Afterglow or Adjustment? Domestic Institutions and Responses to Overstretch

Mark R. Brawley

Columbia University Press

1998

2. From Ascendance to Afterglow: The Bank of England in British Hegemony

 

I first address the example that spawned the afterglow hypothesis. As noted in the preceding chapter, several authors have argued that the Bank of England’s policies after World War I represent an afterglow. Why did the Bank of England choose to reassert leadership after such policies did not appear beneficial for the nation as a whole? Why did Britain’s monetary policies shift again in the 1930s? Krasner suggested that the Bank not only had institutional interests, but was also dominated by financial interests in the City of London; as a starting point, he also suggested that the Bank was an institution created or empowered during the period of hegemonic ascendance.

Though the Bank was established in the late 1600s, it is impossible to speak of the Bank of England as a central bank until the early 1800s—a period associated with Britain’s assumption of liberal international leadership. Until that time, the Bank’s main goal had been to help raise funds for the government, not to control the national volume of currency and credit. As we shall see, when Britain decided to provide leadership in the creation of an open economic subsystem, and when international monetary problems emerged as an important side effect from the integration of domestic and international markets, the Bank of England was given the powers of a central bank to control the situation. With no rival international currencies around, but with the currency in oversupply (a consequence of the long wars against Napoleon, the rapid accumulation of capital in Britain in the late eighteenth and early nineteenth centuries, and the peculiar attributes of the British financial system), domestic interests arose for developing sterling into a currency that could serve international needs. Parliament responded by empowering the Bank of England to act as a central bank.

Once empowered as a central bank, the Bank was able to perform its duties quite well for a long period of time. It provided the most significant currency in international transactions for nearly a century. Its success would create an overhang, though, since the amount of sterling in circulation eventually outstripped reserves. The Bank’s policy instruments and practices were most suited to maintaining sterling’s international position, even after World War I heralded the arrival of other industrial and financial powers. The Bank moved to assert the international role of the pound despite damaging side effects on the British economy. This afterglow did not remain uncontested for long, however, since government debts incurred during World War I brought the Treasury into policy debates concerning exchange and interest rates, increasingly in opposition to the Bank. Britain would only begin to shift out of the leadership role once the Treasury challenged the Bank of England’s authority over policy, though even then the two institutions would not always run complementary policies. Domestic groups pressured both the Bank of England and the Treasury, and were in turn used by each in the dispute over monetary policy.

To come to a complete understanding of how empowerment occurred, it is first necessary to give a brief historical background of the Bank of England prior to its empowerment, in order to illustrate its relationships with other British institutions, the domestic monetary system, the London market, and the financial sector more broadly. These details will also provide insight into why empowerment took such a long time, as well as why this explanation for Parliament’s empowerment of the Bank is more persuasive than traditional explanations, which emphasize only the Bank’s domestic duties rather than a mix of domestic and international responsibilities.

 

The Birth of the Bank of England

The birth of the Bank dates to 1694, a period when Amsterdam was the financial center of Europe. During the conflicts between the Crown and Parliament which culminated in the English Civil War, the competition between these two political authorities blocked the development of any national bank. It was well understood that the creation of a single large, strong bank would make it easier for the government to raise money—for that very reason, each political body blocked efforts by the other to create a bank with monopolistic powers. Each feared the other would be able to raise large sums of money beyond the control of the other. Only after the Glorious Revolution (and the assurance that Parliament would exercise ultimate control over government finances) was it possible to create a bank to handle large-scale government debt.

