This piece first appeared in the Christmas issue of The Spectator.
Hamilton, created by the remarkable Lin-Manuel Miranda, has brought the financial musical to the London stage: a serious biography of a great man translated into rap. What comes next? Now we know. It is the story not of one individual but of a national institution — the life and times of the Bank of England. I can’t wait for David Kynaston’s new history to reach the stage. We may have to call on Tim Rice, a revolutionary himself in the world of musicals, to generate a libretto from the long original text. But there is a wealth of material in this fascinating book.
Often seen as a rather traditional and staid institution, the Bank of England’s more than 320-year life has been remarkably eventful. War and peace, murder and executions, fraud and forgery, panics and bankruptcies (including nine governors to date), heroes and villains all find a place in Kynaston’s story, with its mastery of historical detail. And what a story it is. Financial history, written well, is no dry subject. Indeed, at times it is so exciting that one is reminded of the instruction from Miss Prism to Cecily in The Importance of Being Earnest:
“You will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side.
Act I describes the gradual development of the Bank from its birth in 1694, offspring of the Glorious Revolution, to maturity and its ravishment by William Pitt the Younger in 1797. Following an attempted invasion by 1,200 French soldiers, and the resulting drain on the Bank’s gold reserves, Pitt slapped a Privy Council Order on the Bank, suspending the convertibility of notes into gold. Inflation followed, and Gillray created his famous cartoon (reproduced above) showing the Bank as a lady of a certain age being violated by the prime minister as he tries to get at her gold — the origin of the nickname the ‘Old Lady of Thread-
needle Street’. Throughout this period there were repeated attempts by competitors to repeal successive Bank charters, aided and abetted by a multitude of often anonymous pamphleteers.
Act II describes the struggles of the by now well-established Bank in the 19th century to maintain the value of money, by adherence to the Gold Standard, and to cope with regular banking crises. Conflicting theories of whether and when the Bank should provide support to institutions in trouble were the basis of heated debates. Henry Thornton and Walter Bagehot advocated a policy of ‘lending freely’ in a crisis — the Bank as ‘lender of last resort’ — and others, such as Governor Thomson Hankey, warned of the dangers of a safety net that allowed banks to become ‘too big to fail’. The debate is still unresolved. And so we arrive at the first world war and the end of the global dominance of sterling and the British empire.
Act III takes us through the most profound and difficult period of the Bank’s history, with its attempt to retain the position of sterling in the world and the misguided return to the Gold Standard in 1925 at the inappropriate pre-war exchange rate. Re-joining at a different and lower exchange rate would have prevented the need to cut wages and the resulting National Strike, and arguably might have avoided the humiliation of going off gold in 1931.
But sterling could no longer play the role of the world’s leading reserve currency, and its fate was sealed by the cost of the second world war. Ignoring the convention that the governorship rotated every two years, Montagu Norman presided over the Bank from 1920 to 1944, promoting international co-operation among central banks (alive and well today through the Bank for International Settlements in Basel) and retiring in time to allow the nationalisation of the Bank in 1946. Remarkably, the legislation said nothing at all about the objectives of the Bank, and political wishful thinking about economic management led eventually to the disastrous inflationary episode in the 1970s when inflation reached 27 per cent and the market economy in Britain seemed genuinely at risk.
Act IV is the climax, when Britain comes to terms with the realities of a market economy and the need to control inflation. The Bank of England is finally made independent — once again — in May 1997, exactly 200 years to the month after its ravishing by Pitt.
Over the years, the Bank faced dangers from many quarters, especially from political interference and riots in the streets (on 7 June 1780 more than 200 rioters were shot dead across London after they tried to storm the Bank — these Gordon Riots led to the Bank Picquet, which marched from its barracks to the Bank every night until 1973). Deputy governors were decapitated by both cannonballs and politicians, and inevitably the Bank was exposed to risks from the banking system itself.
Did the Bank become too close to the major banks? Its belief in the strength of the British banking system is illustrated by the letter sent by the then governor,
Kim Cobbold, to the chancellor of the exchequer, Harold Macmillan, in the spring of 1956:
“There has been no major banking failure or moratorium in living memory, no government has had in this country to rescue the banks from illiquid commitments, the banks have survived two great wars and immense economic changes without loss to anybody.
Putting to one side that this ignored the bailout of the banks by Lloyd George at the outset of the first world war, the letter demonstrated a failure to learn lessons from other countries. The collapse of the American banking system in the 1930s should have alerted the UK authorities to the need for a tougher regulatory framework and a legal resolution mechanism for handling failing banks. With such a mechanism in 2007, Northern Rock could have been dealt with over a weekend. Banks are dangerous institutions engaging in maturity and risk transformation that have the potential to threaten our monetary system, and we have still to come to terms with the risk of short-term creditors deciding to run on a bank, as we saw in the financial crisis a decade ago.
The official histories of the Bank — by such distinguished economic historians as J. Clapham and R.S. Sayers through, most recently, to Forrest Capie — are invaluable to the scholar. But they cover short periods and reflect the unique styles of their authors. As an important and long-lasting national institution, the Bank of England merits a one-volume narrative history for the general reader, describing its origins and the key personalities who made it what it is today. When I joined the Bank in 1991, there was already talk of a one-volume history, but nothing came of it. So I should make clear to readers of this review that before I left four years ago, I was determined to find a suitable author for that history and it was my decision to ask David Kynaston to write it.
As with many great stage performances, one may be left feeling overwhelmed by the experience without being entirely sure what the overarching theme of the play was. Perhaps this misses the point. The history of the Bank of England is not the playing out of a single grand design. In the struggle to maintain the value of money and to prevent costly banking crises, the story is not one of inevitable, if unpredictable, progress to a better world — a Whig theory of economic history — but an unrelenting drama played out among the personalities and ideas of the time. As most of my predecessors experienced, it was simply one damn thing after another. Not much fun for them, but a real treat for the reader of Kynaston’s marvellous history. Read it first, and enjoy the musical later.