At the apex of the British state nothing is straightforward. Conventions, open and unacknowledged, reign alongside statute, with an enfeebled monarchy’s significant prerogative powers largely exercised by ministers, and a parliament whose semi-redundant, seemingly aristocratic chamber defers to a notionally sovereign House of Commons, which in turn now appears to bow to the will of the people when expressed in a referendum.
History alone makes sense of the quirks in our institutions, and the Bank of England, founded in 1694, is no exception. Is it a proper bank or merely a branch of government? Is it staffed with bankers or with what are, to all intents and purposes, civil servants? Is the Bank’s governor on a par with the permanent secretary at the Treasury or with the chancellor of the exchequer? As David Kynaston makes clear in an engaging and absorbing account of its history, the Bank is an enigmatically hybrid creature, like a centaur or sphinx – a hybrid that has undergone significant mutations over three centuries of adaptation and evolution.
Although the Bank has been in public ownership since 1946, technically now held by the treasury solicitor at arm’s length from the government since Gordon Brown’s reforms of 1998, it belonged for most of its long history to private investors. From the very beginning, however, this privately held body was enmeshed within the practices of the English state. The Bank was brought into being during the nine years’ war of 1688-97 when the exhaustion of short-term financial expedients fostered a turn to longer-term borrowing. In return for providing the English state with a £1.2m loan at a then whopping 8% interest and a £4,000 management fee, the Bank of England was granted a range of privileges, including joint-stock status, the right to issue paper money and general banking powers.
Although the Bank was a private body with a base of 1,200 subscribers, mainly drawn from the home counties, its character and functions were enshrined in statute and in its charter. Throughout its early decades it became increasingly useful to government, providing loans, advances and banking facilities.
Banks, insurance companies and other financial firms in the EEA – the EU along with Iceland, Liechtenstein and Norway – are able to do business in the UK with separate regulatory approval. The system is known as passporting and allows firms to trade freely across borders. It applies the other way round, so that UK firms can operate in other EEA countries.
The conundrum facing the Bank of England is that Brexit will change this (unless passporting is replicated in any deal with the remaining 27 members of the EU). This means those firms which currently use passporting to operate in the UK will need to be regulated in the UK by the Bank's regulation arm, the Prudential Regulation Authority. In the case of banking, Bank of England data show that about 70 banks could be impacted.
But the numbers could be bigger across the entire financial system. There are nine different passports that banks and financial firms use to provide banking services alone.
The Financial Conduct Authority, the City regulator, last year published data showing just over 8,000 companies authorised in other EU states use these rules to do business in the UK while 5,476 UK-registered firms hold at least one passport to do business in another EU or EEA member state. All that will need to be sorted out in the negotiations ahead.
The 18th-century incarnation was nothing like a modern central bank, yet it was remarkable for its versatility and its character remained fluid. Services to government ranged from acting as banker to major accounts, such as those of the paymaster to the Army and the treasurers of the Navy and Ordnance, to management of a chunk of the national debt. By the time of the war of the Austrian succession in the 1740s, the growing costs of warfare led to a shift from direct financing to a role as the facilitator and enabler of “the national financial war machine”. Gradually and unobtrusively the Bank began to adopt some of the characteristics of a central-bank-in-the-making.
In the crash that followed the seven years’ war of 1756-63, Kynaston finds the Bank functioning in effect as lender of last resort, to keep the financial system afloat. By the late 18th century it was recognised to be both a private entity answerable to its shareholders and a public institution closely associated with the state and conscious of responsibilities to the wider financial community.
The revolutionary and Napoleonic wars of 1793-1815 brought the Bank to the brink. In 1797 sustained withdrawals of gold amid alarms of invasion forced it – in collusion with Pitt’s government – to suspend payments in cash. The ensuing political controversy had interesting consequences. Richard Brinsley Sheridan, the playwright and opposition Whig, referred to the Bank in whimsical terms as an elderly lady in the City, an idea that inspired James Gillray’s cartoon, Political Ravishment, or the Old Lady of Threadneedle Street in Danger. In the longer run, with cash payments restored in the aftermath of the wars, Gillray’s nickname endowed the Bank with what Kynaston describes pointedly as an “affectionate familiarity” well beyond the wit of any PR man.
