The Bank of England is one of Britain’s distinct contributions to history. It was chartered in 1694 to lend money to King William for war on France, when a company of London merchants received from Parliament the right to take deposits in coin from the public and to issue receipts or “Bank notes.” The bank financed a summer’s fighting in the Low Countries, gave the business district of London, known as the City, a currency for trade, and lowered the rate of interest for private citizens.
In the next century, the Bank of England developed for Crown and Parliament sources of credit that permitted Britain, during 115 years of intermittent warfare, to contain and then defeat France and to amass, in Bengal and Canada, the makings of an overseas empire. Through “discounts,” or unsecured lending to merchants and bankers, the bank provided the City with cash and influenced rates of lending and profit, and thus the course of trade. In the war that followed the French Revolution of 1789, it was forced to stop paying its banknotes in gold and silver; it had issued more notes than it had gold with which to back them. Across the Channel, for want of a public bank of his own, King Louis XVI of France lost his kingdom and his head.
In the nineteenth century the Bank of England became the fulcrum of a worldwide system based on gold and known as “the bill on London.” Over a succession of City crises at approximately ten-year intervals, it took on the character and functions of a modern central bank. By World War I, it was propping up an empire living beyond its means. In conjunction with the Federal Reserve Bank of New York and the German Reichsbank, the Bank of England’s longest-serving governor, Montagu Norman, sought to develop a club of central banks that would impose on the chaos of international commerce and the caprices of government a pecuniary common law. In reality, the Bank of England had to fight ever-greater runs on sterling until, in 1992, it was routed and sterling was taken out of the European Exchange Rate Mechanism, the forerunner of the euro.
Even in the postwar period, the bank had successes. In 1986 it directed a dismantling of anticompetitive practices in London’s stock and bond markets that heralded a quarter-century of British prosperity. It also invented the phrase (“Big Bang”) by which the reforms came to be known. Nationalized in 1946, the bank recovered some of its independence in 1997. After the collapse of Lehman Brothers in New York in 2008, it flooded London with money. Shorn of many of its ancient functions and traditions, its armies of scriveners long gone to their graves, the bank is now headed by a Canadian, Mark Carney. What would be more shocking to the shades of the strict Protestants who supplied the bank’s first Court of Directors and shareholders: the 120th governor is a Roman Catholic.
Historians such as Sir John Clapham, John Fforde, Richard Sayers, and Forrest Capie have told parts of this story. David Kynaston tells it all, or at least up to 2013. A careful and thorough writer, Kynaston made his name in the 1990s with a history in four volumes of the City of London after 1815, much of it drawn from the Bank of England’s archive. He then turned to general social history in Austerity Britain, 1945–1951; Family Britain, 1951–1957; and Modernity Britain, 1957–1962. The later books brought him readers who would not be interested in discount brokers and commercial paper.
In Till Time’s Last Sand Kynaston devotes four chapters to the lives of the thousands of clerks that powered this engine of credit and the warren in Threadneedle Street where they worked, one chapter each for the eighteenth and nineteenth centuries, and two for the twentieth. He records the arrival of round-sum banknotes, telephones, women, college graduates, computers, economists, and management consultants in an overstaffed and tedious institution. His models are the novelists of London such as Dickens, Trollope, Gissing, Galsworthy, and Wells. His title comes from an elegy for Michael Godfrey, the first deputy governor, blown to bits next to King William on a visit to the siege trenches around Namur in 1695.
What there is not in this book is political economy, which may be a fault from one or more points of view, but suits its subject. As Montagu Norman is supposed to have said, the place is “a bank and not a study group.” The Bank of England never “got” economics, but sometimes in governors’ speeches and in evidence to parliamentary committees it showed an interest in economic theory (bullionist, Keynesian, or monetarist) to please or mislead the west, or political, end of London. Later on, it published a quarterly bulletin that seemed particularly designed to obfuscate. Down the long corridor of the bank’s history, such doctrines are apparitions.
The Bank of England was always less secretive than tongue-tied. “It isn’t so much that they don’t want to tell you what’s going on,” a twentieth-century banker said. “It’s more that they don’t know how to explain it: they’re like a Northumbrian farmer.” David Kynaston explains the Bank of England.
In the 1690s King William’s ministers became intrigued by a City catchphrase, “a fund of Credit.” It meant that a secure parliamentary tax over a number of years could be used to pay the annual interest on a loan to the king by the City’s merchants. Such a tax could, as we would say, be capitalized.
