable reductions should be achieved by
December,
27
and the banks agreed to seek a 10 per cent contraction
in their advances business.
In February 1956, bank rate was raised to 5.5 per cent, hire-purchase
restrictions were tightened, economies in the programmes of nationalised
industries were announced, investment allowances were withdrawn and
the Chancellor appealed for continuous efforts from the banks to hold
down advances. This appeal was reinforced in July. Pressure was kept
up and by the beginning of 1957, some success was being achieved. In
February, bank rate was reduced by 0.5 per cent to 5 per cent. With a
deterioration in the external situation in summer 1957, however, bank
rate was raised to a crisis level of 7 per cent, and the banks were instructed
to hold advances over the following twelve months at the level of the
previous twelve months. This package also included further restrictions
on public-investment programmes and restrictions on the provision of
credit for overseas borrowers were tightened. On 1 July 1958 Heathcoat
Amory, the Chancellor, announced that he no longer felt it necessary to
ask the banks to restrict the total level of advances to any given gure
after the end of July.
28
Instructions to the Capital Issues Committee were
greatly relaxed, and in 1959 the restraints on hire-purchase operations
were nally removed.
This relaxation was short-lived, however. In the aftermath of the
Radcliffe Committee, the Bank of England developed the new tool of
Special Deposits designed to reduce the clearing banks liquidity, and
therefore their ability to expand lending to domestic consumers and
25
Governors note, 22 March 1955, BoE C40/688.
26
HC Deb 544, c. 825, 25 July 1955.
27
Cobbold statement at Committee of London Clearing Bankers (CLCB) meeting
26 July 1955, BoE C40/689.
28
Heathcoat Amory to Cobbold, 15 April 1958, T 233/1663.
306 Duncan M. Ross
these were rst imposed in June 1960. This called for the clearing banks
to lodge with the Bank of England 1 per cent of their total gross deposits.
29
This requirement was quickly raised to 2 per cent of gross deposits and
in July 1961 a further percentage point was added. At this date, bank
rate was raised to 7 per cent and qualitative constraints on lending were
reintroduced. In summer and autumn 1962, some relaxation was coun-
tenanced. However, the banks continued to argue that they were being
unduly constrained, and they lobbied for a reduction in the minimum
liquidity ratio from 30 per cent to 25 per cent. The Bank of England,
seeing this as an opportunity to modernise its approach to credit con-
trols while preferring Special Deposits to variable liquidity rates took
up this issue and spent considerable time and effort trying to persuade
the Treasury.
30
Some success was achieved, and a de facto minimum of
28 per cent was adopted, but the re-imposition of constraints and con-
trols in response to the crisis of 1964 brought the reactivation of the
bankers self-denying ordinance and qualitative guidance on lending.
31
Maycock, economic advisor to Midland Bank, described how the con-
trols and quantitative ceilings on bank advances in the second half of the
1960s were reinforced to a much greater degree than previously.
32
The
severe squeeze continued through to the beginning of 1967, although
lending ceilings and some other restrictions did remain in force beyond
this date. The shift towards new policy instruments had begun to gain
ground, however,
33
and both the bank charges report of the National
Board on Prices and Incomes and the Monopolies Commission Report
on the proposed merger of Barclays, Lloyds and Martins banks contained
renewed interest in competition between the banks.
34
The new approach
to monetary policy began to be signalled from 1968, with Cobbold as
Governor of the Bank beginning to acknowledge the force of arguments
relating to money supply targeting, and then making it clear that there
was no longer a commitment to purchase gilts at any price.
35
It can be seen fromthis chronology, therefore, that the issue of the rela-
tionship between the government and the nancial systemwas essentially
29
The details of this period are contained in R. F. Bretherton, Demand Management 1958
64 (1999).
30
See e.g. OBrien note, Banking liquidity, 7 March 1963 and note of meeting in the
Chancellors room, 24 May 1963, BoE C40/1203.
31
Treasury directives and notes of guidance on advances, from September 1939 to date,
Barclays Bank Archive 80/1120.
32
J. E. Maycock, Monetary policy and the clearing banks, in D. R. Croome and H. G.
Johnson (eds.), Money in Britain, 19591969 (Oxford, 1970), p. 162.
33
Tew, Monetary policy, p. 239.
34
Maycock, Clearing banks, pp. 1701.
35
Governors speech to Lord Mayors dinner, 17 Oct. 1968, BEQB 8 (1968), 410; BEQB
9 (1969), 1718. See also Tew, Monetary policy, pp. 2467.
one of how the former could encourage or exercise control over the latter
in pursuit of its policy goals. Disputes arose in 1948 and 1949, again in
1955 and 1957. After the report of the Radcliffe Committee, a search for
more technical measures, which would rely less on the Governors ability
to persuade the banks to followthe governments policy, was undertaken,
but this relationship was exploited once again in the mid 1960s.
Effectiveness of policy
The effectiveness of policy in this period has been much debated in the
literature, and it is clear that the shift towards a new approach in the
1970s is evidence of dissatisfaction with both the methods and the out-
comes of the previous decades. In appraising this policy, we should bear
in mind the note of caution sounded by Cairncross who suggested that
for much of this period domestic monetary policy was something of an
afterthought and that therefore little was expected of it.
36
Nevertheless,
this section of the chapter will consider the impact of, rst, the quanti-
tative and qualitative guidance issued to banks on the level and direction
of their lending. It will examine the balance sheets of the banks in this
period and assess the impact of policy on their earning capacity. The
strength of the cartel will be noted, but so too will the declining posi-
tion of the clearing banks vis-` a-vis other nancial institutions. Finally,
it will briey consider the relationship between the banks and the Bank
of England, and with it, of course, the policy channels from the govern-
ment, through the Bank to the banking system. It will be suggested that
the policy approach was unhelpful both to the banks and to the process
of policy implementation. It is clear that by the end of the 1960s a new
approach was not only preferable, but absolutely necessary.
Pressure on bank advances is perceived as the one area in which the
outcome reected ofcial policy. In estimating the effect of policy vari-
ables, Artis concluded that bank lending restrictions proved signicant
on almost any specication of his equations, and that they had an impor-
tant cumulative effect over time.
37
He estimated that the impact of a
mild request was to reduce overall bank lending by about 70 million,
while a severe request resulted in a reduction of double this amount.
It is not, however, the absolute levels of reduction which most concern
us here, but the ways in which the banks responded to the various qual-
itative requests. Figure 15.1 shows the advances granted by members
36
A. Cairncross, Managing the British Economy in the 1960s. A Treasury Perspective
(Basingstoke, 1996), p. 254.
37
Artis, Monetary policy, pp. 2634.
0 5
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of the British Bankers Association to what can be called the most and
least favourable sectors. The policy strategy was fairly simple: to encour-
age manufacturing exports, while discouraging personal and domestic
consumption which might have an impact on domestic demand or the
balance of payments. To these ends, the advice given to the banks was
consistent throughout the period, and Figure 15.1 shows the extent to
which they responded to the various requests.
38
Personal and Financial
Lending was the most frowned-upon avenue of lending, since it was felt
that a high propensity to import resulted in domestic spending having a
very serious and negative impact on the balance of payments. Restriction
of nancial loans was essentially targeted at hire-purchase activity for the
same reason. Manufacturing, on the other hand, was the most favoured
sector, since only by encouraging industry could exports be maintained,
or domestic production developed. Winton has previously noted the rela-
tionship between these two series for Lloyds Bank,
39
and Figure 15.1
shows the extent of acquiescence. Anumber of crucial episodes are shown
clearly in the graph. First, the beginning of a more active policy and
more resolute guidance is reected in the convergence of the data during
the period from 1951 to 1958. The relaxation of restrictions in 19589
resulted in rapid expansion of personal borrowing round the turn of the
decade, but this was then brought under control by the re-imposition of
the guidelines through most of the 1960s.
Further evidence of the impact of the policy is shown in Figure 15.2,
which reveals the proportion of the banks balance sheets held as advances
and investments through the period from 1920 to 1980. The historically
very low levels of advances throughout the 1950s are in part explained by
the pressure exerted by the directive monetary policy of the period. The
rapid expansion of advances in the 1960s, on the other hand, reects two
things: an attempt to re-establish the primacy of the most protable com-
ponent of the balance sheet, and the banks response to ofcial support
in the gilts market. A very high proportion (in excess of 90 per cent) of
the investments held by banks were gilts, and the policy of leaning into
the wind throughout the 1960s allowed them to sell these assets in order
to expand advances. In particular, the banks were able to sell investments
whenever there was a call for Special Deposits. The commentators on this
period are agreed: faced with any call for Special Deposits, the banks were
able simply to sell bonds and maintain their liquidity levels. As a result,
Artis is of the opinion that Special Deposits, one of the key elements in
38
For a discussion of this and the position of the banks with regard to the guidance, see
O. Franks, Bank advances as an object of policy, Lloyds Bank Review (January 1962).
39
J. R. Winton, Lloyds Bank 19181969 (Oxford, 1982), p. 177.
c
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the attempts to control bank liquidity and domestic monetary expansion,
were largely redundant as a complement to bank lending requests.
40
The banks, therefore, were being squeezed in two directions; there
was no point in competing for deposits because they were unable to use
them in the most protable manner by increasing their lending. Second,
they held very high levels of government securities in the 1950s and even
after considerable divestment in the 1960s, they were unable to expand
advances as fast as they wished to. The discussions noted above about the
minimumliquidity ratio and the pressure which the banks felt themselves
to be under is revealed in Figure 15.3, however, to have been greatly
exaggerated. Again, by making use of internal and unpublished balance
sheet data, we can show that the true ratio of liquid to total assets was
around 40 per cent, that is, considerably higher than the ofcial published
data would indicate. This clearly reveals the difculty facing both the
monetary authorities and the banks themselves. A high level of liquid
assets reduced the extent to which the banks could expand their income
stream, andat the same time greatly frustratedthe intentions of the policy-
makers.
The impact of policy in this period was, then, fairly limited, and the
results reported here are in line with those discussed by contemporary
commentators. Four elements are germane. First, it is clear that the banks
were almost always extremely liquid, and could rearrange their assets
fairly easily whenever the need arose. Second, despite the yield differen-
tial between advances and gilts, the banks were often constrained from
increasing their advances. This is the one area in which the policy appears
to have had some success. Third, even after divesting gilts in the late 1950s
to accommodate the increase in advances, the banks still held these assets
in historically relatively large quantities. They were not anyway inclined to
hold more long-dated gilts after their early 1950s experiences (when un-
realised losses mounted rapidly) and the yield differential between long
and short gilts did nothing to encourage them. Fourth, the policy of lean-
ing into the wind had the effect of insulating banks fromuctuating prices,
allowing them to sell off gilts when Special Deposits were called for. It
is this relative ineffectiveness of policy in these years that encouraged the
generation of an alternative approach in the late 1960s and early 1970s.
The impact on the banking system
One area in which the policy pursued in this period did have a signi-
cant impact, however, is in the competitive position and prot-earning
40
Artis, Monetary policy, 264.
0 5
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capacity of the banks. One of the key conclusions of the National Board
for Prices and Incomes inquiry was that bank prots had, throughout the
1950s and 1960s, been excessive, as a direct result of the high average
bank rate.
41
Some support for this position can be seen in Figure 15.4,
which reports rates actually paid on deposits in three of the major banks,
and in addition a notional rate calculated as 50 per cent of that reported
by Capie and Webber.
42
This last, it should be noted, is an arbitrary gure
justied by the fact that not all deposits were interest-earning. It is, how-
ever, striking that this notional rate crosses the rates calculated in the mid
1940s and remains above thereafter, having previously always been below.
This implies that around the time of the crossover, the banks either started
to pay interest on a smaller proportion of their deposits than previously,
or paid interest at lower rates, or both. Otherwise, the pattern of actual
rates paid does generally follow the pattern shown by the notional rate.
The conclusions to be derived from this graph are fairly clear, however.
First, there is a very high degree of uniformity in average rates paid on
deposits. This may conrm the view that the banking cartel in this period
was operating fairly powerfully, at least on deposit rates. Second, there is
clear evidence of a large endowment effect in the 1950s and 1960s, with
the margin between average deposit rates and bank rate at its narrowest
in years of low bank rate (1954, 1959, 1963) and at its widest in years
of high bank rate (1957, 1961, 1964 onwards). Further evidence of the
endowment effect indeed of its considerable widening in the 1960s
is provided by Figure 15.5. This shows the average margin earned by the
three banks for which data are available, and reveals the extent to which
the banks were exploiting this endowment effect in periods of rising bank
rate by increasing average advances rates by more than average deposit
rates. It is interesting to note that, although the Westminster Bank had a
consistently higher margin than the others fromthe 1950s, neither prots
nor total assets grew at a faster rate. An explanation for this may be that
the Westminster was more constrained by lending controls than other
banks, with a higher proportion of their lending being directed towards
non-essential borrowers.
It is clear, however, that the banks were more than happy to exploit
both a considerable windfall effect and steadily widening prot margins
on advances/deposits business in these two decades, and that they acted
in a fairly tightly cartelised manner. These elements were powerful factors
in the indictment of the banking system delivered by the National Board
41
National Board for Prices and Incomes, Bank Charges (Cmd. 3292, PP (1967), para.
43.
42
F. Capie and A. Webber, A Monetary History of the United Kingdom, 18701982, I: Data,
Sources, Methods (1985), table III (10), pp. 4945.
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316 Duncan M. Ross
for Prices and Incomes in 1967 and the Monopolies Commission in
1968.
43
The combinedeffect of these two reports, arguedTew, was to pro-
duce a detailed and disturbing critique of the banks and their cartelised
mode of operation.
44
The main components of this critique were: (a)
the cartel had a deeply soporic effect; price competition was marginal
at best; and (b) this led to excessive non-price competition, particularly
in the spread of branches throughout the country. This meant that the
banks investment in xed capital was far higher than it needed to be
and an attitude of entrenchment, rather than responsiveness, had been
created.
Criticisms of this sort had been presaged in the Bank of England as
early as 1965. In March of that year, Fforde wrote a long paper in which he
discussed the banking systemand the need for changes in the competitive
environment. His conclusion was clear and unambiguous:
The clearing banks do not seem to be motivated by a desire to maximise prots
so much as by a desire to provide the maximum of branch banking services
at a reasonable price to the customer consistent with a reasonable growth in
prots and an avoidance of any loss. In the circumstances, the result is likely
to be an uneconomic use of manpower which cannot be eliminated by ordinary
competitive forces.
45
This behaviour in which the banks were happy to accept a fairly steady
owof income, but were relatively unconcerned about the need to deliver
efcient or protable services was clearly a response to the constraints
imposed on competitive actions in the postwar years, but it is also clear
that, by the 1960s, the view had formed that the banks were adopting
an overly passive approach to the pursuit of new business. Channon
refers to the banks in the late 1960s as sleeping giants
46
and notes ris-
ing public awareness of the relative unattractiveness of their deposit and
advances rates. By this period, British banks were losing business to a
wide range of competitors, foreign banks as well as non-banking nan-
cial intermediaries located in Britain. The inability of the large British
banks to respond to the new environment of the 1960s has been blamed
on their administrative heritage of managerial and competitive inertia.
47
Fforde noted that one third of all outstanding advances to UK residents
43
National Board for Prices and Incomes, Report no.34: Bank Charges (Cmd. 3292, PP
19667 xliii, 87); Monopolies Commission; Barclays Bank Ltd, Lloyds Bank Ltd and Martins
Bank Ltd. Report on the Proposed Merger (PP 19678 (319) xxvi, 395).
44
Tew, Monetary policy, 242.
45
J. S. Fforde memo, Implications of changes in the banking system, p. 25, 11 March
1965, BoE C40/1205.
46
D. F. Channon, British Banking Strategy and the International Challenge (1977), p. 40.
47
G. Jones, British Multinational Banking 18301990 (Oxford, 1993), ch. 10.
at the end of 1964 was due to American banks, and another third to
British banks domiciled overseas: the foreigner has scored a competitive
success, and the prots have been remitted abroad. It is not hard to see
why.
48
One explanation for this particularly favoured by the banks them-
selves, it should be noted is that the restrictions on lending only applied
to the British clearing banks. In giving evidence to the Radcliffe Commit-
tee, the Committee of London Clearing Bankers had pointed out that the
restrictions on their lending had been counterbalanced by the ease with
which alternative sources of credit could be utilised.
49
The Committee
itself concurred:
The joint-stock banks are obviously the dominant source of short-term nance,
and the insurance companies, pension funds and building societies, of long-term
nance. But . . . there is no rmline of division, as is sometimes supposed to exist,
between the market for credit and the market for capital . . . nearly all [nancial
institutions] are prepared to switch some part of their funds to take advantage
of unusually favourable opportunities of short-term or long-term investment.
Pressure in one part of the market soon makes itself felt in other parts.
50
The distinction between long- and short-term credit was being blurred
by the impact of policy, but so too was the traditional institutional own-
ership of particular sectors of the market. This had particularly serious
implications for the ability of the banks to maintain their commanding
position in the domestic credit market once American banks started to
make their presence in London felt. After robust lobbying by the clearing
banks, the Bank of England was persuaded in 1961 of the need to extend
the Governors requests to constrain lending to encompass a wider range
of nancial and banking institutions active in the City.
51
It did not pass
without notice that, of all the groups included in the request of July 1961,
only the American banks had failed to achieve a reduction in lending three
months later.
52
Figure 15.6 reveals the extent to which the clearing banks domi-
nance of the entire British banking market declined during the period
under discussion. It is difcult to separate the impact of the controls on
the banks ability to compete with new forms of nancial service pro-
vision from their unwillingness to do so, but it is difcult to avoid the
48
Fforde memo., Implications, p. 15, 11 March 1965, BoE C40/1205.
49
D. J. Robarts, A. W. Tuke, A. D. Chestereld, in Radcliffe Committee, Minutes of
Evidence, qq. 3540, 3578 (23 Jan. 1958).
50
Radcliffe Committee, Report, para. 315.
51
Treasury and Bank exchanges on Control of nancial institutions other than banks,
2 Nov. 1961 8 Jan. 1962, BoE C40/1203.
52
Note, Bank advances, 2 Nov. 1961, BoE C40/1203.
0
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conclusion that the policy had had some effect.
53
Nevertheless, it is clear
that, by the end of the 1960s, a very different competitive environment
had emerged. The growth of Euromarkets in London and the parallel
development of international banking through a range of consortia and
joint ventures all combined to focus attention on their ability to respond
to very different types of demand at the end of the 1960s.
54
Llewellyns
approach to explaining structural change in the British nancial system
in the 1980s is couched entirely in terms of competitive pressures under-
mining cartelised behaviour and forcing the removal of restrictions on
the products and services offered by individual institutions.
55
A similar
approach for the 1960s would see emerging competitive pressures forcing
a reappraisal of the approach to monetary policy, while at the same time
undermining the deeply entrenched cartel and forcing the banks to re-
assess their domestic and international strategies. From the authorities
point of view, sophisticated nancial and money markets, populated by
internationally competitive institutions, were much more difcult to con-
trol or constrain than providers of domestic banking services. Domestic
Credit Expansion (DCE) which focused not only on domestic balance
of payments decits, but included international capital movements was
one response to this greater internationalisation.
