Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (12 page)

As Walter Bagehot, the great nineteenth-century editor of the
Economist
who reveled in the quaint paradoxes of English life, described them, members of the Court were generally “quiet serious men
¹⁰¹
. . . (who) have a good deal of leisure.” Indeed, he felt it an ominous sign for a private banker to be fully employed. “If such a man is very busy, it is a sign of something wrong. Either he is working at detail, which subordinates would do better and which he had better leave alone or he is engaged in too many speculations . . . and so may be ruined.”

These arrangements, according to Bagehot, put the financial stability of London and, as a consequence, the world in the hands of “a shifting executive
¹⁰²
; a board of directors chosen too young for it to be known whether they are able; a committee of management in which seniority is the necessary qualification, and old age the common result.” It was a strange, even eccentric way of doing things—for the most important financial institution in Britain, in fact in the world, to be in the hands of a group of amateurs, men who generally would have preferred to be doing something else but
who viewed the years they devoted to steering the Bank as a form of civic duty.
^fn2

Though the directors of the Bank were charged with governing the supply of credit in Britain, and by extension around the globe, they did not pretend to know very much about economics, central banking, or monetary policy. An economist of the 1920s
¹⁰³
once described them as resembling ship captains who not only refused to learn the principles of navigation but believed that these were unnecessary.

To the extent that they did espouse a systematic doctrine of monetary policy, it was the “real bills” theory of credit, that we now consider clearly fallacious. This held that provided banks, including the Bank of England, only made loans to finance inventories of goods—such as bales of cotton, or rolls of paper, truckloads of copper wire or steel girders—rather than for financial speculation in stocks and bonds or for long-term investments then no inflation could result. It is simple to see why this is nonsense. In periods of inflation, as the price of goods in inventory keeps rising, this doctrine would call for banks to keep on expanding credit, thus adding further fuel to the inflationary fire. That this doctrine did not lead to monetary disaster was due to the gold standard, which by keeping prices roughly stable, ensured that the “real bills’ doctrine was never given a chance to be applied in an environment of rising prices.

The demands of war finance transformed the Bank. Forced to issue more and more currency notes without gold backing, it became increasingly subordinate to the needs of the UK Treasury. Despite its status as a national institution, the respectable City burghers who ran the Bank had been very careful, over the years, to keep a wary distance from any government. They were clear in their minds that the Bank was not an organ of the state nor did they remotely wish to make it one. An apocryphal story,
much circulated in the City before the war, best captures that attitude. A governor was asked by the chancellor of the exchequer to testify before a royal commission. When questioned about the Bank’s reserves, he was only willing to say that they were “very, very considerable
¹⁰⁴
.” When pressed to give even an approximate figure, he was supposed to have replied that he would be “very, very reluctant to add to what he said.”

As the stresses of raising money for the war mounted, tensions between the Bank and the government escalated, finally coming to a head in 1917. The governor was then Walter Cunliffe, a tall barrel-chested, John Bull sort of character who sported an imposing walrus mustache, was a renowned big game hunter, and looked more like a gentleman farmer than a City grandee. Over the years, he had become increasingly autocratic and erratic in his judgments and had developed an exaggerated sense of his own importance as governor to the point of insisting that his status required him to deal with the government through the prime minister alone, not even through the chancellor of the exchequer.

In 1917, Cunliffe became infuriated by what he believed was the cavalier way he was being treated by officials at the Treasury, among whom the chief culprit was none other than that brilliantly impertinent young upstart Maynard Keynes. Cunliffe was well known in the City as a man of few words and even more limited intelligence, a bully who acted first and thought later. In a fit of temper, without consulting any of his fellow directors, he dispatched a telegram to the Canadian government, then the North American custodian of Britain’s gold reserves, forbidding it to accept any further instructions from the Treasury in London. The British government came close to the extremely embarrassing position at the height of the World War of not being able to settle the bills from its American suppliers.