The government’s connivance in the suspension of cash payments marked the beginnings of an occasionally lax co-dependence. Although the Bank Charter Act of 1844 seemed to have settled the bullionist issue by establishing a fixed ratio between bullion held and notes issued, it was at moments of tight liquidity an oppressively inflexible requirement. Financial crises in 1847, 1857 and 1866 were only resolved when the Treasury on each occasion sent a letter to the Bank suspending the bullionist clause in the legislation, the equivalent in financial terms of a lumbar puncture relieving pressure in the system. The lessons learnt reinforced the Bank’s sense that in a crisis discretion and a sure hand on the tiller were more efficacious than rigid adherence to published directives.
Indeed, one of the most beguiling features of the Bank’s history is its reliance on informality and unexplained, unobtrusive intervention. For all its public importance, it was a decidedly introverted institution, with its own culture and customs. The very discipline of economics was alien to its traditions, and it came late – surprisingly late, as Kynaston notes – to the recruitment of trained economists. Yet the Bank had a point. Is central banking really a branch of economics, or is it rather an art, not unlike a magician’s, with sleight of hand the prime requirement in maintaining confidence and the suspension of disbelief? Banking is, perhaps, like the manufacture of sausages: it is best that the consumers of pork products and ordinary depositors not know too much detail about what is involved behind the scenes. The gristle in banking derives from the narrowness of the margins, the scale of the risks and the relative slenderness of the depositor base.
The Old Lady was not quite the comfortable establishment fixture of popular assumption. Kynaston draws attention to a long line of critics who took aim over the centuries at the secretive ways and reliance on intuitive virtuosity. These included a distinguished procession of economists and financial writers from David Ricardo – appalled by the powers of a mere “company of merchants” ignorant of the laws of political economy – by way of Walter Bagehot at the Economist to John Maynard Keynes (though he was eventually elevated to the Bank’s governing court). Nor were politicians much friendlier, from William Gladstone, a trenchant opponent of this unreformed vested interest, to Margaret Thatcher, who did not hit it off at all with her first central bank governor, Gordon Richardson.
Kynaston has much to say about the character of the governors, not least the unprecedented 24-year tenure of the eccentric Montagu Norman, which eventually ushered in Attlee’s nationalisation of the Bank. This reform was waved through by Churchill, who blamed Norman for the worst blunder of a blunderful political career – the return to the gold standard during Churchill’s chancellorship in 1925. However, opposition to an overmighty Bank was not simply a matter of personalities and policies. It was also about basic principles of democratic accountability in monetary policy, something that exercised both Thatcher and her successor, John Major. On the other hand, Nigel Lawson, Norman Lamont and Gordon Brown saw that independence was crucial to the central bank’s credibility in the currency markets, and in 1997-8 pragmatism prevailed.
This book brings into perspective the 2007-8 banking crisis, whose aftershocks persist a decade on. Although the arc of Kynaston’s narrative is one of rising prosperity in the long term, this is a story punctuated by popping bubbles, major swindles, banking bailouts, sterling devaluations and squeezes on liquidity, which become themselves the matter of his drama. Thus although Kynaston pays due attention to the quotidian regularity of the procedures that underpinned the Bank’s solidity, normality here becomes a will-o’-the-wisp; and the reader is left with the impression – misleading or perhaps all too telling – of an institution often in firefighting mode as it lurched from one disaster to the next, notwithstanding the periods of dull financial probity that existed in between. The low interest rates and quantitative easing of the post-2008 era are our strange new normal; but crises were firmly part of the old normal too. Given the creative destruction inherent in the financial system, it seems as likely as not that another mess will be along soon enough.
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