56
Tew has pointed out,
however, that DCE was both potentially unstable and difcult to tar-
get effectively, and ofcial interest moved quickly towards adoption of
the money supply as the appropriate indicator for demand management
purposes.
57
By the appearance of Competition and Credit Control in 1971, not
only had the previous monetary policy approach greatly weakened the
domestic banks, but in addition the ability of the Bank of England to
53
Some evidence of howthe banks could respond to competitive opportunities and develop
new business in periods when restrictions were relaxed is contained in D. M. Ross,
Banking enterprise during the window of opportunity, 195861, in A. Slaven and D.
Aldcroft (eds.), Enterprise and Management: Essays in Honour of Peter L Payne (Aldershot,
1995), pp. 17197.
54
See D. M. Ross, European banking clubs in the 1960s: a awed strategy, Business and
Economic History 27 (1998), 35366. For a discussion of the emergence and growth of
the Euromarkets, and in particular the contribution of British banks to this, see C. R.
Schenk, The origins of the Eurodollar market in London, 19551963, Explorations in
Economic History 35 (1998), 22138.
55
D. T. Llewellyn, Structural change in the British nancial system, in C. J. Green and
D. T. Llewellyn (eds.), Surveys in Monetary Economics, II: Financial Markets and Institu-
tions (Oxford, 1991), pp. 21059.
56
For a discussion of Domestic Credit Expansion, see J. J. Polak, Monetary analysis of
income formation and payments problems, IMF Staff Papers 6 (1957); The Banker 118
(Dec. 1968).
57
Tew, Monetary policy, 247. See also Cairncross, Managing the British Economy in the
1960s, p. 253.
320 Duncan M. Ross
manipulate the market had declined. Recognition of this dual impact
of policy was explicitly incorporated in the public announcements of the
new approach, which was, according to the Governor, OBrien,designed
to permit the price mechanism to function efciently in the allocation of
credit, and to free the banks from rigidities and restraints which have for
far too long inhibited them from efciently fullling their intermediary
role in the nancial system.
58
Domestic competition between the banks
was to be encouraged, but so too was a level playing eld between banks
and other nancial intermediaries hence the imposition of a uniform
minimum reserve asset ratio of 12.5 per cent.
Conclusion
This chapter has discussed the imposition of monetary restrictions and
controls during the period of directive monetary policy in the 1950s and
1960s. Three elements need to be considered. First, it is clear that the
banks acquiesced to a considerable degree with the thrust of policy, and
the nature and direction of bank lending were signicantly adjusted. This
has long been seen as one of the few successful aspects of the policy in
this period, since attempts to control domestic expenditure and levels of
liquidity through Special Deposits and other technical inuences on the
banks balance sheets largely failed. Second, the banks themselves were
seriously affected by the policy of constraint and restriction. Unable to
expand the most protable element of their balance sheet, they instead
became content to compete through expansion of branch provision while
at the same time adopting a fairly tight cartel on prices. A widening mar-
gin between deposit and advances rates provided a steady income ow
and the entire effect was one of undermining competitiveness. By the end
of the 1960s, the clearing banks had lost considerable ground on their
foreign and domestic competitors in the British banking market and the
inroads of these institutions loosened the authorities ability to inuence
domestic monetary conditions through the conduit of the banking system
alone. This is the third important element to which we should pay some
attention the changing nature of the relationship between the govern-
ment, the Bank of England and the domestic banking system. Long-term
controls and administrative guidance to the banks came to be strongly
resented and they sought from the 1960s to be given greater freedom to
implement more competitive polices. The role of the Bank of England as
an intermediary in the monetary policy transmission mechanism came
58
Key issues in monetary and credit policy, an address by the Governor to the
International Banking Conference, Munich, 28 May 1971, in BEQB 11 (1971), 198.
under threat as a result both of the governments frustrations with their
inability to force compliance with their policy goals and the banking sys-
tems declining importance in the monetary markets. As the number of
institutions and markets in the City expanded with the inux of foreign
banks, domestic controls were no longer reasonable or effective. The pol-
icy of Competition and Credit Control introduced in 1971 is well named,
since it focused on each of these issues: competition between the banks
and between the banking system and other nancial institutions, and at
the same time the methods by which inuence over credit expansion
or as it began to be recognised, the money supply could be exerted. In
so doing, relationships between the government and the City moved on
to a very different footing from the informal controls which this period
characterised.
Appendix
Calculation of rates of return on deposits and advances
1. All balance sheet data have been calculated from internal Balance
Sheets and Prot and Loss accounts. Each bank had different con-
ventions and approaches to these.
2. Rates calculated on deposits and advances are annual averages based
on total earnings/cost per category per year, divided by the average
balance sheet total for the category, which has been calculated by
taking the mean of the year-end total, the previous year-end total and
the half-year total.
3. The average advances data for all banks include Items in Transit
items in the course of collection and balances with other Banks. The
banks were not consistent in their denition of such items and their
inclusion in advances will result in some understatement of the average
rate earned on advances, although this will be offset as the balance
sheet advances gures were stated after the deduction of bad debt
provisions.
4. The gures for deposits exclude hidden reserves, except for Lloyds
where they are included, because these cannot be consistently iden-
tied. This will impart a slight downward bias to the estimates for
Lloyds average deposit interest rate.
5. The deposits totals used are for deposit and current accounts. The
average rates paid on deposits are therefore composites.
16 The new City and the state in the 1960s
Catherine R. Schenk
During the 1960s the relationship between the City and the state under-
went a profound change. Through the 1950s the City had emerged only
slowly from the controls of wartime. Commercial banks were cushioned
in an oligopolistic environment where competition on interest rates was
carefully constrained and there were close links between the City and
the state (here used to refer to the Treasury and the Bank of England).
Gentlemens agreements, moral suasion and unilateral edicts were the
modus operandi of the Bank of England in their efforts to control the
expansion of credit and to protect the exchange rate of the pound through
these stop-go years. In terms of international nance, sterling policy pre-
occupied both Treasury ministers and Bank of England ofcials, and the
City usually co-operated with efforts to prop up the pound and to operate
the Sterling Area.
1
In the forum of foreign investment the governments
Capital Issues Committee vetted all proposals until 1959 and allowed
only those whose potential impact on the balance of payments was likely
to be positive.
During the 1950s there were two aspects of Londons international
role that seemed to threaten its prospects, but in the event neither was
as important as anticipated. The end of sterling as a reserve currency,
predicted in the 1950s to be a death knell for the City, had little lasting
impact because it was preceded by the diversication of the Citys activi-
ties. European integration, too, seemed to pose challenges and opportu-
nities for the City that in the end were not realised because the European
commitment to the liberalisation and integration of nancial markets
foundered as the international monetary system crumbled. What did
change the City and disrupt its relationship with the state was the un-
expectedly fast pace of nancial innovation.
During the 1960s the nature of the City changed in a variety of ways.
The activity of the accepting houses soared with nancial innovations
1
Sterling Area countries had preferred access to the London capital market compared with
European or other foreign borrowers: C. R. Schenk, Britain and the Sterling Area. From
Devaluation to Convertibility in the 1950s (1994).
322
The new City and the state in the 1960s 323
such as the Eurodollar and Eurobond markets.
2
The relatively liberal
regulatory environment for non-resident international nancial activity
attracted banks from around the world, particularly from the USA. The
pace of nancial innovation accelerated in a way that made it increasingly
difcult to control or even to account for ows of international short-term
capital. Sterling was no longer the only major currency of the City and
this began to drive a wedge between the interests of the City and those
of the state as sterlings viability in world markets deteriorated. These
developments undermined the cosy relationship between the City and
the state that had developed during and after the Second World War.
The Bank and the Treasury were slow to appreciate this new context and
did not formalise the systemof prudential supervision until after the 1974
domestic and international banking crisis.
Underlying these developments was the profound impact of the crum-
bling of the international monetary system throughout the 1960s. This
created a demand for products to spread the increasing exchange and
interest rate risk, and to avoid the controls on international nancial ows
that proliferated as governments sought to insulate their economies from
the symptoms of the collapse. In this dynamic and sometimes unstable
environment, the services of the City were at a premium: knowledge of
international opportunities and dangers, and the ability to arrange inter-
national syndication of loans and spread exchange risk. Networks became
more important with the growth of the interbank market and sharing of
information. The expanding and complex nature of many new facilities
enhanced the economies of scale and scope in London. These factors
all increased Londons share of international banking; Britains share
of the worlds deposit banks foreign assets increased from just under
20 per cent in 1966 to peak at 26 per cent in 1969. In the 1970s Londons
share decreased due to the geographical diversication of nancial activ-
ity as well as the relaxation of controls on New York as an international
banking centre. By 1978, Britains share of these assets had returned to
19 per cent.
Changes in the City
Among the regulators there was remarkable consistency throughout the
1960s. Lord Cromer was Governor of the Bank of England for the rst
half of the decade. Himself a merchant banker, he publicly promoted
2
The assets of accepting houses increased from 955 million in 1962 to 3,587 million in
1970: (Wilson) Committee to Review the Functioning of Financial Institutions, Evidence
on the Financing of Industry and Trade, 8 vols. (19778), V, p. 45.
324 Catherine R. Schenk
the internationalisation of the City and pressed consistently for deregu-
lation of capital controls and the stability of sterling. OBrien, who suc-
ceeded him in 1966, had come up from within the Bank and in this
sense was less professionally tied to the City. Nevertheless, he contin-
ued to promote the Citys interests, particularly stressing its contribu-
tion to the balance of payments through the invisible account. He came
into sharp and public conict with the Labour government in the late
1960s over controls on sterling nance. The Chancellors of the Ex-
chequer were a less homogenous group. The Conservatives (Selwyn
Lloyd and Maudling) publicly supported the City, but Maudling in
particular was privately less enthusiastic about the international role of
sterling as the international monetary system collapsed. In contrast, the
Labour Chancellors presided over a prolonged crisis for sterling that pre-
occupied their policy-making. This, along with an ideological antipathy to
international nance, meant they gave shorter shrift to calls fromthe City
to liberalise the remaining sterling exchange controls. Although the Bank
of England and the Treasury were generally sympathetic to the City, the
Treasury was more cautious than the Bank, sometimes complaining that
the latter was under excessive inuence by nancial institutions. Never-
theless, there was a consensus that London should remain an important
international nancial centre.
The various controls introduced by other state authorities to cope with
the increase in speculative capital ows considerably enhanced the attrac-
tions of London. This was particularly true for Londons main rival New
York, which was deliberately and severely hampered by the measures
taken to prop up the United States balance of payments until 1974. The
interest equalisation tax introduced in 1963, controls limiting the activ-
ities of foreign banks in New York, and generally tight money prompted
many American banks to emigrate.
3
Banks were also pulled abroad in
these years by the multinational expansion of their corporate customers,
the nance for which the US government decided should come fromout-
side the USA. The authorities in Londons European competitors (such
as Zurich, Paris and Frankfurt) also aimed to insulate their nancial
systems from volatile short-term capital ows and imposed a variety of
restrictions on their own banks activities, further enhancing the attrac-
tions of London. These controls included prohibition of interest on non-
resident deposits, isolation of domestic markets from foreign investors,
and taxes on outward ows of short-term capital.
3
R. Sylla, United States banks and Europe: strategy and attitudes, in S. Battilossi and
Y. Cassis (eds.), European Banks and the American Challenge (Oxford, 2002), pp. 53
73.
Foreign banks rushed into London to take advantage of Britains rela-
tively relaxed regulatory regime and the economies of scale and scope
offered in the City. From 1962 to 1970 the number of foreign bank
branches or subsidiaries increased from 51 to 129, most in the second
half of the 1960s. From 1965 to 1971, sixty-nine foreign banks opened
branches in London, of which almost 40 per cent were US banks. During
the 1950s only two US banks opened branches in London, bringing the
total to thirteen in 1960, but by 1970 there were thirty-seven branches
of US banks in London. In the early 1960s most US banks coming to
London were branches of larger banks from New York, Chicago and
California. In the later part of the decade there was a rush of smaller
regional American banks to take part in the Eurodollar market and to
service their multinational corporate customers. In addition to branches,
foreign banks also bought interests in traditional British banks. For exam-
ple, the First National City Bank owned part of M. Samuel and Co. of
London, and in 1965 the Mellon National Bank of Pittsburgh bought a
25 per cent stake in the Bank of London and South America (BOLSA).
In 1968 Manufacturers Hanover Bank was the rst US bank to establish
a wholly owned merchant bank subsidiary.
The invasion of foreign banks into London did not initially concern
the authorities so long as they were not involved in supplying domestic
credit. The Treasury aimed exchange control at transactions by British
residents on their own account, and constrained the use of sterling more
generally, but left alone entrep ot nance betweennon-residents using cur-
rency other than sterling. This separation of domestic and international
business was further marked by credit controls on domestic lending by all
banks operating in Britain from May 1965. Until this time foreign banks
had not been constrained by domestic credit restrictions but this was not
a large part of their business. Since sterling lending was later conned
to an increase of not more than 5 per cent above the level in the period
May 1965 to March 1966, foreign banks which had not yet established
themselves in the domestic market were effectively squeezed out, concen-
trating their business on the offshore market, and further reducing the
role of sterling in the City.
The continued growth in the activities of foreign banks and the relative
freedomof their operations compared to domestic banks nally prompted
a response from the British authorities at the end of 1971. In October
the Competition and Credit Control reforms aimed to increase compe-
tition among domestic banks and to put foreign banks on a more equal
competitive footing with domestic commercial banks. The interest rate
cartel for clearing banks was ended and foreign banks were subjected to
the same reserve requirements on sterling liabilities as domestic banks,
12
1
/
2
per cent. This served to increase the sterling business of foreign
banks (especially American) during the 1970s.
The new actors in the City were among the most innovative and com-
petitive nancial institutions in London and quickly came to dominate the
Eurodollar market.
4
Eurodollar accounts started at the Midland Bank but
were quickly adopted and expanded by merchant banks and American
banks.
5
American banks were also the leaders of other nancial inno-
vations including the US dollar Certicate of Deposit. This new com-
petitive atmosphere in the City reduced the extent to which the Bank
of England could manage the City through informal meetings and
Gentlemans Agreements. The conict over capital account liberalisa-
tion and the question of regulating the Eurodollar market will be used as
examples to show the emergence of this new relationship.
The decline of sterling and European integration
In the 1950s it was often argued that the prospects of the City of London
were tightly linked to the strength of condence in sterling. The cautious
and sometimes contractionary policies necessary to support the xed
exchange rate were considered by many to be detrimental to domes-
tic industrial performance and it seemed that the interests of the City
were contradictory to those of domestic producers and consumers.
6
The
tendency to identify the interests of the City with those of sterling gradu-
ally disappeared as the international business of the City became increas-
ingly dominated by US dollar and other non-resident currency trading.
The dollar superseded sterling as the main reserve currency in the early
1960s and sterlings role in nancing world trade fell from about 50 per
cent immediately after 1945 to 35 per cent by 1960 and 2530 per cent
by 1965.
7
Michie estimates that by 1970 only 20 per cent of world trade
was denominated in sterling.
8
4
R. Pringle, Why American banks go overseas, The Banker 116 (Nov. 1966), 784. For
a critique of London banks unprofessional management practice see Through foreign
eyes, The Economist 26 (Nov. 1966), xxxviii.
5
C. R. Schenk, The origins of the Eurodollar market in London, 19551963, Explorations
in Economic History 35 (1998), 22138.
6
See A. J. Shoneld, British Economic Policy Since the War (1958); A. R. Conan, The Problem
of Sterling (1966); S. Strange, Sterling and British Policy. APolitical Study of an International
Currency in Decline (Oxford, 1971).
7
W. M. Clarke, Inside the City. A Guide to London as a Financial Centre (1979), p. 197. By
1981, 75 per cent of external assets of banks in Britain were denominated in US dollars
and only 5.5 per cent in sterling: R. M. Pecchioli, The Internationalisation of Banking. The
Policy Issues (OECD, Paris, 1983), pp. 423.
8
R. C. Michie, The City of London. Continuity and Change Since 1850 (1992), p. 90.
While the Bretton Woods system crumbled, the Sterling Area that had
propped up the international role of sterling gradually disintegrated. At
the end of 1961, sterling still made up 87 per cent of the ofcial reserves
of overseas sterling countries, but this share had fallen to 83 per cent in
1964, 75 per cent at the end of 1966 and 65 per cent at the end of 1967.
9
However, diversication did not have a signicant impact on the overall
level of sterling balances because ofcial reserves as a whole increased so
that the fall in sterlings share did not imply a substantial run-down in
ofcial sterling balances. The slight decline in ofcial sterling holdings
was offset in part by an increase in privately held sterling due to relatively
high interest rates and the rise in the absolute value of international trade
denominated in sterling.
At the end of 1962, Maudling as Chancellor of the Exchequer asserted
in an internal minute that he regarded it as a major aim of policy to free
the British economy from the inhibitions of reserve currency status.
10
The Bank of England was sceptical. Mynors, its Deputy Governor,
argued that monetary authorities and others held currencies in reserve
because they were useful in trade; the reserve role of sterling thus derived
from its role as transaction currency. In this case, it was the costs and
benets of sterling as a trading currency that needed demonstrating and
not the difculty of funding the sterling balances, which is but an echo
of lost causes.
11
W. A. Allen predicted that if more limitations were intro-
duced on the use of sterling, the trading community of London would
move to another international nancial centre and Once out, how do we
get them back? And what provides the butter on our cut-loaf then?.
12
This, of course, was in the days before the big surge in the Eurodollar
market, when commercial sterling business was still vital to the Citys
prosperity. The Bank also argued that because of the lack of interna-
tional condence in the US dollar, there was no viable alternative reserve
asset to sterling and that eliminating its role would have a contractionary
effect on the volume of world trade and international economic activity
generally. The time was not ripe for the elimination of the international
role of sterling until an alternative source of international liquidity could
be devised. This, in turn, depended on international and supranational
institutional debate and consensus, and could not be forced by unilateral
British action on sterling.
9
The 1967 gure is at the new devalued rate of exchange: Bank paper on The future of
the sterling balances, March 1968, BoE OV53/38.
10
Quoted at top of Mynorss reply dated 3 Jan. 1963, BoE, OV47/63.
11
Mynors paper, 3 Jan. 1963. This paper was circulated to the Bank of England Common
Market Committee for consideration on 18 Jan. 1963 and sent to Maudling on 22 Jan.,
BoE OV47/63.
12
Mynors paper, 3 Jan. 1963, BoE OV47/63.
International payments problems continued, however, and sterling suf-
fered fromanother condence crisis in summer 1964, prompting the new
Labour government to look again at ways to turn short-term sterling lia-
bilities abroad into longer-term debt.
13
This time Fforde of the Bank of
England noted I do not think that at the highest levels in the Bank there
would be dissent from the proposition that to get rid of reserve-currency
status while maintaining our trading currency position would be a most
desirable achievement.