In April 1694 Parliament granted the king duties on ships’ cargoes and beer and spirits up to £100,000 a year, which would be sufficient (after £4,000 in management expenses) to pay an 8 percent interest on a loan of £1.2 million to make war with France. The City merchants who put up the loan were allowed to incorporate as “the Governor and Company of the Banke of England.” As Adam Smith wrote later, the king’s credit must have been bad “to borrow at so high an interest.”
The bank’s charter, which was at first for just eleven years, was prolonged again and again, always at the price of a further payment to the Crown. Parliamentary acts of 1708 and 1742 gave the Bank of England a monopoly on joint-stock (i.e., shareholder-owned) banking in London and its environs. In 1719 the finance minister of France, the Scottish-born John Law of Lauriston, devised a scheme to convert the liabilities of the bankrupt French Crown into shares of a long-term trading company. In a sort of panic, men such as the journalist and novelist Daniel Defoe warned that unless Britain followed, it would forfeit all the country had gained from twenty years of warfare. “Tyranny has the whip-hand of Liberty,” Defoe wrote.
The bank was sucked into an auction against the South Sea Company for the privilege of refunding the British national debt, only to find that South Sea, by bribing members of Parliament with free shares, had rigged the auction. In the spring and summer of 1720, shares in South Sea rose to giddy heights and then collapsed, and the bank was there to rescue the state creditors. The prime minister, Sir Robert Walpole, swept South Sea’s bribes under the parliamentary carpet.
As a consequence, the bank gained a position in the British constitution that it has never entirely lost and a satrapy in the eastern part of London, where king and Parliament must ask leave to enter. From its quarters in Grocers’ Hall, in Poultry, the bank moved in 1732 to its present address in Threadneedle Street, where it expanded to occupy a three-acre city block. Rather against its nature, the Court employed as its architect in the later part of the century a talented bricklayer’s son, John Soane, who did more than anyone to create the neoclassical style in bank architecture that conceals, behind columns and pediments, the rampage that is deposit banking.
In 1745 the bank survived a run when supporters of the former ruling house of Stuart, which had been ousted by King William in 1688, invaded England from the north. The bank paid its notes in silver shillings and sixpences. During the “Gordon Riots” of June 1780, an armed crowd sacked London’s prisons and was repulsed from the main gate of the bank by cavalry and foot guards. The incident gave rise to the Bank Picquet, a night watch of redcoats in bearskin helmets that was only stood down in 1973.
More perilous than either of those setbacks were the demands for cash the bank faced in the 1790s from the wartime prime minister, William Pitt the Younger. Inundated with short-term government bills it was expected to cash on sight, amid a business slump and an invasion scare, the Bank of England lost almost all its reserves and, early in 1797, told Pitt it could no longer pay out in gold. In March of that year, the Irish MP and playwright Richard Brinsley Sheridan created the popular image of the bank as “an elderly lady in the City, of great credit and long standing, who…had contracted too great an intimacy and connexion at the St James’s end of town.” Two months later the cartoonist James Gillray drew a lanky, freckled Pitt stretching to land a kiss on a gaunt dame dressed in banknotes, with notes in her hair for curl papers, sitting on a chest of treasure: “POLITICAL RAVISHMENT, or The Old Lady of Threadneedle-Street in danger!”
During Restriction, when Parliament lifted the requirement that the bank convert banknotes into gold and which lasted until 1821, it printed notes of £1 and £2 for the use of the public at large. Forgery was rife, and the bank sent hundreds of men and women to the gallows or the penal colonies for the crime. For the journalist William Cobbett, who like everybody else in those days thought gold and silver coins were money in a way that banknotes were not, there was no offense in forging a forgery. “With the rope, the prison, the hulk and the transport ship,” Cobbett wrote in 1819, “this Bank has destroyed, perhaps, fifty thousand persons, including the widows and orphans of its victims.” Behind these antique British institutions, there is always the flash of a blade.
Gold was a hard master. The bank all but stopped converting banknotes again in 1825. Having been reluctant for years to discount to Jewish houses, it was saved by a shipment of French bullion from Nathan Rothschild. As the government in Westminster became better organized and the country’s banks consolidated and grew, there were complaints (in the words of a Norfolk banker) that “the pecuniary facilities of the whole realm should thus depend on the management of a small despotic Committee.”