William of Orange’s arrival on the English throne solidified the Glorious Revolution, but also provided a link between the English government and the financial strength and experience of the Netherlands. Within a short time, he allied the Netherlands and England in a war against France; England simultaneously faced a hostile Scotland, and was conquering Ireland. The size of the English army grew eightfold, and expenditures grew apace. The government sought new loans and revenues from all available sources. The Bank of England sprang from one of these wartime financial measures. ₁ The alliance with the Netherlands meant that Dutch finances and expertise could be used to mobilize resources. The Bank of England issued Parliamentary-backed annuities, which proved quite popular with Dutch investors, not only because of patriotism, but also because the form of investment was familiar to them. In 1698, during the War of the League of Augsburg, the Bank was able to erase a debt of some £400,000 thanks to a Dutch loan, so the funds the Bank could draw in were considerable. ₂

One of the Bank of England’s early historians notes three reasons why there was wide support for the creation of such a bank. First, savings were deposited with goldsmiths, who often lacked sufficient security. It was hoped a single large bank would handle deposits more sensibly. Second, it was widely believed that the establishment of the Bank would gather enough funds together to create downward pressure on interest rates. Finally, there was hope that the Bank would be capable of issuing sound paper currency—facilitating the expansion of business in general. ₃ Because of such expectations, the Bank’s founders could count on support from the commercial community. Political backing for the Bank reflected an interest in the expansion of liquidity, though it is not clear whether there were any concerns over how such an expansion might threaten confidence in the currency.

Concerns were also voiced. Some feared the Bank would exercise too much control over the finances of the realm, or that it would be a tool of the monarch (as many other national banks of the time were) and thus aid the Crown in circumventing Parliamentary control. There were even fears that the Bank would be too successful in gathering in people’s deposits only to collapse, leaving the country poverty-stricken (anticipating the very problems which would occur with the South Seas Company). As it turned out, the Bank was able to make cheap loans to the government during the great wars at the onset of the eighteenth century, ease the adoption of new taxes, give citizens a more secure depository for their funds, and eventually lead to a general lowering of interest rates.

England’s monetary situation at this time exhibits many parallels with the contemporary Dutch case to be discussed in the fourth chapter. Since coins were more than a mere representation of value (they were also supposed to contain metals equivalent to their value), one of that era’s fundamental challenges was to maintain the coins’ quality after they entered circulation. The public could profit by removing some of the metal from each coin. In the tough economic times of the 1690s such practices proliferated, and the quality of coins worsened. Parliament responded in 1695 by ordering all traders to sell or buy coins only at their nominal value or less (whether the coins were in good shape or not), or face stiff penalties. Anyone possessing metal clipped from coins would have that metal seized and a large fine assessed; they would also be branded. Only goldsmiths were allowed to deal in bullion. In 1696 Parliament followed up this legislation with the Re-Coinage Act, an attempt to replace worn-down existing coins with new ones. It was discovered that coins in circulation were often little more than half the weight they should have been, which explains why foreigners regularly discounted English coins and bills of exchange by 20 to 30 percent. ₄ It is important to note that despite concerns over the coinage and stabilization of its value, there was as yet no desire to develop the pound’s international role, nor any desire to empower the Bank of England as a central bank.

Instead, the Bank operated as a private monopoly. Its charter of incorporation, issued in July 1694, gave it monopolistic privileges that were to last for a period of twelve years, after which the government could revoke its charter after a warning period of one year. The Bank was authorized only to deal in bills of exchange, gold, and silver bullion (as well as any goods upon which money had been advanced, but which had not been redeemed within three months of the end of the agreed term). ₅ The Bank was not allowed to borrow or owe more than its capital stock—if it did, members of the corporation were personally liable in proportion to the amount of stock they owned.

With the financial burdens of the wars against Louis XIV, the Bank of England was unable to raise enough capital to meet all the government’s needs. Parliament therefore incorporated a second major bank in 1696. This was known as the Land Bank, since the notes issued were backed by pledges of land. This rival bank reflected the political power of the landed interests as opposed to the Bank of England’s powerbase in the City of London. (Thus the evidence of the Bank of England having only narrow sectoral support based in London dates back to the Bank’s founding.) Although the Land Bank failed to raise the promised sums for the government, the Bank of England still felt the pressures of competition, if not political threat. The price of Bank of England shares fell from £107 to £83. At the same time, the government failed to deliver the new coins it was supposed to introduce into circulation, causing the Bank of England difficulty in meeting its own payments. After the Land Bank failed, the government was forced to turn once again to the Bank of England. The Bank was then able to extract a genuine monopoly, plus an exemption from taxes and an extension of its privileges. ₆

The initial capital raised by the Bank was loaned in its entirety to the government, in return for interest payments of £100,000 per annum. The Bank also began to develop other sources of income, primarily through the issue of notes and, in the early days, the discounting of bills of exchange. ₇ These two types of activities were originally aimed purely at turning a profit, but were later to become central elements of the Bank’s ability to exercise influence over other financial actors.