14
This new attitude was partly inuenced by the
continuing process of reforming the international reserve system, the fail-
ure of Britains rst effort to join the European Economic Community
(in which the reserve role of sterling played a part) and the rise of the US
dollar as the currency of the City with the growth of the Eurodollar and
Eurobond market. British negotiators in the two applications to join the
EEC in the 1960s hoped to avoid involving the role of sterling. Instead,
discussions focused on trade issues, but in the end the weakness of sterling
and the international obligations its reserve role gave to Britain meant it
was drawn in as an obstacle to accession, especially by de Gaulle.
15
While the role of sterling in the EEC was problematic, the Bank of
England eagerly anticipated the prospect of greater European competi-
tion in the City after British accession. In July 1961 the Bank expected
some scope for increased importance of the City for banking and the
stock exchange. British yields were relatively high, which would attract
capital for British industry if inward investment were liberalised.
16
The
Banks Common Market Committee noted in 1963 that taking the eld
as a whole, there is more reason to regard the prospect with condence
than with apprehension. The report went on to conclude that
to the extent that the infusion of new personalities makes for new ideas and the
re-examination of old ones, this should be welcome. In general our institutions
and arrangements should stand up to critical examination not too badly; and if
the pace of improvement, development and de-ossication (particularly in the
Clearing Bank eld) can be speeded up in the process, so much the better.
17
At the end of 1962 Haslam of the Bank of England toured nancial
markets in Holland, France and Belgium and reported that
13
Thompson-McCausland to Cromer, 11 Dec. 1964, BoE OV53/30.
14
Fforde to Thompson-McCausland, 2 Dec. 1964, BoE OV53/30.
15
C. R. Schenk, Sterling, international monetary reform and Britains applications to join
the EEC in the 1960s, Contemporary European History 11 (2002), 34569.
16
UK accession of the Treaty of Rome: implications for the City, 8 July 1961, BoE
OV47/39.
17
Common Market and take-overs, paper by Common Market Committee for Gover-
nors, 7 Jan. 1963, minuted by Cromer a rst class and most interesting paper, BoE
OV47/63.
The impact of the common market on the exchange markets has so far been neg-
ligible. Although there are as yet no moves towards closer integration of markets
or standardization of procedures and charges, the banks of the Six fear the com-
petition of London, and the entry of the UK might cause them to look at their
systems again.
18
The general view that integration would be good for the City prevailed
in the second application of 1967, although there was more emphasis on
the need to liberalise capital ows to conform to EEC directives.
19
By
this time, the French government was preparing to establish Paris as an
international nancial centre. It was noted that in the minds of some
Frenchmen, fear of British dominance in the nancial eld may be a
reason for wanting to see us excluded from the Community, but this is
not likely to be said openly.
20
The British hoped to appease the French by
arguing that linking London with the rest of Europe might consolidate a
stronger European banking network that would more effectively balance
the power of New York. In the event, the efforts to rehabilitate Paris
foundered on the turmoil surrounding les ev enements of the summer
of 1968.
Banks in the City and on the continent had a more active approach
to integration, at least in terms of their rhetoric. In 1963 the Midland
Bank joined the club des c elibataires and formed the European Advi-
sory Committee, a loosely linked banking group that sought to anticipate
the need for an integrated European nancial market. Other British banks
also paid lip-service to the need to prepare alliances to deal with nan-
cial integration, but these efforts were not very successful.
21
The rather
muted response of the Bank of England and the City was the result of
the lukewarm attitude towards nancial liberalisation among the EEC
members. This in turn was prompted by a desire to insulate themselves
from the continuing crisis in the international monetary system by main-
taining and increasing capital controls. Meanwhile in Britain the struggle
over the sterling exchange rate intensied.
Speculative pressure mounted in the second half of 1966, leading to
the devaluation of sterling in November 1967. The story of the lead-
up to the devaluation and its immediate aftermath has been told widely
elsewhere, but its implications for the longer-term international role of
18
R. Haslam memo., 3 Dec. 1962, BoE, OV47/62.
19
Stone to Fenton (draft of views of Bank of England for Treasury), 3 June 1965, BoE
OV47/63.
20
EEC negotiating brief for the economic committee by W. S. Ryrie, The international
role of sterling, 17 May 1967, T 230/955.
21
D. Ross Clubs and consortia: European banking groups as strategic alliances in
Battilossi and Cassis (eds.), European Banks and the American Challenge, pp. 13560.
sterling are not as well documented.
22
In Britain it was hoped that the
exchange crises of the US dollar and sterling at the end of 1967 and
the beginning of 1968 would provide the crisis required for generating
enthusiasm within and outside Britain for a permanent plan to eliminate
the international role of sterling. Devaluation of sterling turned attention
to a US dollar that was already under speculative pressure. In March
1968 the gold pool collapsed, and the British used this as an opportunity
to lobby for a joint support scheme to run down the sterling balances,
effectively ending sterlings reserve role. Cromer went to the key gold pool
meeting in Washington in March hoping to garner $5 billion and a public
joint declaration of support for sterling, but British assumptions about
the importance of sterling to European and American partners had been
miscalculated. The Europeans were reluctant to engage in further sup-
port after the devaluation and in addition to the facilities that had already
been arranged. Cromer came away with only $4 billion (including the
existing $1.4 billion IMF standby).
23
In May and June 1968, the Hong
Kong government led the Sterling Areas retreat by negotiating a form of
exchange guarantee for its sterling reserves. In July, members of the G10
nally agreed to put up $2 billion of support for future diversication,
pending negotiations with the overseas Sterling Area. The Second Basel
Agreements were nally concluded in September 1968, effectively mark-
ing the acceptance of the end of sterlings reserve role. By this time the
increasing role of the US dollar in the City made sterlings demise less
inuential.
The Eurodollar market
The Eurodollar market was the single most important element in
Londons revival in the 1960s; once foreign banks became market leaders,
it sharpened focus on the newrelationship between the City and the state.
When the Midland Bank rst began bidding for Eurodollar deposits in
1955, the Bank of England was surprised and there was some discussion
about how this violated the spirit of the exchange control legislation as
well as the interest-rate cartel among commercial banks. In the end, how-
ever, the innovation was tolerated since it was not strictly illegal and did
attract US dollars into London, thereby helping the balance of payments.
Although it was allowed to continue there was no announcement to this
effect in the hope that the innovation would spread slowly.
24
Burn has
22
A. Cairncross and B. Eichengreen, Sterling in Decline. The Devaluations of 1931, 1949
and 1967 (Oxford, 1983).
23
See correspondence in BoE, OV53/38.
24
Schenk, Origins.
argued that in the 1960s the Bank of England was primarily concerned
to restore the City to its former position as the centre of world nance
in order to enable nancial capital to regain the position of relative inde-
pendence from the state which it had lost in 1931.
25
He argues that the
Bank promoted the Eurodollar market to this end. Certainly, the follow-
ing analysis will conrm the commitment of the Bank of England to freer
capital ows, but it also reveals considerable frustration within the Bank
that informal state regulation of the City was no longer feasible.
In spring and summer 1962 the Bank of England investigated the possi-
bility of exerting greater monitoring or restrictive control over Eurodollar
deposits and their use.
26
They had no method of identifying in detail the
size of the market or its participants, and feared that the term structure
of the deposits vis-` a-vis loans might become precarious. It also seemed
possible that the market could disrupt exchange-rate stability. Possible
responses included asking for voluntary self-restraint, imposing liquid-
ity ratios, or a hint from the Governor that we are watching the market
and request for more detailed and more regular information.
27
OBrien,
Preston and Hamilton agreed that the Bank should approach Sir George
Bolton (who in 1957 had moved from the Bank of England to head the
BOLSA) for more detailed information on BOLSAs dealings in Euro-
dollars, on which basis the Bank could devise recommendations for other
banks.
28
This was seen as exclusively a Bank of England duty, not for
Treasury action. Hamilton noted that
although obviously the Treasury could not be ignored I am not anxious for any
further papers to be sent to them yet. The fact that the Balance of Payments
note of 18 June went to Sir Denis Rickett has already resulted in a 50 minute
explanatory talk with Copeman on the telephone.
29
The Treasury did not understand the Eurodollar market and the Bank
were not keen to explain it to them.
At a meeting at the beginning of August 1962 the Bank decided that
requesting voluntary self-restraint would be embarrassing to apply.
30
Although this was the usual way that the Bank of England dealt with
25
G. Burn, The state, the City and the Euromarkets, Review of International Political
Economy 6 (1999), 22561, at 228, emphasis in the original.
26
In June 1962 the Bank for International Settlements proposed a joint study of the
Eurodollar market by member central banks. In August OECD Working Party no. 3
proposed also to study the Eurodollar market.
27
Selwyn note for a meeting in Stevenss room, 2 May 1962, BoE, EID10/21.
28
OBrien and Preston notes, both 30 May 1962, BoE EID10/21. For a more detailed
account of Boltons involvement in the Eurodollar markets founding see Burn, The
state, the City and the Euromarkets.
29
Hamilton (deputy chief cashier) note, 9 July 1962, BoE EID10/21.
30
Summary of a meeting at the Bank of England, 16 Aug. 1962, BoE EID10/21.
domestic commercial banks, it was not possible to extend this approach
to foreign bankers with whom the Bank did not have longstanding
co-operative relationships. Even asking for more information on their
Eurodollar deposits was likely to be awkward since to ask themfor details
is tantamount to saying that we want to make sure they are prudent
bankers.
31
This, of course, is the essence of prudential supervision, but
the Bank of England did not yet see this as its role. Furthermore, the
Bank of England believed that separate liquidity ratios for Eurodollar
loans were impossible to enforce for technical reasons. Burn notes that
this option was dismissed in March 1962 because it would mean admis-
sion of responsibility by the Exchange Equalisation Account that it would
stand by a bank in default.
32
The Bank did not want to become a lender
of last resort to the market. Instead Cromer informally approached the
leading six or so banks in the market and warned them to keep their posi-
tions liquid by maintaining adequate reserve ratios.
33
In the end, it was
the series of studies of Eurodollar markets commissioned by the Bank for
International Settlements from October 1962 that led to the collection
of detailed data based on exchange control returns by authorised dealers
in foreign exchange.
As the value of Eurodollar deposits soared, both players and regula-
tors began to worry that the market was potentially dangerous. At the
beginning of 1963 Sir Charles Hambro of Hambros Bank expressed his
disquiet to the Bank, prompting a carefully drafted response fromMynors
that enthusiastically supported the market. It is par excellence an exam-
ple of the kind of business which London ought to be able to do both well
and protably. That is why we, at the Bank, have never seen any reason
to place any obstacles in the way of London taking its full and increasing
share. Tellingly, however, he continued if we were to stop the business
here, it would move to other countries with a consequent loss of earnings
for London.
34
In summary, the most important nancial innovation in the 1960s was
tolerated, although not initially promoted, by the Bank of England. The
most immediate reason was that any increased supervision was likely to be
ineffective unless it was sufciently onerous as to pose an insupportable
burden on banks. The major obstacle, however, was that imposing new
controls on capital inows would erode the status of London as an inter-
national nancial centre. As a report by the Bank of England had stated
in 1961, however much we dislike hot money we cannot be international
bankers and refuse to accept money. We cannot have an international
31
Ibid.
32
Burn, The state, the City and the Euromarkets, p. 241.
33
Summary of a meeting at the Bank of England, 16 Aug. 1962, BoE EID10/21.
34
Mynors to Hambro, 29 Jan. 1963, BoE EID10/22.
currency and deny its use internationally. Furthermore, it was still per-
ceived that the prospects of the City and of sterling were tightly bound:
if we take a swipe at London, we shall do lasting damage to sterling.
35
It was not until the domestic and international banking crises of 1974
that the Bank of England was prompted to change its relaxed attitude
and to launch more coordinated (although not very successful) efforts at
prudential supervision.
Once the Eurodollar market was established, the authorities actively
promoted the development of the Eurobond market. In mid December
1962 the Treasury outlined the plan for a foreign currency loan to be
launched by Warburg and Co., noting that the object of these loans is to
make the facilities of the London capital market more widely available and
to mop up some of the very volatile Euro-dollars at present in London.
At this point it was reported that the Belgian government had applied to
raise $30 million.
36
This rst proposal fell through in February 1963
37
but a subsequent loan was completed and this was followed by a loan
to IRI of Italy in July. In 1963 the total amount of US dollars raised
in international capital markets through Eurobonds was $55.5 million.
Thereafter the market accelerated, mainly servicing government or state-
owned companies demands for medium-term loans.
38
In addition to the Eurodollar and Eurobond market, there were other
nancial innovations in London.
39
They included products that sought to
spread exchange risk as the pegged rates set by the Bretton Woods system
came under increasing pressure (currency basket, currency option, and
dual-currency convertible bonds) as well as products to spread interest-
rate risk between borrowers and lenders, such as roll-over credits. Other
innovations increased the use of the US dollar in London. In May 1966
the London branch of the First National City Bank issued the rst nego-
tiable dollar-denominated Certicate of Deposit (CD). Until 1968, with-
holding tax was charged on CDs with a maturity over one year, but after
this was removed, the CD market ourished. By the end of March 1968,
twenty-six banks (including eleven US banks) had issued CDs and a sec-
ondary market had developed.
40
35
JML report for Hamilton, 19 Oct. 1961, BoE EID10/19.
36
Radice draft letter to Rumbold of Commonwealth Relations Ofce, 13 Dec. 1963, BoE
C40/1213.
37
Commonwealth Relations Ofce to Jamaica, telegram, 11 Feb. 1963, BoE C40/1213.
38
K. Burk (ed.), Witness seminar on the origins and early development of the Eurobond
market, Contemporary European History 1 (1992), 6587; I. M. Kerr, A History of the
Eurobond Market. The First 21 Years (1984).
39
S. Battilossi, Financial innovation and the golden ages of international banking: 1890
1931 and 195881, Financial History Review 7 (2000), 14175.
40
Overseas and foreign banks in London, Bank of England Quarterly Bulletin (1968), 158.
This section has argued that during the 1960s the business of the City
changed and this affected its relationship with the state. The advent of
current-account convertibility in 1958 increased the range of business in
London, and the tightened regulation of nancial centres elsewhere in
the world increased the attractions of London. The arrival of new banks,
especially from the USA, introduced a more competitive environment
that challenged the cosy way the City had operated during the 1950s.
The acceleration of nancial innovation of products and processes out-
stripped the pace of supervisory or regulatory reform. While the Bank
of England successfully kept the Eurodollar market its preserve, sterling
policy was under the control of the Treasury, bringing the two institutions
into conict with each other.
The debate over capital controls
The issue of whether and when to relax exchange controls on capital
ows offers an example of the conicting positions taken by the City,
the Bank of England and the Treasury. Through the postwar period
a general move towards freer markets prevailed in international trade,
but the enthusiasm for freer capital movements was constrained by the
balance-of-payments problems associated with the crumbling of the xed
exchange-rate system through the 1960s. The convertibility achieved in
Europe at the end of 1958 was external current-account convertibility
only. Capital-account transactions remained closely controlled for a fur-
ther fteen to twenty years in most countries. The imbalance in the inter-
national economy between surplus and decit countries under the xed
exchange-rate regime led to sharp increases in short-term capital ows
among developed countries in response to changes in short-term interest
rate differentials and expectations of changes in exchange rates. This in
turn discouraged further liberalisation of capital controls in the USA
and Britain to prevent outows, and in Germany and Switzerland to pre-
vent inows.
41
Although we have seen that British governments did not
impose controls on capital inows in response to the Eurodollar market,
they did retain controls on capital outows. Indeed, after 1958 leaks of
short-term capital became a more prominent target for exchange con-
trols to protect sterling. The Bank of England represented the interests
of the City and was almost always in favour of capital account liberalisa-
tion, which brought it into periodic conict with the more protectionist
Treasury.
41
OECD, Liberalisation of Capital Movements and Financial Services in the OECD Area
(Paris, 1990), p. 34.
In 19589 Parsons of the Bank of England wrote to Rowan at the
Treasury passing on the complaints from the City over restrictions on
usance facilities for trade involving third countries.
42
The City believed
that continuing the restrictions harmed sterling because third countries
looked for another currency to nance their trade. Moreover this was
traditional business for London, and, although the facility is not greatly
used, it has considerable prestige value. The pressure from the Bank
often stressed that controls brought sterling into disrepute (an issue close
to the heart of the Treasury) as well as hampering the activities of the
City (which did not have as great a priority for the Treasury). Many in
the Treasury had little sympathy for the City. David Bensusan-Butt, for
example, responded that prestige and tradition were not a good enough
reason to relax controls that might cause a drain on the reserves if con-
dence in sterling waned.
43
This viewprevailed through a series of repeated
pleas from the Governor of the Bank of England on behalf of the City,
until the controls were lifted.
44
At the end of April 1959 Cobbold began his campaign to remove
the ban on renance credit. He made repeated and increasingly urgent
demands that the desire of the market to be able to grant renance cred-
its arises partly from the feeling that it ought to be able to give the full
services that is its traditional role and partly from its wish to increase its
business.
45
Roger Makins and A. W. France in the Treasury were not
convinced. France noted it seems to me that the case for doing this is
simply not enough and that we should continue to refuse. There are better
candidates [for liberalisation].
46
At the end of June members of the Bank
of England and Treasury met to discuss the issue. The Treasury ofcials
suggested that relaxation should wait until after the election in October
and the Chancellor agreed. Cobbold was incensed and demanded that
he be allowed to quote the Chancellor that it was he who refused to relax
these restrictions, thus making public the split between the Bank and the
Treasury.
47
By October 1959 the Treasury and the Bank were nally agreed that the
ban on renance credits should be lifted since sterling appeared strong,
they were an essential part of trade nance, and they were unlikely to
42
Parsons to Rowan, 22 Aug. 1958, T 231/1034. The controls had been imposed in
September 1957 in response to a balance of payments crisis.
43
Bensusan-Butt to Rudd, 29 Aug. 1958, T 231/1034.
44
Parsons to Rickett, 24 Nov. 1958; Cobbold to Makins, 15 Jan. 1959, and to Chancellor
of the Exchequer, 28 Jan. 1959, T 231/1034.
45
Governor of the Bank of England to the Chancellor of the Exchequer, 13 Nov. 1959,
T 231/1034.
46
France minute on a brief by Glaves-Smith, 12 May 1959, T 231/1034.
47
Makins minute of a BankTreasury meeting, 8 July 1959, T 231/1034.
have a very detrimental impact on the reserves. But the Chancellor of the
Exchequer, Heathcoat Amory, continued to refuse to act despite pointed
questions askedinParliament.
48
Althoughhis Treasury advisers no longer
believed there was a case for singling out this form of credit for a ban,
Heathcoat Amory contended I have a feeling that our short term trade
credits are likely to continue to rise, and that together with our other
overseas commitments are likely to make quite big enough inroads into
our reserves.
49
The ban was not lifted until May 1963.
Another case was the elimination of security sterling. Non-residents
could only sell their sterling securities for security sterling, which traded
at a discount on the ofcial rate. In April 1962 the Bank began its cam-
paign to eliminate this control because having a discounted rate for ster-
ling undermined condence.
