The Old Lady of Threadneedle Street

The Wall Street Journal
By James Grant

‘We have appointed you as our economics adviser,” Montagu Norman, the longest-serving governor of the Bank of England, said to a brainy new hire in the early 1930s. “Let me tell you that you are not here to tell us what to do, but to explain to us why we have done it.”


“Why?” is the question, all right. Not long after the founding of the bank in 1694, the gold value of the pound sterling was set at slightly less than £4 an ounce. In the early 1930s that value came unstuck. Today it stands at £935 an ounce, a devaluation asymptotically approaching 100%. Reading David Kynaston’s sweeping narrative, you may wonder if the supposed progress of monetary science has not been a case of radical retrogression.


In its glory days, the Bank of England—known far and wide as the Old Lady of Threadneedle Street, an allusion to both her London address and tut-tutting personality—was a stockholder-owned institution under the leadership of a governor, a deputy governor and a 24-man board of directors (called a “court”). She took deposits, made loans and financed wars. None of the directors was an economist. None was a banker. It was merchants—businessmen—who looked after the pound sterling.


Not that the pound needed much looking after. Gold coins circulated as money. So, too, did bank notes representing gold coins. The paper was convertible into the metal, and the metal into paper, both at the fixed and inviolable rate of £3.89 (in today’s decimalized sterling). Gold freely entered and left the country. Low prices attracted it (bargains have that magnetic power); high prices repelled it. It was the market, then, that determined the size of the money supply. In the 100 years between the Napoleonic wars and the guns of August 1914—an age not to be confused with heaven on earth but, for England, a mostly peaceful and mostly prosperous one—the bank did its least damage.


Mr. Kynaston’s history starts at the 17th-century founding—much resented by the London goldsmiths, who had a well-considered premonition about a governmental banking monopoly—and concludes in 2013, in the still-wobbly aftermath of the 2008 financial crisis. In between, we catch a glimpse of the South Sea Bubble of 1720 and of the 20-year suspension of gold convertibility during the long war with Revolutionary France, during which a rash of forgeries of bank notes, a capital crime, led to a shocking number of hangings. We likewise catch a glimpse of the tedium of clerical labor in the steel-pen age (“look busy anyway” the bosses admonished), of life at the bank during the Blitz (“only cold lunch available”) and of the manner in which changes in the bank’s lending rate were communicated to the market as late as the 1950s: The Bank’s broker, doffing his top hat, climbed up on the customary bench at the Stock Exchange and bawled out the new rate to the expectant crowd.


We read, too, the words of gruff, sage Walter Cunliffe, the bank’s governor at the start of World War I, on how to nip a financial panic in the bud: “Meet the situation like lions,” which is to say no half-measures. We watch the gold pound turn to paper in 1931—gold convertibility ends—and the bank get nationalized in 1946. Come next the repeated devaluations, multiple schemes to control bank lending and endless talk that characterize the modern age. The financier George Soros, for one, cheered the devaluations. He made a king’s ransom on the sterling pratfall of 1992.


“Till Time’s Last Sand” is a long book—you lift it with alarm. To your relief, Mr. Kynaston makes the pages turn with his focus on the human side of things. A master of historical detail, he was the bank’s designated biographer, a status that gave him free run of the Old Lady’s archives.


The title—“Till Time’s Last Sand”—is a phrase plucked from a poem commemorating Michael Godfrey, a progenitor of the bank who lost his head to a cannonball in 1695 while serving in Flanders on a mission to pay the English troops fighting there. The lovely words evoke permanence, though even they cannot gloss the pound’s chronic loss of purchasing power.


Mr. Kynaston’s stylistic signature is the extended quotation. Most of the passages he presents—like the excerpt from a 1906 speech at the Ritz hotel to illustrate the club-like atmospherics of the London banking scene—serve their purpose. At one point he offers up a lengthy excerpt from Montagu Norman that he extracts to show that the quotation is nearly unintelligible. It is certainly that, though we could have taken Mr. Kynaston’s word for it.