In 1844 the Peel Banking Act (after Sir Robert Peel, the prime minister) gave the bank a monopoly over the issuing of banknotes in England but prescribed that any increase must be matched by an increase in gold reserves. Constrained in its banking business and overtaken by giant joint-stock banks forged by mergers outside London, the bank became a lender of last resort, ready to mobilize its resources and those of the City to keep isolated cases of bad banking practice from paralyzing trade. It became the arbiter of who was fit to do business in the City and who was not.
The bank came to this position not through theory but in the tumult of events, above all the failure of the discount broker Overend Gurney in 1866 and the first rescue of the blue-blooded Baring Brothers & Co in 1890. Though it could not drop Bank rate (its short-term interest rate) too far or fast without losing its gold reserves, the bank could nudge interest rates in the direction it wanted. The central bank familiar from our times took shape.
With the outbreak of war in 1914, the bank again stopped payment in gold. When £350 million in war loans failed to sell in full, the governor, Lord Cunliffe, without telling his colleagues, let alone the public, bought the unsold £113 million for the bank’s account.
Montagu Norman, “Old Pink Whiskers” (as Franklin D. Roosevelt called him), ruled the bank from 1920 until 1944 and made so many enemies in the Labour Party and in British industry that the bank’s nationalization after World War II became inevitable. Devoted to the idea of the British Empire, Norman was too high-strung and unconventional to be part of it, like a character from Rudyard Kipling (whom he adored). Under his advocacy, Britain returned to gold in 1925, but industry could not tolerate the high interest rates needed to sustain the value of sterling on the global market. There was a general strike in 1926, and in 1931 Britain left the gold standard (no doubt for all time). Those events made the reputation of Norman’s principal opponent, John Maynard Keynes, whose doctrine of stimulating demand in bad times became British orthodoxy until it perished amid soaring consumer prices and a 17 percent Bank rate in the later 1970s.
Norman was close to both Benjamin Strong of the Federal Reserve Bank of New York and Hjalmar Schacht of the German Reichsbank. He thought of central bankers as “aristocrats,” as he wrote to Strong in 1922, who would dispel the “castles in the air” built by troubled democracies. Misled by Schacht, who was himself deceived, Norman did not see that for Adolf Hitler a central bank was just another weapon of war. Parliament was outraged in 1939 when, after Hitler’s invasion of Czechoslovakia, Norman transferred to the Reichsbank £6 million in gold deposited in London by the Czechoslovak National Bank. “By and large nothing that I did,” he wrote two years before his death in 1950, “and very little that old Ben did, internationally produced any good effect.”
Norman demolished pretty much all of Soane’s bank but the curtain wall and erected in its place the present building, designed by Sir Herbert Baker. Nikolaus Pevsner, the expert on England’s buildings, called the destruction more terrible than anything wrought by the Luftwaffe in World War II: “the worst individual loss suffered by London architecture in the first half of the 20th century.” Kynaston thinks that judgment unfair.
With the clarity of hindsight, many authors have said that the postwar Bank of England, by 1946 just an arm of the UK government in Whitehall, should never have tried to maintain sterling as a currency in which foreign countries held their reserves. Siegmund Warburg, the outstanding London merchant banker of the postwar era, said that Britain was now the world’s debtor, not creditor. As a reserve currency, he much later recalled having argued, sterling was “a very expensive luxury for us to have…. The Governor of the Bank of England at the time didn’t like this statement at all.” Charles Goodhart, one of a handful of economists who trickled into Threadneedle Street, thought the bank should have sought an alliance with the Continental central banks. “The Bank (and Whitehall) exhibited devastating Euro-blindness,” he wrote.
Kynaston has no time for such brooding. Sterling remained a reserve currency, in part because as a consequence of the fight against the Axis Powers and Japan, Britain was too poor to redeem the sterling still in use abroad. What follows is a story of Pyrrhic victories and sanguinary defeats, fading British military strength, bad judgment in Whitehall, poor management of industry, and, between 1970 and 1990, a rise in consumer prices greater than in the previous three hundred years combined. In a word, found by Kynaston in the bank’s market report for Friday, November 17, 1967, when its dealers spent £1.45 billion to defend sterling’s value against the dollar and failed: “Crucifixion.”
Yet this was also the period, as Kynaston shows, when the bank encouraged London to capture the dollars that had piled up in Europe as a result of the Marshall Plan and US imports of foreign luxuries, and turn them into loans for European industry. Who needed automakers if you had eurobonds (and the Beatles)? As a market for capital, the City regained almost all the ground it had lost since 1914.