Lloyd George, by now prime minister, and justly furious, summoned Cunliffe to 10 Downing Street, and berated the governor, threatening to “take over the Bank
¹⁰⁵
.” After some delicate behind-the-scenes negotiations over protocol, the shaken Cunliffe wrote the chancellor of the exchequer as cringing a letter as form would allow, asking him “to accept my
¹⁰⁶
unreserved apology for anything I have done to offend you.” Cunliffe, who, because of the war and contrary to all tradition, had been appointed for a second two-year term, was not reappointed again.

DURING THE WAR
, as the Bank kept expanding its role as chief underwriter and promoter of government debt, its few senior executives found themselves overwhelmed with work and responsibility. In 1915, the deputy governor, Brian Cockayne, invited Montagu Norman to become his adviser. Though this was to be an informal and unpaid position, Norman, then at a loose end after leaving Brown Shipley, jumped at it. He had originally joined the Court of the Bank in 1907, at the age of thirty-six, but had done so largely for tradition’s sake—it was customary for a partner at Brown Shipley to be on the Court. Indeed for the first few years, he rarely went into the place and showed little interest in its workings. His associations with the institution, however, went far back. He came from two of the most prominent banking families in the City, that special aristocracy from which the Court of the Bank was drawn, and both of his grandfathers had been long-standing directors of some repute in their time.
^106a

His paternal grandfather, George Warde Norman, though not a full-time banker—his own inherited fortune derived from timber and real estate—had acquired a large stake in Martins Bank through marriage and was elected a director in 1821. In 1830, at the age of thirty-seven, George Norman retired from full-time business in order to devote himself to his estate in Kent, indulging his love for literature and history; promoting cricket, a family obsession; and enjoying his brood of seven sons. Nevertheless, he remained a dutiful member of the Court for more than fifty years, although in contrast to the typical member, he developed a great interest and some expertise in monetary economics. Like so many Victorian gentlemen of leisure, he published pamphlets—in his case on monetary theory—and became a leader of the move to codify gold standard rules, which were embodied in the Bank Act of 1844. He further broke with tradition at the Bank by categorically refusing to take his turn as
^106b
deputy governor and governor. Unable to see any reason why he should tear himself away from the many enjoyments of life to inflict upon himself the unnecessary responsibilities and burdens of office, he claimed that his nerves could not cope with the tensions, a curious hint of the troubles that his grandson would face.

Norman’s maternal grandfather, Sir Mark Collet, was very different. A self-made man, he had begun his career as a clerk in a merchant house and moved to New York in 1849. On his return to England two years later, he joined the firm of Brown Shipley, the British arm of the merchant banking house of Brown Brothers of New York and Baltimore, and eventually became senior partner in London. Elected to the Court of the Bank of England in 1866, he dutifully served his turn as governor and was knighted for his services.
^106c

Few people were surprised that with this sort of pedigree, Montagu Norman should end up at the Bank. Nevertheless, when he joined in 1915, he had had only a short and not particularly illustrious career as a merchant banker and was not very well known in the City. In his first few weeks, Lord Cunliffe, then governor, was heard to remark, “
^106d
There goes that queer-looking fish
¹⁰⁷
with the ginger beard again. Do you know who he is? I keep seeing him creep about this place like a lost soul with nothing better to do.” Few people could then have predicted that the “fish” would accomplish an extraordinary upward swim through the institution. Nothing in his background suggested that he would be well suited to the work of a central banker. Within three years, however, he was elected deputy governor, and two years later became governor, a post he would eventually hold for an unprecedented twenty-four years.

If Britain was the most responsible of the belligerents, its ally France balanced it out by choosing to be the most feckless. The French government spent a total of $30 billion on its war effort. Few nations resisted paying their taxes more vigorously than the people of France—they seemed to
view even the slightest official inquiry as to their financial circumstances as an unjustified intrusion by the state “into the most holy recesses
¹⁰⁸
of private life” and an infringement of their fundamental rights as citizens. As a result, at least for the first two years of the war, the government balked at raising taxes, not reversing itself until 1916 when it seemed on the verge of financial collapse. In total, France paid for less than 5 percent of its war expenditures out of higher taxation.