 

The Bank’s Relationship with the Government

Because of the Bank of England’s monopoly, it developed envious foes. In 1707, the Bank’s political enemies engineered a run designed to break the Bank, which it was able to stem only by tapping into private resources. Shareholders were forced to put up more of their own holdings to meet depositors’ demands. ₈ Much of the Bank’s early history centers on such struggles to retain its privileges, paralleling the history of contemporary trading companies. Parliament renewed the Bank’s charter in 1708, extending it twenty-one years beyond the end of the old term. In return, the Bank granted new loans to the government. This act also stressed the Bank’s exclusive privileges by prohibiting associations of more than six individuals from carrying on banking business within England. Another loan to the government in 1713 got the Bank a further extension of its charter (to 1743).

Because of the size of government debt, rival institutions continued to arise to handle those securities which the Bank of England could not digest. In 1711, the South Seas Company offered to take on government debts for a six percent interest on the security of various duties and a monopoly of the South Seas trade. By 1719, the South Seas Company’s stock price had risen to £126, but after the government consolidated its debts the price hit £850 (and even higher, reportedly up to the astronomical sum of £20,000 per share!). Speculation in other companies followed, until the bubble burst and stock prices collapsed. The Bank of England avoided association with these troubles by refusing to aid its rivals. Only by sleight of hand did the Bank survive the shortage of liquidity generated when the South Seas bubble burst. The Bank recycled its holdings of currency, paying out to trusted depositors who publicly displayed their withdrawals but then secretly redeposited them, so that the same currency could be withdrawn by another depositor who would openly exhibit it only to redeposit it surreptitiously, and so on. This gave a false impression of the Bank’s health. This image (plus the well-known fact that the Bank had few connections with their troubled rivals) translated into public confidence. ₉

The Bank negotiated another extension of its charter in 1742. Again, the Bank provided an interest-free loan to the government and in return received a confirmation of its monopoly powers and a prolongation of its charter (this time to 1764). In 1764, the Bank gave the government £110,000 plus a loan at 3 percent interest, and in return the Bank’s charter was extended to 1786. The government soon strengthened its protection of the Bank’s privileges, most notably by making forgery of Bank notes a capital offense. In 1781 yet another extension was given in exchange for yet another loan, lengthening the Bank’s charter to 1812. ₁₀ Thus for most of its first century, the Bank of England was first and foremost a profitmaking monopolistic enterprise that dealt in financial assets. Its profits derived from its government-sanctioned privileges. The Bank did not exercise the powers of a central bank yet, but it did enjoy the benefits of power and prestige as the largest financial actor in London.

 

The Rise of England as an Economic Power

London’s position as an international financial center steadily improved during the eighteenth century, though it had not yet surpassed Amsterdam. The relationship between these two centers intensified as their markets became ever more integrated through competition for funds originating in the Dutch Republic. ₁₁ Contemporary British writers, such as Adam Smith, continued to look to the Bank of Amsterdam as the model banking institution to support trade expansion, rather than their own Bank of England. ₁₂

Yet the Bank of England’s comparative strengths versus the Bank of Amsterdam were emerging. The Bank of England had by this time weathered several crises, including those with international causes and ramifications. Shortages of liquidity in one country often squeezed liquidity elsewhere, as funds were withdrawn in one financial center to alleviate problems in another. These crises undercut confidence in other centers, including Amsterdam. London fared comparatively well though, thanks to the Bank of England’s ability to limit international capital flows when necessary. The Bank’s directors had learned in the crises of 1763, 1772, and 1783 that if they restricted the Bank’s note issues even for a brief time, the flow of monetary metals out of the country could be halted or even reversed without having to suspend cash payments to depositors or going to the government to get direct regulatory controls on capital markets. In other words, by this time the Bank directors had learned to use their power over the issue of paper money to manipulate market forces to influence flows of reserves and the foreign exchanges. Yet despite such actions in the later 1700s, the Bank of England still did not have control over the volume of currency and credit in the country. The Bank was the largest player in the London capital market and could therefore influence other financial actors, but it was not yet a central bank. ₁₃