Step by step, so as not to frighten the horses, the bank began to reform. In 1969 the management consulting firm McKinsey & Co was invited in. “I will…tell them,” John Fforde, the chief cashier, said of the two McKinsey partners, “we would be pleased to see them at lunch from time to time and will add, tactfully, that we would not expect them to lunch with us every day.” Kynaston has an ear for this sort of thing.
The highlight of the book is his account of relations between the bank and Margaret Thatcher, who came to power at No. 10 Downing Street in 1979 and at once abolished the paraphernalia of exchange control that had been in place to protect sterling since 1939. Seven hundred and fifty bank employees, housed at an ugly building by St. Paul’s Cathedral, were put to doing something else.
Thatcher and her chancellors were at first devotees of the doctrines of the Chicago economist Milton Friedman, who held that restricting the growth of money (variously defined) would halt the rise in consumer prices, rather as night follows day. As Kynaston writes, “It was monetarism or bust at No. 10.” The bank obliged with an array of monetary measures, set up targets, aimed at them, and missed.
Chancellor Nigel Lawson cooled on monetarism and instead instructed the bank to maintain sterling’s exchange rate with the deutsche mark, the West German currency, so as to impose on the UK economy the discipline and order of German industry. That policy, and its successor, the Exchange Rate Mechanism of the European Union, came to grief on “Black Wednesday,” September 16, 1992, when those who bet against sterling overwhelmed the bank. At 4 PM that day, the bank’s dealing room stopped buying pounds. A US banker recalled “Everyone sat in stunned silence for almost two seconds or three seconds. All of a sudden it erupted and sterling just free-fell. That sense of awe, that the markets could take on a central bank and actually win. I couldn’t believe it.”
While the Continental countries moved toward the euro, a chastened Britain sought its own solution. The credit of the Bank of England was not what it was, but it was still a great deal more solid than that of any particular UK government. Why not give the bank back its independent power to set interest rates free of the pressures of Parliament and prime minister? That idea, outlined by Lawson back in the 1980s and killed by Thatcher, was executed in 1997 by the Labour chancellor Gordon Brown, who established at the bank an independent Monetary Policy Committee. There followed ten years of prosperity and price stability.
At the same time, the bank lost its regulatory function. The bank had always governed the City not through rules but by small acts of disapproval, often so subtle that they were known as the “Governor’s eyebrows.” This approach became antiquated after the Big Bang brought to London foreign bankers less attuned to the facial expressions of Englishmen, and in any case the bank had failed to detect fraud and money-laundering at the Pakistani-owned Bank of Credit and Commerce International. Bank regulation was transferred to the Financial Services Authority, which did it no better. Regulation was returned to the bank in 2013.
Kynaston had access to the bank’s archives only through 1997, and his long final chapter, covering the twenty-first century, is drawn from newspaper reports, a couple dozen interviews, and the speeches of governors Eddie George (until 2003) and Mervyn King (2003–2013). He makes no great claim for it. There is nothing here of cryptocurrencies like bitcoin, Carney’s polymer banknotes, or his far-flung speeches on subjects from Scottish independence to global warming, which would have astonished his 119 predecessors.
As it turned out, the calm that followed bank independence was perilous. With its eyes fixed on consumer prices, the bank failed to act when the price of assets such as real estate started going through the roof. As King put it just before being appointed governor, “you’ll never know how much you need to raise interest rates in order to reduce asset prices.” The banks found themselves with loans secured on hopelessly overvalued security. In 2008, three British banks—Royal Bank of Scotland, Bank of Scotland, and Lloyd’s—and a couple of building societies (savings and loans) lost their capital. It was the greatest bank failure in British history.
Like its counterparts in the US, Japan, and continental Europe, the Bank of England bought securities from the surviving commercial banks in the hope that they would use the cash created to make loans and forestall a slump in business. This program, known as quantitative easing, has added nearly £500 billion to British banks’ reserves. Whether it has stimulated trade, hampered it, or had no effect at all is impossible to say. As Eddie George put it in other circumstances, and very much in the Bank of England style, “It is easy to slip into the position of the man on the train to Brighton who kept snapping his fingers out of the window to keep the elephants away. Since he saw no elephants, his technique was self-evidently effective.”
Brexit presents the Bank of England with all the challenges of the past three hundred years plus a few more. The Tories and the Scottish Nationalists detest Mark Carney, while Labour wants to move the bank from London to Birmingham, an industrial city in the English Midlands with little by way of banking, no stock exchange, and fewer places of recreation. To survive its fourth century, the bank will need all its cunning.