50
Their reasoning, however, fell on deaf
ears in the Treasury, given the repeatedly parlous state of the balance
of payments, and again relations between the Bank and the government
became strained. By 1966 Treasury ofcials agreed with the Bank that
the security sterling market should be eliminated, but found it difcult
to convince the Labour Chancellor of the Exchequer, Callaghan, and
his advisor Thomas Balogh, who were reluctant to relax controls when
sterling was under pressure. By this time purchases of security sterling
by Hong Kong on behalf of the Bank of China kept the security sterling
rate at or near the ofcial rate, which relaxed the pressure to eliminate
it. The Chancellor initiated another investigation into unblocking secu-
rity sterling in February 1967 and it was nally eliminated in the budget
of April 1967. This was the only relaxation of capital controls in the
budget.
In October 1968, the Labour government re-introduced the control
on sterling nancing of third-party trade that they had imposed in 1957
and removed in 1959. This was part of an attempt to reinforce the
impact of the devaluation of 1967, but it provoked considerable out-
rage within the City and from the Conservative opposition, particu-
larly Reginald Maudling who had been Conservative Chancellor 19624.
This episode was widely interpreted as exposing an important breach
between the Bank of England and the Treasury.
51
During a speech a few
weeks later OBrien, the Governor of the Bank, was critical of Labours
48
Glaves-Smith to France and Rickett, 9 Oct. 1959; Chancellor minute, 6 Nov. 1959,
T 231/1034.
49
Chancellor minute, 24 Nov. 1959, T 231/1034.
50
Rickett to Lee for Chancellor of Exchequer, 13 April 1962, BoE OV47/54. He also
advocated relaxing the voluntary July 1961 controls on outward FDI.
51
The Economist, 1 Nov. 1968, p. 65.
policies and claimed that the City had lost faith in the government.
This prompted seventy-six Labour backbenchers to sign a motion to ask
for his resignation and the Conservative opposition to defend OBrien
vociferously.
52
This analysis rather contradicts Stranges view that the government
promoted the use of sterling as a transactions currency internationally in
the 1960s.
53
Instead, it seems that the Treasury resisted relaxing controls
on short-term capital ows despite pleas by the Bank of England and the
City. From 1964, as sterling came increasingly under pressure in inter-
national markets, the Treasury became deaf to the pleas from the City
for relaxations that could offer a potential leak should condence worsen.
The Bank of England was unable to push the Treasury to change its deci-
sion despite the personal intervention of the Governor. The balance of
power appears to have swung rather against the Bank of England in these
matters in the 1960s. Part of the breach between the Treasury and the
Bank had to do with the decline of sterling, both in terms of international
condence and as the only transactions currency in the City. Policies that
sought to support sterling were no longer usually in the interests of the
City.
Conclusions
The crumbling of the international monetary system certainly did not
inhibit the development of the City of London in the 1960s. The rising
volume of global short-term capital ows enhanced the economies of
scale and scope that were obtainable in London. The prolonged crisis
also encouraged nancial innovation to respond to new demands to
spread interest- and exchange-rate risk. The defensive and protection-
ist responses of other states increased the relative benets that London
gained from the British policy of supporting non-resident activity in
London, while protecting the balance of payments by restrictions on the
use of sterling. The changing nature of the Citys business and member-
ship after the advent of the Eurodollar market meant that the decline in
sterling had little impact on the prospects for the City. Indeed, while in
the 1950s it was often argued that the prospects of the City depended
on the strength of sterling, it was argued conversely in the 1960s that
the prospects of sterling depended on the strength and competitiveness
of the City. European integration produced considerable soul-searching
and some strategic alliances among City institutions, but it was generally
52
Ibid., 16 Nov. 1968, p. 64.
53
Strange, Sterling, p. 236.
agreed that the Citys dominance would continue and even be enhanced
by future nancial integration.
There were divergent views between the Treasury and the Bank about
the activities of the City of London. As in the 1950s, the Bank continued
to be the champion of the City, while the Treasury put more emphasis
on caution and protection of the central reserves. The rhetoric that the
interests of sterling and the City were synonymous continued through
the 1960s despite the fact that the Eurodollar market made the US dollar
the main international currency in use there. Indeed, the Bank used the
rhetoric of the 1950s to try to wrest concessions on capital controls from
the Treasury. By referring to sterling and the City almost as patriotic
symbols, the Bank hoped to persuade the Treasury to relax its attitude to
certain forms of sterling credit.
The debate over capital controls between the Bank and the Treasury
during the 1960s serves to highlight the different agendas of these insti-
tutions. It is probably fair to say that the Treasury had the stronger arm
during the 1960s and that this prolonged controls on the use of sterling.
Recurring sterling crises and balance-of-payments decits in this decade
strengthened the cautious hand of the Treasury against the more lib-
eral stance of the Bank. In the end this may have hastened but did not
cause the switch away fromsterling in the City that was already underway
before 1958. With its policy focused on sterling, the Treasury was slow
to become aware of or involved in monitoring the Eurodollar markets.
This tendency was reinforced by the reluctance of the Bank of England
to consult the Treasury on this issue, partly because the complexity of the
market seemed beyond the expertise of the Treasury, but also because
the Bank saw this as a quintessentially banking issue and therefore out-
side the Treasurys policy realm. This division of responsibility enhanced
the dichotomy of the regulatory system between sterling and offshore
business.
While the Bank continued to champion the City, its ability to super-
vise the activities of its constituents through traditional informal methods
declined. A major factor in this decline of inuence arose from the divi-
sion between resident business in sterling on the one hand, and offshore
foreign currency business on the other hand. The former attracted most
attention fromthe Treasury in the formof controls to bolster the exchange
rate. The lack of regulatory or supervisory attention to the latter encour-
aged the immigration of foreign banks and bankers in large numbers that
eventually swamped the British banks in the City. This newconguration
was not conducive to the informal traditional monitoring techniques that
the Bank had employed when the City was a cosier entity. The possi-
ble dangers of this new environment were not recognised until the 1974
domestic and international banking crisis in the City prompted efforts to
formalise prudential regulation.
54
This analysis has broadly supported Kellys view that there was a high
degree of continuity between Labour and Conservative governments dur-
ing the 1960s, both promoting the interests of the City to meet their pol-
icy goals of supporting sterling and the balance of payments. It has also,
however, highlighted areas of conict as the interests of the City and the
interests of sterling diverged. The Conservative party is usually viewed as
having greater empathy for the traditions of the City, although it was seen
that Treasury ministers were not as supportive as the Bank of England.
Importantly, it was a Conservative Chancellor, Maudling, who was the
rst to announce internally the intention to abandon the international
reserve role of sterling because of the constraint it put on British eco-
nomic policy.
55
The Labour governments after 1964 were more enthusi-
astic about maintaining controls and resisted the demands from the City
to protect their traditional sterling commerce. The inuence of the Bank
seems to have been weaker under the Labour governments, but in the
end the process of liberalisation continued despite the sterling crisis of
19667. In 1977 Kelly claimed that if the environment for American
banks in Britain has been attractive, it is because of this almost com-
plete agreement, willing or unwilling, that the City depends on its open
and international character and that Britain depends on the City.
56
This
seems a fair summary of the situation.
54
C. R. Schenk, Crisis and opportunity: the policy environment of international banking
in the City of London, 19581980, in Y. Cassis (ed.), London and Paris as International
Financial Centres (Oxford, 2005).
55
It was not until March 1972 that Chancellor Barber made this goal public.
56
J. Kelly, Bankers and Borders. The Case of American Banks in Britain (Cambridge, Mass.,
1977), p. 45.
17 The Bank of England 19702000
C. A. E. Goodhart
When I rst entered the Bank of England in 1968 there was an aphorism
which senior management used quite frequently and approvingly, espe-
cially to young academic economists such as myself. This was Governor
Cobbolds statement that the Bank is a bank and not a study group.
1
As
I understood the essence of this, it implied that the heart of the Bank then
lay in its operational links with nancial markets and institutions, and not
in its contribution to macroeconomic analysis and policy. In 1968, as I
shall describe, this was correct. By 2003 the main function of the Bank
had become macroeconomic policy analysis, and decisions on interest-
rate changes within the context of an ination forecast undertaken by
trained economists. In a sense the Bank has become an economic study
group rather than an operational bank, though that assessment needs,
and will be given, considerable qualication.
Rather than starting, however, with an assessment of the Banks recent
role changes in the formulation of macro-monetary policy, though such
changes have been major, I shall start with a discussion of the Banks
role in the maintenance of nancial stability. Here there have been ver-
itable revolutions, and, in my view, we have probably not yet reached
a steady state. Then I shall turn to the Banks (enhanced) role in
macro-monetary policy-making. The third main section will cover the
Banks (diminished) role as a market operator in the City; and the
nal section will review the Banks (again somewhat diminished) role in
external affairs. I shall conclude with an uncertain look into the
future.
An earlier version of this chapter was given at a Conference on Central Banking History in
Frankfurt on 7 November 2002. I amgrateful to many colleagues for help and suggestions
in its preparation, particularly Bill Allen, David Cobham, Tim Congdon, Peter Cooke,
John Flemming, Ian Plenderleith and Brian Quinn.
1
(Radcliffe) Committee on the Working of the Monetary System, Principal Memoranda of
Evidence, 3 vols. (1960), I, p. 52.
340
The Bank of England 19702000 341
Supervision, nancial stability and the lender
of last resort
What is surprising in retrospect was how little formal responsibility the
Bank of England either took, or was assigned by the government, for
oversight of the British banking and nancial system prior to the fringe
bank crisis which began in December 1973. The supervisory role in the
Bank was restricted previously to one senior ofcial (the Discount Ofce
Principal, at that time J. Keogh), with a handful of supporting ofcials.
The Banks money-market dealings were with the discount houses, a set of
institutions which had been fostered by the Bank to intermediate between
itself and the much larger London clearing banks. The discount houses
were highly levered and subject to market-rate risk, and the Bank wanted
to be well informed of the positions of its main market counter-parties.
Moreover, part of the stock-in-trade of the discount houses continued
to be commercial bills, though these had been increasingly dominated
in volume by Treasury bills. Such commercial bills were accepted by the
accepting houses, i.e. the London merchant banks, becoming two-name
bills. As the Bank dealt in such bills with the discount houses, it wanted
to be sure of the quality of the business and standing of the accepting
houses whose credit also stood behind such bills.
For the rest, what was remarkable was howsparse were the formal links
between the Bank, the commercial banks, and the rest of the nancial sys-
tem. In this respect the Bank had far less intelligence about, and effectively
no supervisory control over, the commercial banking system at this time
(late 1960s) than was, I believe, the case either in the USA (where the
Ofce of the Comptroller of the Currency, the Federal Reserve System,
the Federal Deposit Insurance Corporation and the State authorities all
played a much larger role) or in most continental countries. There was a
limited provision of monetary data (mostly provided on a voluntary basis
by the clearing banks, more so after about 1963, following the Radcliffe
Committees recommendations for improving the availability of mone-
tary data), but the Bank did no off- or on-site bank inspections, though it
did discuss their annual results with (most of) the banks (with the clearing
banks not deigning to talk with anyone other than the Governors). The
Bank did not generally license, nor authorise, nancial institutions;
2
this
was done by government (mostly the Board of Trade, which subsequently
metamorphosed into the Department of Trade and Industry).
2
The Bank, as agent for the Treasury, did, however, make appointments under the
Exchange Control Act, such authorisation being widely regarded as the pinnacle of bank-
ing recognition. Also any foreign bank wanting to operate in the London markets had to
see the Principal to get his informal permission.
342 C. A. E. Goodhart
This lack of formal involvement in the supervisory/stability eld was
quite largely due to the command and control approach to monetary
policy which persisted longer in Britain than in most other countries, and
so made the need for such supervision less pressing. This approach, in
turn, was partly due to the then daunting size of the British national debt,
which led governments to be even more concerned about using interest
rates exibly as a policy instrument. Anyhow, with interest-rate increases
used somewhat unwillingly, primarily in response to external weakness
in the balance of payments, endemic internal inationary pressure was
held in check by direct quantitative constraints over bank lending to the
private sector. This policy favoured large manufacturing exporters. The
banking sector was, in the years immediately after the Second World
War, overwhelmed with government debt, and its ability to assume risky
lending was tightly restricted.
Such a system gave the Bank an informal role as go-between for the
government on the one side, and the banks and other nancial interme-
diaries on the other. For its part the government relied on the Bank to
introduce, monitor and maintain (if not quite enforce) its commands;
while the banks and other intermediaries knew that they had to get the
Bank on their side if any (special) pleadings that they wished to make
would be taken seriously by government. This role provided considerable
informal leadership of the City for the Bank, and a process of similarly
informal gathering of information (for example, via City lunches).
Insofar as there were any stability-related controls over the banks at
this time, they related to liquidity rather than to capital adequacy. In any
case outsiders could not assess the capital adequacy of the clearing banks
so long as they maintained hidden inner reserves; discussion whether
such opacity was a source of strength, or weakness, to the system was
commonplace in the 1950s and early 1960s. Cash and liquidity required
ratios were maintained, though whether their function was related to
monetary policy or to nancial stability was never very clear; nor was
their efcacy, in either guise. Assessment of the role of such ratios was a
common academic pastime in the 1960s, as a survey of articles written
then would reveal.
Perhaps largely, certainly partly, because of such credit constraints lim-
iting innovation and risk-taking, banking was an extremely safe, and bor-
ing, occupation between 1945 and 1973. There was little credit risk,
3
3
As one colleague has put it, essentially the City banks were a club which set lending rates
collectively and controlled access in collusion with the Bank. Since the total quantum of
lending, and its allocation, were determined administratively, there were really few credit
judgments to be made, few loan loss provisions necessary and few credit losses recorded.
Nirvana for the commercial banks.
though, as shall be described later, there was considerable interest-rate
risk, and there were occasions when nancial intermediaries became
(temporarily in most cases) burnt by this. Nevertheless there were no
publicly perceived domestic nancial crises worthy of the name. Although
Britain has been the home of monetary experts who have expounded
on the theory of lender of last resort (with the 200th anniversary of
Thorntons great book
4
having been celebrated with a conference in Paris
in September 2002), the reality is that the Bank of England has been
involved in the last two centuries in very few episodes of lender of last
resort, far fewer than in most European countries or in the USA.
Those few cases when the Bank was asked to help virtually never
involved a pure case of liquidity shortage (money markets could cope
with those), but almost always some mixture of liquidity problems and
solvency concerns, usually with the latter triggering the former. Some-
times the solution was an arranged merger. When there was a call for the
injection of funds, the Bank did not feel capable of putting up more than a
small share of the money itself; it had limited capital. In the most serious
and dramatic case, at the outbreak of war in August 1914 a still under-
researched episode, though Seabourne
5
has done an excellent study the
government took on the burden. In the Barings case (1890 version) the
Bank coordinated a consortium of banks in London to provide guaran-
tees that Barings debts would be met. The Bank was comfortable with a
role as arbiter of concerted private sector responses to a crisis, much less
so to act as an independent, sole rescuer. Moreover the club-like ethos
in London fostered such a preference; but in truth lender-of-last-resort
operations by the Bank had been largely dormant for decades at the start
of the 1970s.
All this was to change in the 1970s, a frightening decade for central
bankers. The decade began with a worldwide boom. In Britain this was
amplied by an extremely rapid expansion of credit. Amongst the many
problems of a command and control system of direct quantitative con-
straints is that fringe organisations develop whose only rationale is that
they are structured so as to avoid those direct controls. This had hap-
pened in Britains nancial system where various kinds of nance houses
and fringe banks had developed in the 1960s to take advantage of such
loopholes, and often these were lightly capitalised and highly leveraged.
This distortion of the banking system, and the consequent increasing
ineffectiveness of the system of credit controls, was the main reason why
4
H. Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain
(1802).
5
T. Seabourne, The summer of 1914, in F. Capie and G. Wood (eds.), Financial Crises
and the World Banking System (1986), pp. 77116.
the Bank lobbied the government to restore a more competitive nancial
system.
This was achieved by the reform Competition and Credit Control
in 1971. Competition was immediately redoubled as the main clearing
banks sought to regain market share, though more so through interbank
loans than by loans directly to the property companies and other cus-
tomers of the fringe banks. Meanwhile the boom, especially in the prop-
erty market, encouraged the fringe banks to expand even faster. Eventu-
ally, with the occurrence of the rst oil shock, and an upsurge of ination,
the boom ended in a crisis. The property market was struck by a com-
bination of sharp increases in interest rates and additional taxes, and
collapsed. This collapse then led to the failure of rst one fringe bank
(London and County Securities Group), and then partly through a pro-
cess of reputational contagion (whereby loans to similar institutions were
withdrawn), to the closure of a swathe of other fringe banks.
6
Without any form of direct supervision in place, the Bank was short of
basic intelligence. The fringe banks, being initially small upstarts, had to
clear their payments through a much larger correspondent clearing bank.
The Bank then asked the relevant clearing bank, which had a correspon-
dent relationship, in each arising case to assess whether the associated
fringe bank was insolvent or salvageable.
7
When the fringe bank was
assessed as salvageable, then the Bank coordinated injections of liquid-
ity via a lifeboat to which all the major clearing banks and the Bank
contributed (together with related interests, e.g. large shareholders of
the affected fringe banks),
8
probably with the correspondent taking the
major share and others on a pro-rata basis (and the Bank of England
10 per cent).
The collapse in asset prices, and in the economy, in 19735 was
extremely steep, and their lifeboat contributions were an unwelcome
added burden to the clearing banks. At one stage there were even pub-
lished rumours about one of the clearers (National Westminister).
9
So the
clearing banks in due course informed the Bank that they were no longer
willing to contribute new money. The Bank then had to go it alone;
10
it
has not been reported whether the Bank received any offers of potential
support, or an indemnity from the Treasury (i.e. the government), in this
role. By the time this stage had been reached, however, the crisis was on
the wane, and relatively little new money (from the Bank) was in fact
required.
6
The fullest available record of this event is M. Reid, The Secondary Banking Crisis 197375
(1986).
7
Ibid., p. 90.
8
Ibid., pp. 989.
9
Ibid., p. 123.
10
Ibid., p. 138.
What this episode revealed was that there was little, or no, pruden-
tial control, or supervision, of the banking (or wider nancial) system,
and that, in the new competitive, and thereby riskier milieu, such over-
sight was (felt to be) necessary, and would need an associated regula-
tory dimension. The immediate result was a reorganisation in the Bank.
Initially a nucleus of a new specialised department was established in the
Discount Ofce, which absorbed staff and resources rapidly. Thereafter
this became a separate department, devoted to banking supervision and
regulation (initially under George Blunden, who handed it on to Peter
Cooke in 1976), culminating in the Banking Act (1979) which gave for-
mal powers to the Bank to authorise, monitor, supervise, control and,
under certain circumstances, to withdraw prior authorisation (which was
tantamount to closure) for banks.