Yet these special skills would shape the Bank’s later development. They would set it apart from and ahead of other national or municipal banks of the time, including the Bank of Amsterdam. These other banks were merely banks of deposit; they took in coins and issued bills in equivalent amounts. The Bank of England took in deposits, but also traded with those deposits, so that issues amounted to more than simply the coin and bullion in the Bank’s reserves. Although this meant the Bank had greater freedom in note issue than other national banks, it also lacked several key powers some other national banks held. Most significant, Bank of England notes were not yet legal tender. ₁₄ Even though the Bank had mastered some techniques for steering currency markets via manipulation of its own note issue, it was still not in control of the capital market within Britain, which of course meant that ultimately the Bank held only limited sway over the exchange markets. As long as Bank of England notes were not legal tender, they would only circulate in London. Also, despite the Bank’s size, it did not operate branches outside of London. This meant that the Bank could affect the London market strongly, but had only weak connections to the wider English markets. The countryside, which was serviced by local banks rather than London firms, largely remained outside the influence of Bank policy.

The same economic trends developing in Britain in the later eighteenth century that would provide the microfoundations for the assumption of leadership in international liberalization worked to undermine the Bank’s influence over the money supply. As Britain accumulated capital relative to labor, the competitiveness of various sectors changed. Capital-intensive goods and services could earn higher returns on international rather than domestic markets. These sectors would soon pressure the government to lower tariffs, to open foreign markets, to enhance protection for trade and foreign investments, and eventually to alter sterling’s characteristics so that it could serve as an international money. In monetary affairs, capital accumulation initially undercut efforts to expand trade. In 1750, there were few country banks—perhaps no more than a dozen or so. The accumulation of capital in Britain in the later half of the eighteenth century supported the development of banks, and heightened competition among them. By 1793, there were some 400 banks outside London. The crisis of 1797 reduced them to 270, but by 1808 there were approximately 600. The number rose even higher, to 721 in 1810.

This surge in the number of banks altered the domestic monetary situation. The overwhelming majority of these country banks were weak, owing to the limitations imposed upon them by the Bank of England’s privileges—the country banks could only be partnerships (rather than corporations), and were limited to six partners at that. ₁₅ There were really two separate systems. The London financial market attracted stronger participants, who focused on international business; moreover, since the Bank of England could influence the London banks through management of its own notes, it was developing the ability to manage international relations. The financial system in the countryside, on the other hand, had a large number of weaker, less experienced participants, with no dominant actor to integrate or manage their activities. The coexistence of these two systems, along with their poor integration, fueled problems once the whole structure was put under stress.

 

The Financial Pressures Created by the Napoleonic Wars

The wars fought against Napoleonic France forced the British government to do all it could to raise vast sums of money, which squeezed liquidity in the financial system. In order to protect the Bank of England’s reserves, convertibility of Bank notes into gold was restricted. This in turn created pressure on the country banks, and many lacked the resources to meet their depositors’ demands for bullion or acceptable currency. Between 1791 and 1818, 273 country banks failed, with 92 of those failures coming in the three years 1814&-;1816. ₁₆ The weaknesses in the banking system had finally produced damaging results. People also came to realize the possibility that the Bank could counter such instabilities thanks to its paramount position in the financial system of London, and the nation as a whole. A report of the Lords Committee in 1797 referred to the Bank as the “head of all circulation,” and it was at this time that Sir Francis Baring first described the Bank of England as “the dernier ressort [sic].” ₁₇ Despite desires to stabilize the financial system, and the recognition that the Bank held a unique position in London, it still was not empowered as a central bank. I therefore submit that the domestic needs so often cited as the source of central bank formation were at their highest at this time; it was certainly clear that a lender of last resort could stabilize the financial system, and that the Bank had the potential resources to perform such a duty, but the Bank of England would not yet be empowered as a central bank.