Human beings are not at their best around money. It seems to destabilize them. Credit—the promise to pay money—is still more discombobulating. This being so, the history of the Bank of England is necessarily a story of crisis and error as much as it is of wealth and right judgment. Walter Bagehot, the famous editor of the Economist, marveled at the development of Victorian finance along about 1870. For the first time in history, Bagehot observed, no worthwhile economic undertaking need fail for want of money.


Not that all of the money was invested wisely. Panics recurred at roughly 10-year intervals beginning in 1825. Then, as now, prosperity was its own worst enemy. Ultra-low interest rates fanned the speculative flames. “John Bull can stand many things, but he cannot stand 2%” was Bagehot’s maxim (it should be ours, too). Confidence led to cocksureness, which brought forth excesses in lending, borrowing, and securities valuation and corner-cutting.


What did the bank do about it? Not nothing, even in the palmy days of laissez-faire. The 1825 crisis, perhaps the worst of the 19th century, pushed the bank to do what it had never done before. Mr. Kynaston quotes Jeremiah Harman, a member of the board of directors: “We lent by every possible means . . . consistent with the safety of the Bank; and we were not on some occasions over nice; seeing the dreadful state in which the public were, we rendered every assistance in our power.” That assistance proved sufficient to stop the panic cold.


Still, it was a long way from emergency lending to the hands-on interventionism of the 21st century. In Victorian times, especially after a landmark piece of legislation in 1844 robbed the board of its policy-making discretion, the Old Lady was content to let the gold standard function unimpeded. “The Bank,” as John Horsley Palmer, a governor and veteran bank director, explained it, “is very desirous not to exercise any power, but to leave the public to use the power which they possess, of returning Bank paper for bullion.” Which is to say, the bank did not presume to impose its will on people who could convert their currency into gold, or vice versa, just as they chose.


Mr. Kynaston deftly describes these arrangements, so foreign to the 21st century. True, anyone may nowadays exchange his pound notes or dollar bills for gold—or bitcoin—or do the reverse. The difference is that the value of money is undefined in law. Its value floats—or, rather, sinks, as today’s Bank of England (like today’s Federal Reserve) seeks to depreciate the value of the currency under its management by 2% a year. We have come a long way since William Huskisson, in 1822, addressing his fellow members of Parliament about their desire to cheapen the pound rather than return to the value established before the long war with France, said that “once you lower your standard, it will become a precedent that will be resorted to on every future emergency or temporary pressure.” The past 100 years have made Huskisson a prophet.


Monetary fashions may change, but people remain the same, as Mr. Kynaston’s history reminds us. In all times, a great and wealthy banker who runs his eminent institution into the ground turns to the government (or to the government’s bank) for help. Sometimes the authorities turn their backs, as was they did to the wholesale bill dealer Overend Gurney, which crashed in 1866 (or, in the U.S., to Lehman Brothers, which fell in 2008). At other times, they open their vaults, as the Bank of England did to avert the failure of Baring Brothers & Co. in 1890. The governor of the bank, William Lidderdale, was besieged with cries for help. “Can’t you do something, or say something, to relieve people’s minds?” a government bond broker begged him, “with his arms aloft,” as Mr. Kynaston relates.


The British government, in the person of Viscount Goschen, the chancellor of the exchequer, heard the pleas. He agonized, as others in similar positions have subsequently done. “If I do nothing,” Goschen confided to his diary, “and the crash comes, I shall never be forgiven: if I act and disaster never occurs, Parliament would never forgive my having pledged the National credit to a private Firm.”


Perhaps the difference today is that the national credit is increasingly pledged to the private firms judged “too big to fail.” In Goschen’s day, the value of money was fixed; prices and wages had to adapt to the changing economic and financial circumstances. In our own day, the value of money is variable; the Old Lady, along with almost every other major central bank, seeks to manipulate its value to stabilize (or revitalize or retard, as the case may be) economic growth or stock and bond prices.


Unanchored exchange rates, radical monetary nostrums, the lowest interest rates in recorded history, central-bank management by doctors of economics: When you stop to consider what money, and the institutions of money, have become, you look back with renewed respect at the foreboding of the London goldsmiths of 1694. They caught a glimpse of monetary modernity, and they didn’t like it one bit.

David Kynaston