11
No such powers had been available
before that date. Meanwhile other nancial intermediaries, such as build-
ing societies or insurance companies, remained (lightly) regulated by var-
ious government departments (apart fromquite restrictive constraints on
the assets that some of these non-bank nancial intermediaries could hold
and activities in which they could engage).
The fringe bank crisis was almost entirely domestic, i.e. conned
to British headquartered companies. Meanwhile, however, the onwards
march of liberalisation, involving the removal of direct controls, notably
exchange controls in 1979, and of information technology were lead-
ing to a growing internationalisation of nancial business. For a vari-
ety of reasons, mostly relating to the innovation of the Eurodollar and
Euromarkets, London regained its role as an international nancial cen-
tre in the 1960s, and thus international monetary problems became of
particular importance to the Bank, which took a leading role in such
issues from the 1970s onwards.
The Herstatt failure in June 1974 was, perhaps, the rst with major
international implications (though the Franklin National failure in the
USA in 1973 was the rst to shatter the calm). The German authori-
ties had shut this bank after nancial markets had closed in Germany,
but before foreign-exchange transactions, in which Herstatt had partici-
pated in quite large amounts, had been settled in New York, causing a
degree of chaos there. Growing internationalisation, in this and many
other respects, now led to a need for a common meeting place to discuss
11
There were still a number of odd quirks in the Act, notably a division of deposit-taking
institutions into two tiers, of which the rst represented rst-tier banks, whereas the
second could only describe themselves as licensed deposit-takers. This (reputational)
distinction was not widely understood, and was subsequently abandoned. It was an
administrative nightmare and was leading to perverse results as banks took on business
they were unsuited for to qualify for recognised bank status.
such supervisory and regulatory issues. Central bankers had met regu-
larly at the headquarters of the Bank for International Settlements (BIS)
in Basel for many years. It was, therefore, a logical step for supervisory
ofcials also to come together at Basel on regular occasions to discuss
matters of common interest. Thus was born (in 1974), as a result of
an initiative from Gordon Richardson, the Basel Committee on Banking
Regulation and Supervisory Practices. For the rst fteen years of its exis-
tence, it was chaired by the participant from the Bank of England, and
was usually known by his name; thus the Blunden Committee (19747)
gave way in due course to the Cooke Committee (197788). The failures
of Franklin National and Herstatt prompted the First Basel Concordat
which allocated responsibility for supervising internationally active banks
to home and host authorities.
The next important milestone was the collapse of Banco Ambrosiano
in 1981, an Italian bank with supposed connections both to the Vatican
and to (right-wing) subversive groups, but the important feature from
a regulatory viewpoint was its structure, with a holding company in
Luxembourg, and two main subsidiaries, one in Italy and one, dealing in
international business, headquartered in Panama. It was not supervised
in Luxembourg, because it did no banking business there, and supervisors
in Rome and in Panama could only see part of the overall picture, a
picture that the bank could retouch to taste by transfers of assets/liabilities
between its two parts. The need was to establish consolidated supervision
at the headquarters of any international banking business. This required
international agreement, monitoring and potential sanctions; these latter
were that any bank that did not submit to consolidated supervision might
be excluded from operation in the main international nancial markets,
notably New York, London and Tokyo.
This Committee was in no position to pass binding laws. The Basel
Concordat and other Basel Committee initiatives were statements of prin-
ciple to which those participating were prepared to be bound; some coun-
tries did pass legislation as the only way to give them effect, notably via
EEC directives. But they had no legal standing in themselves. Indeed
there is no real international law in this eld.
12
However the commit-
tee can recommend measures, and sanction banks failing to adopt them
by excluding them from its members markets. This amounts to soft
law.
So by the mid 1970s, a need was perceived for banking supervision
both at the domestic and, via consolidation, at the international level.
12
R. M. Lastra, Central Banking and Banking Regulation (Financial Markets Group,
London School of Economics, 1996); J. Norton, The EC banking directives and inter-
national banking regulation, in R. Cranston (ed.), The Single Market and the Law of
Banking (1991).
The purpose of these initiatives was to clarify where responsibility lay for
the supervision of international banks, to prevent fragile, and possibly
fraudulent, banking leading to avoidable failures and potential systemic
crises.
But what was the analytical and conceptual basis on which nancial
regulation and subsequent supervision was to be applied? Initially there
was little, or no, formal analysis. Apart from a concern to mandate suf-
cient liquidity to deter runs (an approach with its roots in the nineteenth
century), the main approach seemed to be to examine the procedures
of those banks commonly regarded as following best practice, and then
encouraging all other banks to do the same.
Some time in the 1970s and early 1980s, however, attention began to
swing from liquidity to capital, as being the touchstone for ensuring safe
and prudential banking practices. It would be a nice exercise in the history
of economic thought to explore that process. In a sense it is obvious that
a bank (with limited liability) whose capital (and franchise value) had
been eroded to a low level would be much more prepared to gamble for
resurrection than a better capitalised bank. Also, the greater the capital,
the greater the loss that could be absorbed. On those simple insights a
huge regulatory edice has subsequently been erected.
An initial impetus to the case for strengthening bank capital was the
pressure on the balance sheets of good banks (prominently including
the major American banks and the British clearers) from the recycling
of oil surpluses from the Middle East back to New York and London.
This concern, based on the very rapid growth in the dollar liabilities of
these banks, surfaced quite strongly as early as late 1974. Much, perhaps
most, of the early concern about capital adequacy occurred in the USA,
especially in the Ofce of the Comptroller of the Currency.
Afurther spur to that process was provided by the less-developed coun-
tries crisis in 1982. The need to recycle petro-dollars from oil-exporting
to oil importing countries in the 1970s had encouraged a major growth
in international bank lending, and successfully so during this ination-
ary decade, with its associated low, often negative, real interest rates. But
when Volcker changed monetary policy in October 1979, real interest
rates rose sharply and commodity prices slumped. Mexico, Argentina
and Brazil then found themselves unable to renance their borrowing in
1982. If the loans to these countries had been marked to market, some,
perhaps a majority, of the major money-centre international banks in the
world, and especially those in New York, would have been (technically)
insolvent, and the worlds nancial system would have faced a major
crisis. It was, almost certainly, the most dangerous nancial occasion of
the second half of the twentieth century, much worse than October 1987
or August to October 1998.
One lesson that the worlds central bankers took from that episode
was that bank capital ratios had been diminishing (under the pressure
of competition), were insufcient and needed to be rebuilt. Competition
was now, however, international. In particular Japanese banks, sitting
on large capital gains from their equity portfolios, and state-guaranteed
banks (notably in France) could undercut interest rates by trading on
the basis of lower basic (tier 1) capital. The need was to get inter-
national agreement to establish a common minimum level of capital ade-
quacy ratios. The Basel Committee worked to this end from 1982 till
1988 under the leadership of Peter Cooke, while Quinn from the Bank
of England, and Taylor and subsequently Corrigan from the New York
Federal Reserve Bank maintained close bilateral relationships between
the UK and USA.
The eventual result of the inevitable haggling over detail
13
was the
1988 Basel Accord. One key feature of this was an acceptance of the
reasonable view that the amount of capital that a bank required should
be weighted by the relative riskiness of its assets. That, however, took the
Basel Committee down the complex route (is it a dead-end?) of trying to
measure such relative riskiness. The 1988 accord did so in a broad-brush
manner and hence not only laid itself open to arbitrage, but also articially
encouraged some continuing market trends, e.g. securitisation. Basel II
is trying to repair the shortcomings of its predecessor (Basel I), but many
fear that Basel II will similarly introduce unfortunate side-effects (e.g.
enhanced pro-cyclicality and excessive prescription).
Despite the growing number of bank supervisors, and notable success
in reversing prior declines in capital ratios, the history of banking during
the subsequent decades in Britain was spotted by occasional bank fail-
ures. Unlike the fringe bank crisis none was, or was allowed to become,
systemic, nor did individual depositors lose any money, except in the case
of Bank of Credit and Commerce International (BCCI), and even in that
case the deposit protection scheme provided some relief. The Johnson-
Matthey failure (in 1984), BCCI (in 1991) and Barings (in 1995) were all
isolated cases of bad, in some respects fraudulent, banking. In the adverse
macroeconomic context of 19902, with high interest rates, a weaken-
ing economy and a collapsing housing/property market, and in the febrile
market conditions of autumn 1998, the British banking and nancial sys-
temremained robust. In so far as the main purpose of banking supervision
13
Much of the controversy was over the question of what should count as capital in banks.
The Japanese inclusion of unrealised equity gains was debated heatedly. Much ingenuity
and time was spent by the investment banks in devising ever more complex instruments
purporting to be acceptable capital in the balance sheets of banks.
is to prevent systemic problems (and/or to protect depositors), then the
Bank performed effectively.
Unfortunately the adoption of hands-on supervision will be interpreted
by public, politicians and press as involving a responsibility for preventing
any failure. It is arguable that the objective of enforcing good behaviour
on all individual bank managements, especially when they have con-
sciously decided to behave fraudulently (BCCI) or to avert their eyes,
and fail to apply adequate internal control mechanisms, to investigate
inexplicably good trading results in distant countries (Barings), could
only be prevented by such nannying, invasive supervision that the private
banking system would be smothered under public sector intervention.
Nevertheless, despite all protestations that supervision neither can, nor
should, prevent all (bank) failures, that was the way that it was publicly
perceived.
Meanwhile, the Banks role as lender of last resort was becoming sub-
ject to change, and some further attenuation. In the case of Johnson-
Matthey Bankers (JMB), a small bank, which failed in 1984 after using
up much of its capital in bad loans to two West African traders, the Bank
rst tried to get the parent conglomerate to rescue it. When that did not
work, the Bank turned to its usual stratagem of encouraging the com-
mercial banks in London to volunteer to contribute to support the bank
in trouble. But now the large, incoming US banks refused to play, citing
legal problems in the USA if they were perceived as using shareholder
funds for extraneous purposes. If the US banks would not contribute to
the Banks begging bowl, it was only amour propre for the other foreign
banks to refuse too. Eventually the British clearing banks acceded to the
Banks requests, but only grudgingly and, it was clear, for the last time.
Moreover, at one juncture in this episode the Bank felt that it needed
to go ahead and place a sizeable deposit (100 million) with JMB, and
did so on its own accord, only bringing Lawson, the Chancellor of the
Exchequer, and the Treasury into the loop at a later stage, by which
time the commitment had been given against the time constraints of the
market opening in Asia. Time constraint excuses, or not, the Chancellor
was furious.
14
What became obvious after this event was that any funds
risked by the Bank itself during a rescue were in a very real sense pub-
lic moneys, ultimately owed to the taxpayer. From this date onwards
no signicant lender-of-last-resort commitment could be contemplated
without the prior consent of the Chancellor (and Treasury), who would
in turn have to answer to Parliament. The old image of the Bank able
14
N. Lawson, The View from No. 11 (1992), ch. 32.
to dispose of unlimited lender-of-last-resort funds, as a deus ex machina,
always invalid, was now even further from the truth.
15
Each failure led to recriminations, the establishment (in two cases) of a
formal inquiry and, after JMB, a new Banking Supervision Act in 1987.
Thus by the mid 1990s the conduct by the Bank of its direct supervisory
duties was not assessed by the general public or the politicians as notably
successful. Meanwhile, the conduct of regulation and supervision for the
nancial system elsewhere, e.g. in securities business, by the Securities
and Investments Board and its various subsidiary Self Regulatory Orga-
nizations (SROs), was assessed as even worse, for example for failing to
spot and to end the pension mis-selling scandal.
The Labour party in opposition, prior to its election as government in
1997, had made it clear that it would introduce an Act to put nancial
regulation on to a rmer statutory basis and to get rid both of the SROs
(and of the associated concept of practitioner-based supervision), amal-
gamating all the SROs into a single, hopefully more efcient, body; but
it had made no mention of incorporating banking supervision into what
then became a unied and comprehensive Financial Services Authority
(FSA). So when the party did so, at the start of its period in ofce (May
1997), it came as something of a shock.
Since this latter step had not been publicly debated, it not only came
as rather a shock, but it is also not yet possible to discern all the argu-
ments that led to this policy decision. Amongst them, however, were
the facts that the demarcation lines between banking, securities business,
and insurance had become blurred, so that supervisory unication should
enhance efciency and commonality of treatment; and that the conduct
of banking supervision had not enhanced the reputation of the Bank.
What was less clear was whether removing supervision from the Bank
was in some sense a quid pro quo for giving it operational independence in
setting interest rates, as discussed below; perhaps on the grounds that a
Bank with too many functions could be too much of a power centre within
the democratic system, or could, in theory, become subject to conicts
of interest.
Be that as it may, the role of lender of last resort could hardly also
be transferred to the FSA.
16
Moreover, responsibility for the (smooth)
15
Neither BCCI nor Barings was a standard retail bank; furthermore any rescue of BCCI
depositors would have generated much moral hazard, given its reputation and need to
offer higher interest rates to depositors. Moreover deposit insurance, introduced as part
of the 1979 Banking Act, partially protected the widows and orphans. So the Bank
eschewed any commitment of its own funds in these two cases.
16
See C. A. E. Goodhart, The organisational structure of banking supervision, Financial
Markets Group, Special Paper no. 127 (2000), republished in Economic Notes 31 (2000),
132.
operation of the payments system and the main nancial markets
remained with the Bank. So it retained responsibility for nancial stabil-
ity, though exactly what that meant remains somewhat fuzzy. In practice,
it tends to meanthat the Bank shares responsibility for regulatory changes,
for example through the Basel Committee and the various European fora
with the FSA, and still tends to lead on international monetary issues in
discussion in the various G groups (for example G7, G20, etc.) and with
the International Monetary Fund (IMF) and other international nan-
cial institutions. Meanwhile urgent domestic nancial issues, for example
the prevention and resolution of crises, are handled through a tripartite
standing committee, involving the FSA, Bank and Treasury. Moreover,
the chairman of the FSA and the Deputy Governor of the Bank respon-
sible for nancial stability are members of each others respective Boards
as a further means of getting the exchanges of information channelled
efciently. How well all this will work in a crisis remains to be seen, since
the economic and nancial conjuncture since 1997 has remained com-
paratively calm and stable.
The conduct of monetary policy
In the 1960s there were three main instruments of monetary policy, i.e.
direct quantitative controls on bank private sector lending; interest rates;
and variations in the required down-payment on hire-purchase,
17
plus
another instrument, debt management, which has both monetary and
scal aspects; this latter is discussed separately below. Whether variations
in down-payments on hire-purchase should also be seen as a scal, or
a monetary, instrument remains moot. Such down-payment conditions
form part of the family of margin, or loan to value, requirements that are,
from time to time, advocated on either prudential or monetary policy
grounds. After fairly extensive use in the 1960s, the variation of such
requirements has rather fallen out of favour for either purpose, perhaps
unduly so, and will not be further discussed here.
As noted earlier, the Bank, which was the body charged with the task
of operating, monitoring, and trying to enforce the quantitative credit
controls, was more alive to their shortcomings and limitations than the
Treasury. It campaigned against their continuing use, and eventually won
that battle in 1971 with the publication of Competition and credit con-
trol,
18
seen in the Bank as a real landmark. Unfortunately it coincided
17
Monetary base control (MBC) was never used as an instrument. For a note of record
on the discussions about MBC at the start of the 1980s, see C. A. E. Goodhart, The
conduct of monetary policy, Economic Journal 99 (1989), 293346.
18
Competition and credit control, BEQB 11 (1971), 18993.
with the occurrence of a worldwide boom in 19723. Whereas competi-
tion in credit expansion and (wholesale) fund attraction, e.g. via the new
techniques of issuing Certicates of Deposits (CDs), proceeded apace,
the application of credit control through the market by means of interest-
rate variation was not undertaken sufciently aggressively to check the
asset price-credit boom, to offset the concurrent expansionary scal pol-
icy, or to deter the subsequent oil-ination shock. Given the change in the
regime, the scale of the shocks at the outset of the 1970s, and the history
of reluctance to use interest-rate variations to achieve either internal or
external price stability, this was, with hindsight, perhaps not so surpris-
ing. But it was detrimental not only to the economy but also to moves
towards a more effective regime for the conduct of monetary policy.
In the event Heath, the Prime Minister, instructed the Bank in late
autumn 1973 to constrain credit expansion/monetary growth, but with-
out any further increase in interest rates. Bereft of market instruments
of control, this diktat enforced a return to direct credit control mecha-
nisms. The Bank had, however, recently got rid of direct restrictions on
bank lending, amidst considerable self-congratulation, and a return to
the status quo ante would have been a real blow to its pride. Hence we
devised the corset, which imposed ascending penalties on the growth of
interest-bearing eligible liabilities. By making it marginal, and focusing
on the liability side of the balance sheet, it deected attention from the
reality that it acted, in practice, as a penalty on the expansion of bank
lending to the private sector. Apart from two brief periods in the middle
of the 1970s (February 1975 to November 1976, and then again from
August 1977 to June 1978), in both cases when the economy and mon-
etary growth became so depressed that the corset was no longer binding
and was removed, it was in place thereafter until its nal abolition in June
1980. Like all such mechanisms of direct control, the corset was subject
to avoidance (the bill leak for example
19
), and how much of the slower
growth of the monetary aggregates, especially in its second application
at the end of the 1970s, was just cosmetic was very hard to assess at the
time.
Let us turn next to the third, and key, instrument of monetary policy,
the Banks control over interest rates, achieved by setting the money-
market rate at which it will allow the commercial banks access to
the high-powered money base. There are two separable aspects to the
19
Commercial bills were marketable. Hence banks could induce their larger depositors,
via minor changes in relative interest rates, to switch out of deposits into holding bills
directly, a form of dis-intermediation that reduced both bank lending to the private
sector, deposits and interest-bearing eligible liabilities, and the constraint of the corset
simultaneously.
interest-rate decision, rst the policy regime that determines the frame-
work for such decisions, and second the political-economy modalities of
such a decision-making process.
The choice of policy regime is naturally, and properly, a decision for
government to make, though the Bank could, and did, develop and
express views on the appropriate regime. At the start of my period, the
late 1960s, the Bretton Woods pegged exchange-rate system constrained
monetary policy, especially in the years 19689 when Britain needed to
borrow from the IMF (in support of its 1967 devaluation), and was sub-
ject to Fund conditionality (notably domestic-credit expansion limits)
20
.
Under the Bretton Woods system interest rates were raised to protect
the exchange rate, usually when the trade decit worsened, and low-
ered to support investment and growth when the external constraint was
removed. The resulting stop-go outcome was widely held to be a brake
on Britains growth, and many (much more so outside the Bank than
inside) saw this as a reason to welcome the collapse of Bretton Woods in
the early 1970s.
This collapse did remove that apparent constraint, and there were cer-
tainly some in both main political parties who saw this as an opportunity
to make a dash for a higher rate of growth. The resulting rapid expan-
sion of 19723 was, however, soon brought to an end by ination. The
fashionable academic nostrum of the 1970s was monetary targetry. The
Labour government that had been elected in 1974 was unenthusiastic,
and some elements were set against it. The Bank was doubtful whether
velocity would be stable enough (given its experiences in 1973) to sup-
port a rigid monetary target, but did want some anchor for accountability
and control purposes as is shown in Governor Richardsons 1978 Mais
Lecture.