Recovery from the Napoleonic Wars entailed further changes for the financial system. When Bank of England notes were made fully convertible again, the use of precious metals as backing was altered. Silver was demonetized in 1816, making gold the principal reserve. Despite these efforts to make the Bank of England’s notes more appealing and therefore more useful in international transactions, there was concern that the foreign exchanges were becoming even more difficult for the Bank to influence. These fears arose just as the Bank and the government were learning to coordinate their efforts and reconcile policy objectives when attempting to control the exchange rate. Such coordination was increasingly successful despite widespread opposition to the deflationary consequences of the Bank’s actions. These fears were well grounded, for the most serious problems in the 1820s and 1830s turned out to be expansions of credit despite the Bank’s deflationary policies. ₁₈ When the country banks overexpanded their note issues, they undermined confidence in the pound and thereby drove down the exchange rate. These instabilities increased as the unregulated country bank issues grew in size.

Prior to 1844, the Bank’s directors had followed a simple guideline in formulating policy. They believed that the best way to control against an overissue of their own notes was to focus on satisfying the needs of trade. This principle was rooted in the works of Adam Smith, who assumed that paper currency circulated quite freely in the domestic economy, but that international payments were always made in coin. The idea that the size of the note issue should be centered on something other than the level of demand expressed by merchants (i.e. pro-cyclical) was challenged only after 1810 (with the establishment of the “Bullionist” view), and it was only after 1825 that the more modern style of banking principles emerged. ₁₉

The Bank’s difficulties arose when dealing with its twin functions—managing relations with the domestic monetary system as well as the international sphere—while exercising effective control over neither. The Bank of England had to protect its reserves of gold as backing for its note issue, but gold reserves could be drained out of the country or be drained out of the Bank but remain in Britain. The Bank reacted quite differently to each type of loss. In response to a drain of gold domestically, the Bank would lend more freely to those holding adequate securities (i.e. it would loosen domestic credit). When the drain of gold was foreign, the Bank would tighten the money supply. The Bank of England was able to exercise some management over the national money supply by its actions: if the Bank’s reserves fell, it would reduce its loans and discounts, reducing the number of its notes in circulation, thereby leading other actors in the London market to push interest rates up in competition for the remaining Bank notes available. ₂₀

The Bank’s attempts to constrict the national money supply to counter a foreign drain of gold were not always straightforward. Although the Bank might contract its own note issues, other actors did not necessarily follow suit. The country banks, in particular, might simply offset a shortage of Bank of England notes by issuing their own. The Bank would be able to force the hands of the country banks only if they held Bank of England notes as reserves (as the London financial firms did). At the time, though, country banks’ reserves tended to be held as balances with the London banks, and only to a lesser extent were backed directly by Bank notes. The London banks, too, had several other sources of reserves beyond the Bank of England’s control (such as deposits, demands for currency, and international flows of bullion). The practice of holding Bank notes as reserve balances had not begun until the mid-1820s, and such balances were not very large until the 1840s. Sources suggest that while Bank of England notes may have comprised a part of some country banks’ reserves, they simply were not yet in general circulation outside of London. ₂₁ While the Bank could exert pressure in London, the country banks would only sluggishly follow shifts in the London market.