The republic was saved from complete economic disaster only by its government’s ability to tap two sources: first, the notoriously thrifty French middle classes, which bought $15 billion worth of government bonds; and second, foreign governments, specifically those of Britain and America, which, seeing France bear the brunt of the human cost of the war, lent a total of $10 billion. This still left a substantial gap, which was filled by printing money. While currency in circulation doubled in Britain, in France it tripled.

Drawing on the central bank for money was a much easier process in France than in Britain—in part because the governor of the Banque de France was by tradition not a banker but a high civil servant appointed by the state. Indeed, as far back as 1911 the minister of finance, thinking ahead, had prearranged a line of credit from the Banque to be drawn upon in the event of war. There was a certain irony in this. The Banque de France, like the Bank of England, had been founded in the middle of a war, but unlike its older cousin it had been set up not so much to raise money but to bring order to a chaotic monetary situation.

France in 1799 faced a pressing shortage of currency. Ten years of Revolutionary turmoil had taken their toll. Silver and gold had fled the country, and the failed experiment of the Revolutionary government with the assignats had destroyed any residual confidence in paper money not backed by gold. Two financiers, the Swiss banker Jean-Frédéric Perregaux and the sonorously sounding Jean-Barthélémy Le Couteulx de Canteleu, a rich merchant from Rouen, received the blessings of the first consul of the republic, Napoléon Bonaparte, to create a new bank that would issue
currency backed by gold and have a capital of 30 million francs, equivalent to $6 million.
^fn3

The Banque opened its doors
¹⁰⁹
on January 18, 1800, or according to the calendar of the Revolution then in force, on the 28th day of Nivose, the month of snow, in the year VIII. The bulk of its capital was raised from merchant and banking families, many of them Protestants of Swiss origin. But the glittering arriviste circles surrounding the first consul were also keen to buy into a venture that promised much profit. Napoléon himself took thirty shares, each valued at 1,000 francs; Louis-Antoine Fauvelet de Bourrienne, his secretary, who would later be dismissed for corruption and betray Napoléon by rallying to Louis XVIII, took five; Joachim Murat, Napoleon’s brother-in-law and a future king of Naples, nine; Hortense de Beauharnais, Napoleon’s stepdaughter, his sister-in-law-to-be, and a future queen of Holland, five; Napoléon’s older brother Joseph, a future king of Spain, just one. To encourage investors, the Banque was made as independent of the government as the Bank of England and, in 1803, was granted a monopoly over note issuance in Paris.

In 1805, immediately following the naval disaster at Trafalgar and just as Napoléon was launching his latest campaign against the Austro-Russian alliance, a panic among the merchants of Paris precipitated a run on the still infant Banque and almost forced it into liquidation. It was saved when news arrived in the capital of Napoléon’s brilliant victory at Austerlitz. While confidence was quickly reestablished in the new Banque, lubricated by large indemnity from the Austrians, Napoléon remained enraged by the feeble-heartedness of his bankers.

On his return from Austria, he summoned his council of ministers and, in one of his imperial tantrums, fired his minister of finance. To the Banque’s three-man management committee he offered the choice between prison or a fine of 87 million francs. They chose the fine. Determined
never again to be held hostage by moneymen, Napoleon changed the Banque’s statutes so that henceforth the governor and the two deputy governors would be appointed directly by the government, which at that time meant Napoléon himself. He declared at the time, “The Banque does not belong
¹¹⁰
only to its shareholders, but also to the state. . . . I want the Banque to be sufficiently in government hands without being too much so.”

FOR ÉMILE MOREAU
the war meant a continuation of his exile at the head of the Banque d’Algérie. In 1914, after Henriette Caillaux’s acquittal, he must have secretly harbored some hope of returning to the Ministry of Finance on his mentor Caillaux’s coattails. But this was quickly squashed with the outbreak of war, for Caillaux, always viewed as soft on Germany, was not invited into the war government.