21
Moreover the experience of other countries, e.g. Germany
and Canada, suggested that a discretionary, or pragmatic, application of
monetary targets could be benecial. In the context of the balance-of-
payments crisis in 1976, and resulting IMF pressure, the Labour gov-
ernment did introduce a version of monetary targetry (with the support
and encouragement of the Bank), but once the balance of payments, the
economy and the gilts market all recovered in 1997, it ceased to represent
much of a constraint on policy.
Meanwhile the Conservative opposition, under the inuence of Keith
Joseph, had come to interpret the ination of 19734 not only in terms
of a purely monetary causation, but also in terms of one key monetary
20
Domestic credit expansion, BEQB 9 (1969), 36382.
21
G. W. H. Richardson, Reections on the conduct of monetary policy, the rst Mais
Lecture, published in BEQB 18 (1978), 317.
aggregate, M3, a broad monetary aggregate.
22
When it was re-elected
in 1979, the incoming Conservative government, under Thatcher and
Howe, made a target for M3 the centre-piece of its medium term nan-
cial strategy. The Bank argued, mostly in private, that this placed far
too much weight on a suspect and unreliable economic relationship, the
demand for money function
23
and the predictability of velocity.
One problem for the Bank was that the predictable breakdown of
this relationship could be (partly) ascribed to the Banks own failings.
Exchange control had been abolished in 1979, and once it was gone dis-
intermediation around the corset would become all too easy, so it too
was ended in June 1980. Nobody, however, knew by how much it had
distorted the monetary (and credit) data. We, in the Bank, had made a
guess of slightly over 2 per cent. When the data came in for the month
following the abolition, the statistic rose by over 5 per cent, blowing a
huge hole through the monetary target. Thatcher was furious. Mean-
while, however, scal policy was kept tight, the exchange rate rocketed
(partly under the inuence of North Sea oil), interest rates remained
high, and ination dropped as sharply as anyone could have wanted. For
several years, some, especially in the Treasury, waited with bated breath
to see if the monetary overhang would feed through into greater ina-
tion. (For reasons partly related to nancial innovation, there was a major
kink in the trend growth of M3 velocity just about then.) Then some of
Thatchers monetarist advisers, notably Niehans in an inuential, but
unpublished, paper
24
argued that Britain had been concentrating on the
wrong aggregate, and if we only had looked at the correct, narrower one
we would have appreciated that British monetary policy was too tight,
not too loose.
So, with ever-decreasing enthusiasm, the government moved to a mul-
tiplicity of monetary aggregate targets, with broad money (M3) partly
restrained by the tactic of over-funding the governments scal decit.
The idea was that debt sales to non-banks would be paid by the buyers
reducing their bank deposits. The counter-argument was that, in order
to encourage this, yields on longer-dated gilts would have to rise (relative
22
The greater emphasis on broad, than on narrow, money dated back to 1968 when the
IMFimposed a domestic credit expansion limit on Britain. This tted, in the British con-
text, more easily into a broad money framework. Moreover, the surge in M3 in 19723
clearly led the sharp rise in ination in 19745, whereas any such linkage between M1
or M0 and subsequent ination was much harder to perceive. The distinction between
M3 and M3 was largely technical, and needs no discussion here.
23
The demand for money in the United Kingdom: experience since 1971, BEQB 14
(1974), 284305
24
J. Niehans, The appreciation of sterling: causes, effects, policies, Money Study Group
Discussion Paper, mimeo (February 1981).
to short rates). This would deter corporate debt issues and encourage
private-sector borrowing from banks; hence bank lending to the private
sector would rise, offsetting some (unknown fraction) of the direct effect
of the debt sales on M3. Thus, it was argued (but without much empirical
evidence either way), that over-funding was quasi-cosmetic. Anyhow by
now both the Treasury and the Chancellor were becoming sceptical of
the (causal) effects of such a change in broad money on nominal incomes,
at least in the short to medium term, while in the longer-run trends in
velocity had changed (around 197980), and could well change again.
Attempts by monetarists, such as Allan Meltzer,
25
to advocate more ex-
ible forms of targetry, to take account of such unpredictable shifts in
trends, came far too late to hold back the growing tide of scepticism
about monetary targetry, especially when achieved by a tactic such as
over-funding.
In all this, the Bank played a relatively small role; it was in Thatchers
bad books; Governor Richardson was perceived as not being one of us,
while his successor Leigh-Pemberton made no claimto being a monetary
expert. Meanwhile the Treasury was run during most of these years by
Nigel Lawson who was supremely condent in his own monetary (and
scal) expertise.
Eventually in 19856 Lawson became thoroughly disenchanted with
the whole exercise of monetary targeting, and the monetary aggregates,
once the cynosure of policy and attention, became relegated to the role of
supplementary data (if that). Looking for another anchor for monetary
policy, Lawson turned back to an external peg, notably the deutschmark.
Thatcher, however, was opposed to joining the Exchange Rate Mecha-
nism (ERM), until bullied into it in October 1990. So Lawson (unof-
cially and without any public statement or, at least initially, even a private
warning to the Prime Minister
26
) just followed the policy of shadowing
the deutschmark, until his disagreement with Thatcher. Political pres-
sures to join the ERMcontinued, and we joined nally, when John Major
was Chancellor in October 1990. Again the Bank played very little role,
its views were anyhow mixed; it recognised the risks of a pegged, but
adjustable, exchange rate; on the other hand there was a need for a nom-
inal anchor for policy, and Britains position, of being a member of the
European Monetary System (EMS) but not of the ERM was widely
felt to be anomalous.
25
A. Meltzer, Limits of short-run stabilization policy, Economic Inquiry 25 (1987), 113;
A. Meltzer and K. Brunner, Money and the Economy. Issues in Monetary Analysis. The
1987 Raffaele Mattioli Lectures (Cambridge, 1993), ch. 4.
26
See M. Thatcher, The Downing Street Years (1993), pp. 699702.
Exit from the ERM in 1992 left Britain without a monetary regime.
Both monetary targetry and an external peg had been tried, and had been
seen to fail. After a pause for reection, and no doubt discussion, the next
move was to a regime of direct ination targeting. This had been adopted
earlier by NewZealand (in 1989) and Canada (1991), and was advocated
by many academics and commentators. The Bank surely approved. One
problem, however, was that the government in Britain by nowhad a cred-
ibility problem. For years, perhaps decades, government ministers had
been claiming that their policies would defeat ination, whereas success
had been at most partial. Why should the public believe them any more
just because they were now trying to target ination directly?
This brings us back from the underlying monetary regime to the pro-
cess of how interest rates are set, and by whom. Under the gold stan-
dard, before 1914, the Bank set interest rates directly, though usually
informing the Chancellor of the Exchequer beforehand. During the First
World War responsibility for all aspects of policy, including interest rates,
effectively passed to the government, with consultation, of course, in the
monetary sphere with the Bank. In the interwar period, the initiative for
proposing changes shifted back to the Bank, but with the important qual-
ication that no change could be undertaken without the Chancellors
agreement.
27
Exigencies during the Second World War and the nation-
alisation of the Bank in 1946 shifted responsibility further towards the
government. The Bank could, and did, advise and propose, but the Chan-
cellor was nowtreated as the absolute arbiter of the decision to set interest
rates. He could, and did, overrule the Banks advice, and set interest rates
as he saw t, subject to maintaining the support of Prime Minister and
Parliament.
The Chancellor had his own staff of economists and advisers, of course,
and they provided him with forecasts and projections that formed the
quantitative base for policy decisions, on both monetary and scal poli-
cies. The Bank increasingly recruited economists into its Economic Intel-
ligence Department, and they also produced (internal) forecasts. These
were not then (i.e. in the 1970s and 1980s) allowed to be published, how-
ever, partly because it was argued, no doubt correctly, that all that outside
commentators and journalists would explore would be the (overblown)
differences between the two forecasts. Moreover, having both monetary
and scal policies determined by one decision-maker (i.e. the Chancellor)
27
The balance of power in setting interest rates moved towards the Bank in the run-up
to, and restoration of, the gold standard, 19251931, and back to the Treasury and the
Chancellor after its abandonment: see S. Howson, Domestic Monetary Management in
Britain 191938 (Cambridge, 1975), p. 95; E. T. Nevin, The Mechanism of Cheap Money.
A Study of British Monetary Policy 193139 (Cardiff, 1955).
on one set of forecasts (i.e. the Treasurys) was said to enhance the proper
coordination of the various arms of policy.
28
Of course, the Chancellor was apprised of, and could in principle have
adopted, the Banks forecast in place of the Treasurys. In practice, given
the Chancellors close working relationships with his own advisers and
economists, this virtually never happened, though the Treasury could
be persuaded by professional arguments on occasion to shade their own
views; there was a fair amount of academic interchange at working level.
That said, the Banks economists were largely neutered by the inevitable
tendency of the Chancellor to work with the Treasury projections, so
much so that the Bank used in the 1970s to run simulations, etc., on the
basis of the Treasurys forecasting model (as well as on its own), while
the Treasury paid little attention to the Banks work in this eld.
Under these circumstances in policy discussions with the Chancellor
the Bank used to play to its strengths, which was a greater feel for mar-
ket reactions and responses. The Bank would often seek to get its way
by claiming that whatever the, inherently uncertain, forecasts might sug-
gest, markets would, in their view, react in this, or that, way to a proposed
change of interest rates. Given this advisory niche, the Bank, not surpris-
ingly, almost always reacted sharply and negatively to suggestions that
the Treasury develop its own direct contacts with market participants.
From the mid 1970s onwards there was a formal monthly mecha-
nism for reviewing the conjuncture and policy on interest rates, with a
TreasuryBank meeting of ofcials, followed by a ChancellorGovernor
meeting. But such meetings were not publicised and rarely led to a deci-
sion to change interest rates immediately. Rather there was a tendency
to decide on a bias, with any subsequent move conditional on further
information ows. Moreover, interest-rate changes could be, and were,
perhaps more often than not, made in response to immediate events,
usually then following a quick private discussion between Chancellor and
Governor (or Deputy Governor).
What followed fromthis was that the extent of the Banks inuence over
monetary policy, prior to 1993, depended greatly on the particularity of
the personal chemistry between Chancellor and Governor. When the
relationship was good, and the Chancellor felt that the Governors advice
added value, then, as with Healey and Richardson, the Bank did play a
role. When the Chancellor felt that he would gain little from the Banks
advice, as in the case of Lawson, the Bank had less inuence.
This process for changing interest rates had continued, mutatis mutan-
dis, pretty much unchanged between the 1950s and 1993. But then it
28
This argument was reinforced by the Radcliffe Committee Report, esp. ch. 2.
changed. After the perceived disaster of the ERM exit, Lamont as Chan-
cellor of the Exchequer faced the problem that his claim to vary interest
rates so as to control ination just would not be believed.
To restore credibility he took a number of steps. First, he allowed,
indeed encouraged, the Bank to publish its own forecast of the likely
outcomes for output and ination, conditional on an assumption of
unchanged interest rates. This latter was necessary because the Bank
could not be seen to pre-empt what remained the Chancellors decision.
The Bank was, however, perceived as sufciently expert, independent
from government, and concerned with ination that its forecasts could
be taken as a credible guide whether interest rates needed to change (and
of course in what direction) to hit the ination target.
Next, and subsequently, the next Chancellor, Clarke, not only
announced the event of the regular Chancellor (plus Treasury ofcials)
Bank meeting on interest rates, and published the minutes of the meet-
ing, but he also allowed the Governors opening statement to be read into
these minutes verbatim and without editing. Thus the public was made
directly aware of the Governors (and the Banks) own views, and could
identify exactly when the Chancellor decided differently.
Third, and least important, when a decision to change interest rates
was made, the Bank was given control over the exact timing of its imple-
mentation.
These innovations, taken together, meant that the Banks views and
advice on the interest-rate decision, which had previously been kept
covert and private, now were made transparent. As such, they were,
surely, more inuential. Even so, a self-condent Chancellor, such as
Clarke, was willing to back his own (and the Treasurys) judgement, and
there were several cases of disagreement, but at least they, and the relevant
arguments on either side, were now in the public domain.
29
The Conservative government was, therefore, willing to let the Banks
views, forecasts, etc., be heard in public. Nevertheless it kept the nal
decision under the political control of the Chancellor himself. While both
Lawson and Lamont had considered the idea of giving operational inde-
pendence to the Bank to set interest rates in a favourable light, their
respective Prime Ministers, Thatcher and Major, both balked at the idea
of transferring this power out of political hands. Indeed, the fact that
these Chancellors had considered this at all was only revealed in their
respective resignation speeches, perhaps an indication of the perceived
political sensitivity of the matter.
29
D. Cobham, The Making of Monetary Policy in the United Kingdom19752000 (Chichester,
2002).
When in opposition, the shadowChancellor, Gordon Brown, had indi-
cated that he would want experience of the quality of the Banks advice
for some quite long period before any grant of operational independence
to the Bank. So it was a surprise when he granted this within the rst week
of taking ofce. This major change in the Banks role is so well within
recent memory that it is not really now necessary to describe further how
that has worked (successfully in practice). In any case there will be many
such analyses available in coming years.
Perhaps the only end-note that should be added is that two obstacles
to such operational independence turned out in the event to be nugatory.
First, might there be embarrassment fromthe publication of two separate
forecasts? Here the Treasury assumes that the Bank will achieve its ina-
tion objective, and the Bank takes the Treasurys announced scal policy
measures as given. There are one, or two, points of minor difculty (e.g.
if a scal policy change is condently expected, but not yet announced),
but the two separate forecasts have co-existed with minimal problems, so
far at least.
Second, the argument that monetary and scal policies needed to be
coordinated was, at least in these circumstances, found to be invalid,
so long as the Chancellor both sets the ination target and also accepts
the Banks expertise in setting interest rates to achieve that. Thereby the
Treasury knows that any (scal) measure that inuences forecast ination
will lead to a reaction from the Bank (to stabilise ination at the target
rate). So the Treasury can internalise the Banks reaction function (which
functional form the politicians in effect decreed in advance), and hence
coordinate policies as well as ever before. Indeed, monetary policy has
nowbecome much more transparent and accountable, to both Parliament
and people, than in the past.
The Banks domestic market operations
(a) The gilt market
Britain emerged from the Second World War with a hugely inated stock
of outstanding government debt, as it had after the Napoleonic war and
the First World War. This amounted to some 186 per cent of GDP in
1945, and even by 1965 still stood at 106 per cent of GDP.
30
In the sixteen years from 1964 to 1979 the annual redemptions of
marketable government debt averaged 1,370 million, some 6.1 per cent
30
C. A. E. Goodhart, Monetary policy and debt management in the United Kingdom.
Some historical viewpoints, in K. A. Chrystal (ed.), Government Debt Structure and
Monetary Conditions (1999), pp. 4397.
of the broad money stock M3, and slightly more than 25 per cent of the
monetary base on average in these years. One of the nightmares of the
Bank was that there would be a buyers strike in the gilt market, and that
there would be a ood of cash pouring into the monetary system from
these maturities. The term ood was, indeed, coined by Chancellor
Thorneycroft, and then by Tew,
31
to describe just this situation. So the
primary task of debt management was to limit monetary expansion (and
excessive liquidity); an important secondary objective was to minimise
the cost of the debt.
Moreover, the gilts market was perceived by the Bank as being skittish
and dependent on expectations, which were often, locally at least, extra-
polative. Thus if prices in the gilts market were falling, say as a result
of worsening inationary expectations, it was thought to be difcult and
dangerous to press gilt sales on such a market, in case investors became
dismayed and dispirited. Instead the market should be allowed to nd a
bottom, perhaps aided by policy measures elsewhere, for example a rise
in short-term rates (i.e. Bank rate) or a scal tightening. Then, once the
market began to rise again under its own steam, the government broker
could resume unloading large volumes of debt sales on such a rising
market.
The view that expectations were, locally, often extrapolative, and that
sales were a positive function of the rate of change of prices (not just a
negative function of the level of prices), did not go unchallenged. Some-
what naturally both economists and Treasury ofcials tended towards
some scepticism. A detailed study of the Banks (and Treasurys) views
on the working of the gilts market was a major element of the Radcliffe
Committee Report.
32
Nevertheless the Bank stuck to its guns, and, given
the sheer scale of the national debt, its management of that debt was,
perhaps, the most sensitive and important aspect of monetary and scal
policies which, at the start of our history, was primarily under the control
of the Bank (though this had not been so earlier in the Dalton era in the
late 1940s). The perceived failings of that experiment perhaps reinforced
the Banks inuence later on.
Both the tactics and strategy of debt management were devised by the
Banks ofcial(s) at the gilt-edged desk, in conjunction with the govern-
ment broker, who operated in the market on behalf of the Bank, but
was the senior partner of a private rm, Mullens and Company. These
two, together with the chief cashier and the executive director in charge
31
P. Thorneycroft, Policy in practice, in Not Unanimous (1960), pp. 114, and B. Tew,
Monetary policy, in F. Blackaby (ed.), British Economic Policy 19601974 (Cambridge,
1978), p. 229.
32
See also Goodhart, Monetary policy and debt management.
of domestic nance, effectively decided on policy initiatives in this eld.
They needed to consult, and had to get agreement from, both the Gover-
nors in the Bank and senior Treasury ofcials and the Chancellor (and the
Financial Secretary). Such, however, was the extent of mystique, and/or
market awareness, that was seen as requisite for success in this eld that
it was extremely rare for the Bank to fail to have its proposals adopted.
Indeed, the extent of inuence achieved by the Bank through its spe-
cialised abilities in debt management spread over into other areas of
macro-policy operations as well. The question of how the gilt market
might, or might not, react was often a focal part of the Banks repertoire
when advising on questions of whether (and by how much) to adjust
short-terminterest rates (Bank rate) and on the scale of the budget decit.
So, at the start of this period, debt management was a key feature of
the Banks overall role and importance. Over time, however, a combina-
tion of responsible scal policies (on occasions under pressure from the
IMF) and unforeseen ination, especially in the 1970s, eroded the rela-
tive scale of the debt (relative to GDP, history, and increasingly to other
countries as well). Moreover innovations in the range of debt instruments,
for example convertibles, zero coupons, indexed bonds, and techniques
of issue, notably auctions (which had for many years been resisted by
the Bank, though, to be fair, these were technically impossible prior to
the change in market structure in 1986 as part of Big Bang reform of
UK capital markets
33
), enhanced the ability of the authorities (Bank plus
Treasury) to sell debt even under supposedly adverse conditions.
There was a further ourish of debt management in the mid 1980s
whenthe Chancellor andthe Bank reliedonthe technique of over-funding
the scal decit (and the accruing maturities), to try to hold down mone-
tary growth in the face of a sharp expansion in bank lending to the private
sector. This is not the place to go into an assessment of the merits, or
otherwise, of that policy, a contentious issue already briey discussed. Be
that as it may, while it lasted it put a premium on the marketing skills of
the Bank.