As long as there was no general acceptance of the Bank’s right to determine the exchange rate for the nation (which it attempted in a consistently active fashion only after 1821), there could be little criticism of the country banks’ resistance to the Bank’s policies. When it was argued that the Bank should exercise some sort of control over them, the country banks responded with arguments based on the notion of free competition within markets. ₂₂ The situation was worsened by the pressures for greater employment of capital as Britain’s relative abundance in capital continued to increase. Such pressures led to the legal changes of 1826, which permitted joint-stock banks in the provinces. The only limitation on joint-stock banks wishing to issue notes was that they be located at least 65 miles from London—so that the Bank retained its monopoly there. ₂₃

Until Parliament gave the Bank greater control over the country banks, the Bank would be unable to increase the international value of sterling, or even maintain it against downward pressures when the country banks overexpanded credit. The Bank was also hamstrung by the limits on interest rates upheld by the long-standing Usury Laws, which restricted interest payments to 5 percent. At the time, the Bank of England primarily dealt in two types of securities: Exchequer Bills, and commercial bills of exchange. If the demand for discounts went up, the Bank could meet this by selling securities, but when it wished to purchase bills, it competed against the open market. This often proved difficult, because it could not offer more than the 5 percent rate set by the Usury Laws. ₂₄

With such weak policy instruments at its disposal, the Bank of England’s efforts to manage the foreign exchange markets and the domestic money supply were frustrating, for both the Bank and others. Britain was in position to lead international economic liberalization, and domestic pressures would push policies in that direction. Yet in monetary affairs, expansions of credit undercut the role of sterling internationally. The Bank wanted to boost confidence in sterling to increase its attractiveness for use in international transactions and to be more readily held by foreigners. Yet the Bank’s ability to support sterling lessened as the financial system grew. For instance, following a trade boom in 1825, credit expanded rapidly, and prices rose. In response to this inflationary impulse, the value of sterling on the foreign exchanges began to fall. This in turn caused merchants to go to the Bank of England and redeem Bank notes for gold, which they took out of the country and exchanged for more valuable foreign currencies. In order to protect its gold reserves, the Bank wanted to restrict payments again (i.e., limit the convertibility of its own notes), but the government opposed this course. The Bank of England had to turn to other measures to bolster the pound. Unable to stop the country banks from expanding credit or to push interest rates above 5 percent, the Bank restricted the money supply through its discounting operations. Normally, merchants gave and received credit by promising a future delivery of goods via bills of exchange. Such bills could pass through many hands before the goods ever arrived. Merchants who preferred cash could turn to the Bank of England to discount these bills of exchange (i.e. the Bank would purchase the bill for less than its face value, reflecting the riskiness of the bill’s author, and the future value of the goods). In this situation the Bank wished to restrict credit and thereby raise the value of the pound, so it offered very low amounts for bills it knew to be solidly backed. ₂₅ Sound commercial transactions were hindered by the inappropriateness of the Bank’s policy instruments.

Many people disagreed with the Bank’s practice of restricting the money supply to prevent foreign drains of gold, and even more disliked its reliance on its discount policy in these situations. Proponents of the Currency School (which argued that note issues should be set to support economically sound trade rather than reflecting the Bank of England’s reserves) argued that the Bank’s policies were driving the economy into a cycle. Firms were first encouraged to expand their activities by the lowering of interest rates, then punished for doing so when the looser credit resulted in a drain of gold out of the country. ₂₆ Business opportunities were lost, or worse, firms were destroyed, not for lack of foresight but because of the Bank’s inconsistent policies. These concerns about the Bank’s activities were brought to the fore as competition in capital markets rose, business interest in the exchanges increased as trade became more significant, and several different groups wanted to open discussions about the Bank’s role in the British political economy.

 

Empowering the Institution to Assert Leadership: The Bank Acts of 1833 and 1844

Debates concerning the Bank’s proper position within the English financial and economic sphere led to significant changes in the Bank’s mandate. In 1833 Parliament passed legislation to empower the Bank of England, the first step in making it a true central bank. This legislation was designed to give the Bank control over the rest of the financial system so that the Bank could exert greater power in its management of the foreign exchanges—a step toward international leadership. Specifically, the goal was to instill greater confidence in the pound. The explanation here overlaps with standard explanations for the creation of central banks more generally, but with an added advantage in explaining the timing of the event—these problems had existed for many years, but empowerment was undertaken only at this specific time. Those who wished to see a stronger currency, capable of fulfilling an international role, were joined by other groups that supported a stronger currency (namely, those whose income was denominated in sterling in long-term contracts, such as landlords, or holders of government securities). ₂₇ The concern with sterling’s value on the foreign exchanges was a driving force in the arguments of the Bank’s main supporters, such as John Horsely Palmer and Robert Peel, in the consultations leading up to the Bank Acts of 1833 and 1844.