The policy of overfunding was brought to an abrupt end by the Chan-
cellor, Lawson, in 1985.
34
With the monetary regime between 1987 and
1992 increasingly being based on an external anchor, debt management
policy ceased to be used aggressively to lessen monetary growth; instead
the stated objective was to achieve a full fund, so that any monetary
effects of a decit would be sterilised by net debt sales. By 1990 the debt
33
C. A. E. Goodhart, The economics of Big Bang, Midland Bank Review (1987),
pp. 615.
34
Lawson, View from No. 11, ch. 36, esp. appendix pp. 45860.
ratio had fallen further to 47 per cent of GDP, and, despite a resurgence
in the size of the scal decit in the years 19925, the exercise of debt
management was becoming less of a key pressure point, and somewhat
more of a routine exercise. Increasingly debt was being sold at auctions
where the date and volume to be sold were announced well in advance,
in order to allow the market full prior preparation.
Then in 1997, as part of the sweeping reorganisation of the Bank,
and of monetary policy operations more widely, Brown, the new Labour
Chancellor, removed debt-management operations from the Bank alto-
gether, and placed them in the hands of a separate, Treasury-controlled,
debt-management institution, which was legally part of the Treasury an
executive agency of the Treasury. Against the background of the origi-
nal context at the start of my period, this would have represented a truly
revolutionary step. But the steady reduction in the scale of the national
debt, relative to GDP, and the changing nature of the market (with an
increasing semi-captive demand for long-term debt from pension funds,
etc.) had meant that its management had slowly evolved from a crucial,
but arcane, art into a more routine process.
(b) The money market
The Bank has always made its desired short-term interest rate effective
by setting the rate at which it would make cash, high-powered money,
available to the banking system. It could, under any plausible circum-
stance, make the banking system, on average, short of cash by selling a
larger amount of short-term debt, usually through an auction tender of
Treasury bills, than was forecast to be necessary to mop up the predicted
amount of cash becoming available to the banks, for example from the
scal decit, cash ows to/from the public, gilt sales/maturities, etc., over
the next week. Even if the Bank got its forecast occasionally wrong, so
that there was excess cash for a day or so, with overnight rates falling
close to zero, everyone knew that within a day, or two, the Bank could
easily re-establish control. So period rates, e.g. longer than one week,
depended on predictions of the authorities future policy decisions, not
on the wayward, and sometimes sizeable, uctuations in overnight rates.
Such money-market control is really quite simple, and has remained
essentially unaltered over many decades. Nevertheless several of the tech-
nical market details have seen considerable change. For example, at the
start of the period short-termcash ows ran largely through a small group
of highly levered intermediaries, the discount houses. For historical rea-
sons going back to the nineteenth century, the Bank did not want to
lend directly to commercial banks (except in crisis lender-of-last-resort
operations). So it encouraged a regime where the commercial banks lent
to the discount houses, and the Bank then dealt with those houses. The
houses were required to make markets in overnight funds. So if the clear-
ing banks were short of cash, they would withdraw funds from the dis-
count market, forcing the houses to borrow from the Bank. The houses
kept a large book of bills (both commercial and Treasury bills) and short
bonds, nanced largely by very short-term, e.g. overnight, funds fromthe
commercial banks. So the discount market was subject to considerable
interest rate risk (though it had, at least in the later years, some hedging
opportunities, e.g. using futures), and, if they failed to foresee the advent
of shocks to Bank rate, could teeter towards insolvency.
Placing such small, and quite risky, intermediaries at the heart of the
money market had its disadvantages. Moreover the arrival of large for-
eign banks in London slightly widened the degree of competition (as
did the transformation of the larger building societies into banks). For
this, and no doubt other reasons, the Bank slowly overcame its phobia
about dealing directly with commercial banks, and the discount houses
were dispensed with; they either folded, merged or turned to other niche
activities.
There have been a number of developments in the form of the Banks
domestic money-market operations in recent years. These include the
inauguration of the repo market, the shift shortly thereafter of the Banks
operations on to repo, and the widening of the range of counterparties. It
has also had to manage a much wider range of collateral, notably in the
context of providing liquidity to the Real Time Gross (Payment) System
(RTGS) and for British banks participating in the European payment
system (TARGET). An important by-product of its market operations
is the ability to generate market intelligence which assists its nancial
stability objective.
As the monopoly supplier of cash (high-powered money for the banking
system), a central bank, in a closed economy or a oating-exchange-rate
regime, cannot really avoid specifying the rate at which it will supply,
or withdraw, cash to (from) the system. Otherwise, if there is a surplus,
overnight rates will fall to zero; and, if a decit, rise to whatever level
is necessary to allow banks to cope with that decit, e.g. by ignoring
cash-ratio requirements.
Yet there were two extraordinary occasions during these decades when
Conservative governments tried to suggest that short-term interest rates
instead were market-determined, and not set by the monetary authorities.
The rst occurred towards the end of 1972 in the context of government
negotiations on pay and price controls, and the imposition of a Standstill
on prices, incomes and dividends in November. The government wanted
to avoid the accusation that, when other costs were xed, it had increased
the interest-cost burden on borrowers. Hence it introduced a formula, in
October 1972, whereby minimum lending rate would be related to the
outcome of the previous weekly Treasury bill tender.
35
So for a time the senior ofcials in the Bank played out an elaborate
charade, in which they decided what minimum lending rate they wanted
and then adjusted tender, and market, conditions to achieve that (aided
on occasions by calls for (repayments of ) Special Deposits). In fact this
articial set-up had to be overridden quite soon, in November 1973, in
the context of worsening ination and monetary expansion. It limped on,
however, until overridden again in the course of the balance-of-payments
crisis in October 1976. Shortly thereafter, in the context of a Treasury
bill tender that would have led to an unwanted decrease in interest rates,
the Bank announced that the rate will remain at 12 per cent until the
Treasury bill tender rate moves into the range which would result in a
minimum lending rate of 12 per cent under the usual formula (i.e. 11
1
/
4
11
1
/
2
per cent), or until the Bank administer a further change.
36
That
effectively made it clear, once again, that the monetary authorities were
the effective arbiter of the level of short-term interest rates.
At least the purpose of the 1972 exercise was patent, i.e. to obfuscate
the fact that short-term interest rates were set by the monetary authori-
ties. The next episode, in 1980, was even more confused. It arose in the
aftermath of the decision not to proceed further with (immediate) moves
to Monetary Base Control (MBC), after the publication and debate on
the Green Paper on Monetary Control.
37
One of the hopes of advocates of
MBCwas that the central bank would set the growth rate of the base, and
that (short-term) interest rates would then become market-determined.
In order to allow that to happen, a central banks discount-window lend-
ing would have to be severely curtailed, and/or kept at a penalty rate above
market rates.
As a kind of consolation prize for MBC monetarists (for not getting
MBC), the authorities agreed that operations could become somewhat
more market-oriented with less reliance on discount-window lending;
a note on Methods of monetary control was issued on 24 November
1980.
38
The authorities would still set interest rates (with a viewto hitting
their monetary target), but would, it was suggested, disguise what their
interest-rate objective was (the unpublishedband), andpretendthat it was
all the markets doing. Frankly this was confused and silly. In practice,
35
See BEQB 12 (1972), p. 442.
36
BEQB 17 (1977), p. 21.
37
Treasury and Bank of England, Monetary Control (Cmd. 7858, PP 197980).
38
Ibid., p. 429.
it had little effect, apart from being a pretext for the Bank to introduce
some reform and widening of British bill markets, which it wanted to
do anyhow for its own purposes.
39
The unpublished bands, etc., never
transpired; the authorities went on announcing administered changes in
minimum lending rate, and the monetarist overtones in the supposed
new methods of 1980 rapidly became a dead letter and forgotten.
(c) Other domestic nancial markets and market mechanisms
The gilt and bill markets are the only domestic ones in which the Bank
operates directly. Nevertheless it has always seen one of its core functions
as looking after the general health and successful functioning of nancial
markets in this country, usually known under the general title of the City
of London. In particular, as part of its remit for maintaining nancial
stability, it has direct, and immediate, responsibility for the continued
smooth operation of the payments system, which ultimately depends on
the transfer of good funds through the books of the Bank itself.
This has meant that one niche speciality within the Bank has been
professional understanding of the working mechanisms, inherent risks
and methods of controlling such risks in clearing and settlement sys-
tems covering a wide range of nancial markets in Britain, equity as
well as bond, foreign exchange as well as domestic, future/forward as
well as spot, derivative as well as underlying. This is a notably techni-
cal area and is not widely remarked in press commentaries. Yet Bank
involvement and guidance in such market mechanisms have been perva-
sive and continuous, albeit discreet. Even after the transfer of the super-
vision of nancial intermediaries to the FSA, oversight of the structural
operation of nancial markets has remained an important, but usually
unsung, part of the Banks responsibilities. If anything, with the growing
complexity of nancial markets, and the continuing dominance of the
City as the main international nancial market, this task has increased in
importance.
Besides its inuential role in sculpting the structure of the organisa-
tional plumbing of nancial markets, e.g. clearing and settlement mech-
anisms, the Bank also has played a major advisory role in guiding the
structure, strategy and (occasionally) top appointments in the City. In
this respect it is, perhaps, more often reactive, in the sense of respond-
ing to proposals and names put to it, rather than taking the initiative for
change; the latter might be perceived as overstepping its appropriate role.
39
See Monetary control: next steps, 12 March 1981, and reproduced in BEQB21 (1981),
pp. 389.
All the same the views of the Bank in strategic issues, such as Big Bang
for stock market deregulation in the mid 1980s, represented a key input
into the strategic decision-making process. How far the Bank goes in for-
mulating and pressing its views of the appropriate strategic design of other
nancial markets does, however, depend somewhat on the accidents of
personality among senior Bank ofcials; some were more forward than
others in this eld. At various stages during these decades, the Bank did
play a very substantial role in facilitating and promoting restructuring
of trading mechanisms and governance in key parts of the City (e.g. the
Stock Exchange and Lloyds), and proffering good ofces advice in a
large number of non-nancial corporate situations.
International monetary issues
(a) The foreign exchange market
During those monetary regimes in which policy is constrained by an
external anchor, for example under a pegged exchange rate, the foreign-
exchange market becomes the chief cockpit for monetary policy. Even
when the country is supposedly on a oating exchange rate there can be
crises, often crises of condence threatening a collapse in the exchange
rate, as in 1976, that put operations in the foreign-exchange market at
the centre of attention.
The Bank of England is the governments operator in this foreign-
exchange market, and suggestions on day-to-day tactics have largely
emanated from the Bank. Unlike the gilt-edged market, where the Bank
usually took the lead on strategy as well as tactics, in the foreign-exchange
market strategy was usually decided on equal terms between the Bank
and the Treasury, while the overarching policy regime to be followed was
always rmly in the hands of government. The Bank consistently saw
itself as an agent in this area acting on behalf of its principal, the govern-
ment. This was because the foreign-exchange reserves which it paid out,
when it supported sterling, or accumulated when it sold sterling, came
from or went to the Exchange Equalisation Account (EEA), which was
in the name of the government, not of the Bank.
Again, however, the day-to-day portfolio management of this stock of
reserves fell to the Bank, but still very much in the role of fund manager
acting as agent to the Treasury and government as principal. Any signif-
icant portfolio investment idea had to be explained to, and cleared by,
the principal. Any major change in policy, e.g. to shift between gold and
foreign currencies, is taken and announced by government, not by the
Bank.
This structure of relative responsibility has remained largely unchanged
over the last four decades. However, the importance of this role has var-
ied widely, depending mainly on the policy regime adopted. It was, of
course, very much in the front line during the shaky years surrounding
the 1967 devaluation, the problems with gold in 1968, and the collapse
of Bretton Woods 19713. But foreign exchange management remained
of critical importance during the crisis years, 19736, that followed. The
prospective development of North Sea oil coincided with the return of the
Conservatives in 1979; the Conservatives wanted to avoid having their
monetary control distorted by pegging the exchange rate. A combination
of North Sea oil, high interest rates and condence in Thatcher provoked
a massive, but temporary, blip in sterling in 1981 (to be followed by a
huge upsurge in the US dollar in 19835, which drove sterling back down
to more reasonable levels).
Then, at the end of the 1980s, the policy of shadowing the deut-
schmark was shortly thereafter followed by entry into the ERM. This,
once again, put the spotlight on foreign-exchange operations. After
Britains exit in September 1992 there was much less inationary tur-
moil than in the 1970s. Although there was another sharp appreciation
of sterling in 19967, which has remained largely unexplained, the cur-
rency has been allowed to oat freely. The foreign-exchange dealing room
in the Bank, once the centre of policy interest with telephone discussions
every ve minutes with senior ofcials at the Bank and Treasury, has
by comparison become something of a backwater. That said, the Bank
has been much more actively involved in management of the foreign-
exchange reserves of the EEA in the last decade than previously. In the
last couple of years it has also managed the gold auctions which the Chan-
cellor mandated. Here, as elsewhere, the range of market operations has
been increasing.
When Brown made the Bank independent in 1997, he did make one
additional change in this area. He gave permission for the Bank to inter-
vene in foreign-exchange markets on its own initiative using some of its
own comparatively small reserves, which arose, for example, from sales
of Bank of England euro-denominated bills, or from swaps. This would
allowthe Bank to intervene in the foreign-exchange market by itself, with-
out prior agreement with the Treasury and the politicians, but it could
only do so for purposes relating to monetary policy. The small size of such
Bank-owned reserves made any support of sterling problematical, but a
central bank can intervene to sell its own currency, to check an unwanted
appreciation, without limit in theory. For a variety of reasons, including
concerns about the risks of such a policy and doubts about its efcacy,
the Monetary Policy Committee felt that it should not make use of any
such intervention opportunities to aim to check the appreciation of the
pound in 1997 and afterwards.
40
Whether historians will count this as an
opportunity missed has yet to be seen.
(b) International policies and diplomacy
In the 1960s a rump of the Sterling Area remained and these, and other,
countries maintained sizeable balances invested in sterling assets which
could be switched into other currencies and hence represented an over-
hanging threat to the British balance of payment. Considerable atten-
tion was paid to maintaining good information with these countries. The
devaluation of the pound in 1967 further eroded both the Sterling Area,
and the willingness of foreigners to hold sterling investments in London.
After the oil shock in 1973, many of the oil-exporting countries suddenly
faced huge increases in reserves, and several of these, particularly those
with British links, such as Nigeria and Kuwait, continued for a time their
earlier practice of holding much of these reserves in sterling in London.
Before long, they revised their ideas about how to spend and to invest
them worldwide, despite strenuous efforts to keep OPEC balances in
sterling in London. One aspect of the story of the 1976 crisis reects the
withdrawal of part of such oil funds. After that crisis the reputation of
sterling xed-interest investments in London, as a safe haven, declined
yet further; and the saga of the Sterling Area and of its members sterling
balances came to a sorry end, just as Britain was itself joining the ranks
of oil producers.
Just as London was losing one role, as a destination for foreign hold-
ings of sterling, so it was gaining another during the 1960s and 1970s,
as the pre-eminent international intermediary centre for trading foreign
currencies and debt, mostly in US-dollar form. The Eurodollar market
grew and thrived in London from the 1960s onwards; the Eurobond
market developed here; the international gold market was headquartered
in London; and so on. London became a truly international nancial
centre, with more international banks establishing a presence here than
anywhere else.
The Bank was keen to foster these developments, which in turn placed
it at the centre of the international nancial system. That, and the his-
torical accident of Britains close alliance with the USA, the worlds pre-
eminent power, gave the Bank an international inuence and status well
above its purely domestic strength, although its reputation and position
40
See Monetary Policy Committee minutes, Aug. 1997, para. 64, published with the Bank
of Englands Ination Report, no. 1997, pp. 5762.
were tarnished by the devaluation of 1967, and then the difculties of
the disastrous years, 19736. Nevertheless the Bank still played a major
role in the various crises faced by the international nancial system,
notably the, eventually failing, attempts to salvage the Bretton Woods sys-
tem (196873) and handling the less-developed-countries crisis in 1982.
Governor Richardson enjoyed the role that he could play on the worlds
stage, and did it well.
To support the Governor in these tasks, the Bank had an International
Department, about as large as the Economic Intelligence Department,
and an executive director focusing on such international issues. Fur-
thermore Britains endemic balance-of-payments problems meant that
Britain retained its tight exchange controls over capital movements (until
October 1979). Although clients wishing to make transfers potentially
subject to such controls would normally deal with their own commercial
banks, rulings on difcult issues, case law and minor adjustments to the
regulations were all undertaken by the Bank, which also generally moni-
tored the decentralised conduct and observance of the controls. This was
done in a separate, and sizeable, department. So a signicant proportion
of the Banks professional staff and efforts were directly taken up with
handling overseas affairs in the 1960s and 1970s.
With the establishment of the European Monetary System in 1979,
the 1980s saw a growing shift of emphasis towards Europe, with per-
haps somewhat less attention on global nancial issues. Moreover, the
European scene was somewhat different, requiring experts from domes-
tic departments in the Bank discussing issues of common concern with
their counterparts from other countries. All too often delegations from
the Bank to these various European fora would involve two, or more,
ofcials, one from the relevant domestic department and one from the
International Department. There was a subtle difference from occasions
of global crisis when establishing the Banks views, for meetings at the
IMF and/or World Bank would be the main responsibility of the Interna-
tional Department, though after Bank-wide consultation.
In any case, the growing weight of European coordination meant that
international dealings were largely, if not mainly, carried out by the rele-
vant domestic experts. The logic of this was carried to its ultimate
extreme, in the mid 1990s, with the abolition of the International Depart-
ment altogether. At the same time the policy issues were now divided
up between those relating to macroeconomic issues, which lie in the
monetary analysis area, and those relating to nancial stability, includ-
ing most IMF related work; moreover both areas, monetary analysis
and nancial stability, have divisions which concentrate on international
issues.
The abolition of the International Department, and of its associated
executive director, was a major wrench to the structure of the Bank. The
advantages and disadvantages of this step remain arguable; whether a
central banks external affairs should be centralised under one depart-
mental roof, or decentralised to the relevant domestic experts remains
unclear. Again historians of central banking may nd this an interesting
question to discuss.
The future?
Of course, the most important question affecting the Banks future is
whether Britain will adopt the euro and join the euro-system. If it should
do so, then what would be the roles for the participating national central
banks? Would London become the dominant euro-wide monetary centre,
so that the Bank of England became the equivalent in the euro-system
to the Federal Reserve Bank of New York within the Federal Reserve
System?
The next set of questions relates to the role of the national central
banks, and also of the European Central Bank, in nancial regulation and
supervision within the euro-system. At the moment there are several key
arguments for keeping oversight of nancial stability and of supervision
at the national level (besides the general principle of subsidiarity). These
are:
1 The scal authorities who would have to provide support in a really
serious nancial crisis should be national.
2 Retail (though not wholesale) nancial intermediaries should remain
predominantly national in ownership and control.
3 National central banks should have their ear closer to the local ground.
But point two may over time disappear. If the nancial intermediaries in
the euro-system become eventually euro-wide in form, then the logic of
supporting a single monetary system with a single, centralised, regula-
tory and supervisory system would become more pressing, though even
then the problems of combining a centralised monetary system with de-
centralised, nationally based scal systems would remain difcult and
complex. My own view is that this latter disjunction cannot persist.
But what might happen to the Bank of England (and to other separate
central banks), if Britain did not join the euro? One recent concern, that
the growth of electronic sales and transfer mechanisms might erode both
the demand for cash and the central banks ability to control the systems
short-terminterest rate, seems on closer inspection to be invalid. Another
concern is that recent experience suggests that stability in goods and ser-
vices prices may be consistent with extreme volatility in asset prices, and
that these latter can have serious distortionary effects on the real econ-
omy. Central banks, however, normally deploy only one instrument, the
short-term interest rate, and that is properly predicated to the achieve-
ment of ination targets. I have been amongst those who would advocate
a cautious attempt to nd other instruments, e.g. direct intervention in
asset markets (outside the domestic money market
41
), or the greater use
of margin requirements, but so far this has been a largely solitary cry in
the wilderness (except in the case of Japan where the fact that the short-
terminterest rate cannot go belowzero means that those who believe that
more should be done have to advocate unconventional measures).
Over the last thirty-ve years during which I have watched, and occa-
sionally participated in the evolution of the Bank of England, there have
been a whole series of far-reaching changes. What can be said with
some condence is that change will not only continue, but, as always,
be extremely hard to predict in advance.
41
This might include the purposeful use of debt management operations for monetary
objectives. A few economists, notably T. Congdon, e.g. On the basic principles of debt
management, Lombard Street Research Monthly Economic Review (Feb. 2000), pp. 320
and Another awkward corner in monetary management (Dec. 2000), pp. 116, regard
the failure to appreciate the potential monetary role of debt management as one of
the great intellectual and practical failings of our profession. Others, like me, are more
ambivalent, but do see some force in the argument, especially when the nominal short-
term interest rate is constrained, as is the case now in Japan. Most US economists are
dismissive, except perhaps in extreme circumstances.
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376 Select bibliography
Thain, C., The Treasury and Britains decline, Political Studies 32 (1984),
58195
Thane, P., Financiers and the British state. The case of Sir Ernest Cassel, Busi-
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Tolliday, S., Business, Banking and Politics. The Case of British Steel 19181939
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Tomlinson, J., Public Policy and the Economy Since 1900 (Oxford, 1991)
Attlees inheritance and the nancial system: whatever happened to the
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Democratic Socialism and Economic Policy. The Attlee Years, 19451951
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National Crisis and National Government. British Politics, the Economy and Empire
19261932 (Cambridge, 1992)
Wormell, J., The Management of the National Debt of the United Kingdom, 1900
1932 (2000)
Index
Accepting Houses Association/Committee,
13, 35, 73
Addis, Sir Charles, 147, 148, 150,
218
Amery, L. S., 204, 207, 209, 212,
225
Arnold, Percy, 779
Asquith, H. H. (Prime Minister 190816),
120, 122, 138, 139
Australasia, borrowing by, 197, 198, 201,
205, 2068, 21011
Baldwin, Stanley (Prime Minister 19234,
19249, 19357), 24, 228, 229
Balogh, Thomas, 110, 176, 184, 336
Bank for International Settlements, 232,
346
Bank of England, character and policies of,
1417, 38, 88, 177, 221, 2612, 266,
268, 269, 301, 3026, 316, 320,
3278, 3303, ch. 17 passim
independence of, 1417, 24, 268, 30,
52, 701, 130, 134, 169, 179, 180,
181, 221, 3389, 359, 367
and industry, 15, 15860, 232
nationalisation of, 15, 28, 40, 71, 176,
191
see also Treasury, and individual
Governors of the Bank: Catto, Cobbold,
Cromer, Cunliffe, Leigh-Pemberton,
Norman, OBrien, Richardson
bank regulation, 47, 49, 51, 724, 34151
Bankers Industrial Development
Corporation, 15860
Banking Act (1979), 47, 51, 345
Barber, Anthony (Chancellor of the
Exchequer 19704), 131, 287
Barclays Bank, 84, 87
Barings Bros. & Co., 86, 89, 244, 247,
24950
Beaverbrook, Lord, 220, 222, 224, 228,
233, 261, 263
Bell, Henry, 149
Big Bang (1986), 10, 502, 84, 172, 276,
294, 297, 361
bimetallism, 9, 138
Blackett, Sir Basil, 120, 124
Board of Trade, 18, 103, 131, 237,
341
Boer war: see wars
Bolton, Sir George, 267, 270, 331
Bradbury, Sir John (1925 1st Lord), 25,
26, 120, 157
Brand, Robert, 120, 148, 149, 150, 218,
247
Bretton Woods agreements, 71, 260,
353
Bridges, Sir Edward, 119, 271
British Bankers Association, 35, 44
British Overseas Bank, 239
Brown, Gordon (Chancellor of the
Exchequer 1997 ), 359, 362
budgets
1909, 9, 13, 19, 121, 136, 1401
1914, 122
1939, 1940, 128
Butler, R. A. (Chancellor of the Exchequer
19515), 130, 26970, 271, 273, 304,
305
Callaghan, James (Chancellor of the
Exchequer 19647), 336
capital issues, control of, 123, 129, ch. 10
passim, 218, 226, 227, 284, 288, 304,
305, 322, 334, 338
capital levy, 124, 1478
Catto, Lord (Governor, Bank of England
19449), 303
Chamberlain, Joseph, 154
Chamberlain, Neville (Chancellor of the
Chamberlain-Bradbury Committee, 125,
219
Cherwell, Lord, 272
377
378 Index
Churchill, Winston (Chancellor of the
Exchequer 19249; Prime Minister
194045, 19515), 27, 125, 158, 204,
2227, 272
CityBankTreasury nexus, 78, 17, 20,
117, 118, 121, 125, 134, 145
City of London, character of, 1113, 16,
25, 312, 41, 42, 456, 8690, 137,
171, 173, 174, 182, 215, 2201,
2367, 238, 262, 3223, 3246, 337,
368
Clarke, Kenneth (Chancellor of the
Clarke, William, 189
clearing banks, 84, 87, 88, 90, ch. 15
passim, 322
Cobbold, Cameron (1st Baron, 1960;
Governor, Bank of England 194961),
1301, 1689, 251, 262, 303, 305,
306, 335, 340
Committee of Clearing Bankers, 73, 168
competition and credit control, 47, 131,
287, 298, 319, 321, 325, 344, 351
Conservative governments
19249, 157, 216, 2289
195164, 414, 110, 1301, 16671,
257, 269, 304
19704, 47, 132, 363
197997, 4952, 172, 354, 358, 364,
367
Conservative party, 99101, 112, ch. 8
passim, 339, 353
consols, 138
credit controls, 10, 14, 15, 42, 129, 1301,
16771, 259, ch. 15 passim, 352
Cripps, Sir Stafford (Chancellor of the
Exchequer 194750), 129, 267, 303
Cromer, 3rd Earl of (Governor, Bank of
England 19616), 1789, 180, 181,
323, 330, 332
Crosland, Anthony, 183
Cunliffe, Lord (Governor, Bank of
England 191318), 123, 146
Cunliffe Committee (191819), 125, 219
Dalton, Hugh (Chancellor of the
Exchequer 19457), 129, 295, 301
Department of Trade and Industry, 18,
134
devaluations: for 1919 and 1931 see gold
standard; for 1949 and 1967 see
sterling
discount houses, discount market, 13, 16,
23, 42, 73, 341, 363
Du Cann, Edward, 99, 1034, 111
economic policy, character of, 13, 213,
2430, 348, 3943, ch. 6 passim,
136, 138, 139, 143, 146, 166, 172,
25760, 266, 273, 299301, see also
incomes policy, monetary policy, tariff
reform
Einzig, Paul, 245
Eurodollar, Eurobond market, 45, 46, 52,
323, 326, 3304, 345
European currency (euro), 54, 370
European Economic Community, 46, 50,
185, 188, 274, 3289
exchange controls, 15, 42, 49, 166, 172,
325, 334, 345
Exchange Rate Mechanism, 355, 367
Falk, Oswald, 120
Federation of British Industries, 109, 125,
219, 224, 227
nancial elites, debate on, 7982
Financial Services Authority, 52, 71,
350
First World War: see wars
foreign banks in London, 35, 44, 48, 51,
88, 323, 3246, 330
foreign exchange market, 36, 37, 3668
Foreign Ofce, 18, 233, 237, 241, 245,
246, 248, 249, 253
free trade, 12, 25, 26, 367, 122, 137,
1413, 146, 147, 148, 223, 231
Friends of Economy (19301), 151
fringe banks: see secondary bank crisis
Gaitskell, Hugh (Chancellor of the
gentlemanly capitalism, 7, 33, 35, 95,
117, 135, 156, 172, 177, 236
Glendyne, Lord, 207, 208
gold standard
to 1919, 25, 26, 122, 125, 138, 356
192531, 6, 9, 17, 18, 26, 278, 367,
118, 1257, 150, 1578, 195, 202,
205, ch. 11 passim
1931 crisis, 9, 20, 23, 37, 126, 152,
2345, 239
Goodenough, Frederick, 87, 218
government, character of British, 202,
2430, 237
Government and City relations, historians
views on: Perry Anderson, 7; Robert
Boyce, 8, 117; Peter Cain and
Anthony Hopkins, 7, 83, 117, 135,
141, 236; Youssef Cassis, 7; Ewen
Green, 8, 117, 236, 275; Geoffrey
Ingham, 7, 17, 117, 118, 300; Frank
Index 379
Longstreth, 7, 300; Scott Newton and
Dilywn Porter, 8; George Peden, 18;
John Peters, 123; Sidney Pollard, 6;
William Rubinstein, 7; Rob Stones,
23; Martin, 7
government nance, 1820, 22, 25, 26,
39, 42, 47, 118, 13941, 147, 178,
234; see also budgets, national debt,
taxation
Gwynne, H. A., 156
Hall, Robert, 168, 272, 273
Hamilton, Sir Edward, 119, 121
Heath, Edward (Prime Minister 19704),
111, 352
Heathcoat Amory, Derick (Chancellor of
the Exchequer 195860), 169, 305,
336
Hewins, W. A. S., 155
Hills, J. W., 161, 1635
Hilton Young, Sir Edward, 124
Hirst, Francis, 142, 146, 148
Holden, Edward, 87, 138, 146
Hoover moratorium (1931), 238
Hopkins, Sir Richard, 127
Horne, Sir Robert (Chancellor of
the Exchequer 19212), 22, 24,
127
Howell, David, 108
incomes policy, 108
Industrial and Commercial Finance
Corporation, 129, 190
Industrial Reorganisation Corporation,
190
industry, the City of London and, 5, 6, 8,
15, 38, 45, 81, 84, 99, 129, 135, 136,
141, 145, 147, 150, 15860, 190,
216, 227, 232, ch. 14 passim
International Monetary Fund, 133, 260
investment, domestic, 38, 190, ch. 14
passim
foreign, 33, 37, 178, 284
imperial, ch. 10 passim, 322
see also capital issues
Jay, Douglas, 101, 102, 184, 302, 303
Jenkins, Roy, 184, 185
Johnson Matthey Bankers, 349
joint-stock banks: see clearing banks
Kaldor, Nicholas, 109, 110
Keynes, J. M., 27, 40, 120, 122, 125, 147,
14951, 152, 157, 1613, 2223, 224,
25864, 278
Kleinwort, Alexander; Kleinwort, Sons
Co., 136, 139, 240
Labour governments
1924, 216, 21718
192931, 23, 216, 2304
194551, 28, 401, 12930, 176, 183,
191, 261, 263, 301, 303
196470, 22, 23, 44, 46, 111, 133,
17783, 1859, 191, 324, 336, 339
19749, 479, 133, 295, 353
1997 , 52, 71, 350
Labour party, 27, 28, 40, 64, 65, 100, 104,
10911, ch. 9 passim, 237, 350
Lamont, Norman (Chancellor of the
Lancashire Cotton Corporation, 158
Lawson, Nigel (Chancellor of the
Exchequer 19839), 96, 349, 355,
357, 361
Lawson boom, 280, 282, 284, 287
Leaf, Sir Walter, 149
League of Nations, 149
Leigh-Pemberton, Robin (Governor, Bank
of England 198393), 355
Lever, Harold, 101, 110, 111
Liberal party, ch. 7 passim
Lidbury, Sir Charles, 242, 252
Lloyd George, David (Chancellor of the
Exchequer 19081915; Prime
Minister 191622), 121, 122, 1245,
136, 137, 1401, 145, 1512, 224,
228
MacDonald, James Ramsay (Prime
Minister 1924, 192935), 126, 228,
230, 231, 234
MacDougall, Sir Donald, 272, 273
McKenna, Reginald (Chancellor of the
Exchequer 191516; Chairman,
Midland Bank 191943), 94, 146,
149, 150, 151, 218, 2223, 227, 252
Maclean, Sir Donald, 147
Macleod, Iain, 99, 111
Macmillan, Harold (Chancellor of the
Exchequer 19557, Prime Minister
195763), 42, 158, 1613, 165, 167,
169, 170
Macmillan Committee (192931), 15, 27,
161, 231
Macmillan gap, 126, 129, 175
Maudling, Reginald (Chancellor of the
Exchequer 19624), 324, 327, 336,
339
May Committee (1931), 126, 234
380 Index
merchant banks, 84, 86, 88, 259
Midland Bank, 40, 45, 84, 87, 242,
302, 326, 330; see also Holden,
McKenna
Monetary Base Control, 171, 364
monetary policy (and bank/interest rates),
15, 19, 26, 27, 28, 29, 32, 34, 36, 42,
126, 130, 133, 176, 180, ch. 13
passim, ch. 15 passim, 3519, see also
gold standard, Robot, sterling
Monetary Policy Committee, 119, 134,
367
Monopolies Commission, 47, 49, 306,
316
Morgans & Co., Morgan Grenfell & Co.,
121
Myners Committee (2001), 294
National Board for Prices and Incomes,
47, 182, 306, 313
national debt, 11, 18, 31, 32, 34, 35,
403, 48, 121, 124, 139, 342,
35962
National government 193140, 16, 23, 28,
38, 126, 129, 217, 2345
National Investment Board, 28, 150, 162,
176
National Investment Council, 129
National Westminster Bank, 84
Next Five Years Group (1935), 162
Niemeyer, Sir Otto, 120, 125, 157,
201, 203, 222, 223, 224, 225,
245
Norman, Montagu (Governor, Bank of
England 192044), 16, 39, 119, 125,
15860, 20014, 221, 223, 224, 226,
232, 234, 235, 237, 242, 251
OBrien, Sir Leslie (Governor, Bank of
England 196673), 17, 131, 179, 320,
324, 331, 336
Ofce of Fair Trading, 49
Paish, Sir George, 142, 147, 148
Peacock, Sir Edward, 15960, 247
Phillips, Sir Frederick, 126
planned economy, 31, 403, 601
Plowden, Sir Edwin, 272
protection: see tariff reform
Radcliffe Committee (19579), 131,
1578, 167, 170, 180, 277, 287, 288,
291, 307, 317, 341, 360
Railtrack, 53
Reid, Sir Edward, 242, 244, 246, 248,
24950, 253
Restrictive Practices Court, 49, 50, 51
Richardson, Gordon (Governor, Bank of
England 197383), 17, 353, 355, 357,
369
Robot plan (1952), 10, 29, 132, 26972
Rothschild, Nathan (1st Lord);
Rothschilds & Sons, 86, 94, 120, 121,
122, 138, 140, 244, 247
Rowan, Sir Leslie, 132, 270
Schroders & Co., 88, 240, 244, 248; see
also Tiarks
Schuster, Sir Felix, 138, 140, 142, 151,
155
Second World War: see wars
secondary bank crisis (1973), 132, 344
Securities and Investment Board, 52,
350
Select Committee on National Industries,
182
Shoneld, Andrew, 184, 189
Simon, Sir John (Chancellor of the
Snowden, Philip (Chancellor of the
Exchequer 1924, 192931), 27, 126,
2302, 234
Stamp, Sir Josiah, 122, 2201, 224
Standstill Agreements, 23954
Steel-Maitland, Sir Arthur, 15960
sterling, after 1945, 434, 46, 1324, 166,
1839, ch. 13 passim, 299, 322,
32630, 337
convertibility crisis 1947, 261, 2645
devaluations: 1949, 182; 1967, 45, 188,
2657, 329
see also gold standard (for pre-1931);
Sterling Area
Sterling Area, 19, 40, 45, 166, 178, 1838,
191, ch. 13 passim, 368
Stock Exchange, London, 12, 16, 31, 33,
35, 42, 48, 49, 502, 100, 102, 123,
128, 276, 284, 291, 295
tariff reform, protection
to 1913, 9, 12, 26, 135, 1412, 144,
146, 1546
interwar, 157, 225, 2289, 231, 233
taxation
to 1914, 12, 32, 34, 122, 13941
1920s, 13, 19, 223
1930s, 244
1950s to 1960s, 109, 179
Index 381
capital gains tax, 10910, 179, 2956;
excess prots tax, 128; national
defence contribution, 127; selective
employment tax, 111, 179; stamp
duty, 2945, 297
Thatcher, Margaret (Prime Minister
197990), 1712, 354
Thorneycroft, Peter (Chancellor of the
Exchequer 19578), 131, 1669, 170,
360
Tiarks, Frank, 242, 247, 251, 252,
253
Treasury, character and policies 6, 1720,
ch. 6 passim 218, 237, 259, 262, 271,
337, 338, 356
relations with Bank of England, 6, 9, 14,
15, 17, 26, 28, 29, 119, 1301,
16870, 177, 181, 221, 232, 270,
302, 336, 338, 3579, 366
see also individual Chancellors of the
Exchequer (Barber, Brown, Butler,
Callaghan, N. Chamberlain,
Churchill, Clarke, Cripps, Dalton,
Gaitskell, Heathcoat Amory, Lamont,
Lawson, Lloyd George, Macmillan,
Maudling, Simon, Snowden,
Thorneycroft), and senior Treasury
ofcials (Blackett, Bradbury, Bridges,
Hamilton, Hopkins, MacDougall,
Niemeyer, Phillips, Plowden, Rowan)
Treasury view (1920s), 25, 26
Tuesday Club, 120
unit trusts, 1028
USA, loan (1945), 260, 264
Walker, Peter, 1034
wars, impact of, 22, 24
Boer War, 121
First World War, 26, 33, 345, 1224,
136, 1457
Second World War, 39, 1279, 166,
25960
Webb, Sidney and Beatrice, 23, 60, 135
Wider Share Ownership Society, 101,
113
Williams Deacons Bank, 239, 244
Wilson Committee (19779), 2778, 287,
292, 293, 296
Wilson, Harold (Prime Minister 196470,
19746), 49, 109, 177, 178, 184, 185,
187
Wood, Sir Kingsley (Chancellors of the

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