Prior to becoming a deputy governor of the Bank in 1828 (and then governor from 1830–1833), Palmer had run an important firm in the East India trade. He would argue before the Parliamentary Bank Charter Committee that the Bank of England should fix its note issue to its reserves; this subsequently was referred to as the “Palmer Rule.” ₂₈ This would surely strengthen the pound, but Palmer also wanted to change the relationship between the Bank and other financial firms for the same end. The Bank should be given powers as a central bank, Palmer argued, so that it could achieve an external equilibrium. This required bringing the provincial banks under the Bank of England’s control. The Bank’s existing policy tools seemed to be working within London—so in his view, the challenge was to increase the range of these same instruments and thereby bring the country banks under the influence of the Bank of England. The conclusion that the Bank could manipulate the rate it offered money to others (Bank rate) in order to achieve a desired external balance was based on experience. ₂₉ The failure to influence the country banks stemmed from the fact that the Bank of England notes did not circulate widely outside of London, and were not the primary reserve asset of the country banks.

The first legislation designed to empower the Bank of England as a central bank sought to redress those specific shortcomings. The Bank Act of 1833 made Bank of England notes legal tender. (Because the government used them, Bank notes had already enjoyed some of the character of legal tender, but this made the notes’ status official.) ₃₀ Importantly, the 1833 legislation also exempted the Bank from usury laws covering the discount of bills of exchange not having three months to run, which freed the Bank to raise its rates above 5 percent. The Bank’s primary instruments were strengthened, but it is also important to note that these tools were designed toward one end and one end only: enhancing confidence in sterling. Despite the large number of bank failures in the previous decades, other functions associated with today’s conception of a central bank (such as creating greater liquidity or acting as a lender of last resort) were not at issue.

The Bank’s position was altered in other ways. The government took steps to repay some of the public debt making up the Bank’s capital (though the government also lowered the size of its annual repayment). In return, the Bank was to publish its accounts regularly, and the Bank’s charter was renewed until 1855. (The Bank did not win all that it desired in these debates though; the loopholes in the rules that had allowed the joint-stock banks within London to engage in checking were reaffirmed.) ₃₁

These alterations in the Bank’s abilities did not achieve the desired results. Economic shifts outpaced reforms. Instabilities in the English money markets increased in the late 1830s, because of a number of reasons—all associated with the rapid economic changes that continued to sweep the country (such as the expansion of joint-stock banking, further development of London’s money market, and the increased competition among the old banks, the new banks, and the Bank of England). ₃₂ The rising number of banks was particularly disturbing, since the newer banks relied much more heavily on the business of discounting and rediscounting bills. With so many inexperienced banks engaged more heavily in this riskier business, the system now produced an even larger volume of credit. ₃₃ The same rise in relative capital abundance that I associate with the microfoundations of hegemony was therefore also the source for instabilities in the value of the currency. Thus at the very time when more groups would be interested in entering international transactions, the currency’s value was fluctuating.

Even though the 1833 Act strengthened Bank notes vis-à-vis other monetary instruments, the country banks could still undermine the Bank of England’s management of Britain’s foreign exchange by expanding credit. The Bank’s continued inability to control the foreign exchanges was one of the highest concerns covered by the report of the Secret Committee of the House of Commons on Joint-Stock Banks undertaken in 1836. ₃₄ Other problems were laid at the feet of the country banks, encouraging Parliament to consider further reforms.

 

The Bank Act of 1844

Although the Bank Act of 1833 changed symbolically and measurably the relationship between the Bank of England and other British banks, the Bank could not be called a true central bank until its powers were further enhanced. Prior to 1833 the Bank had been privileged in several notable ways—given a monopolistic position in large business transactions in London, and made banker to the government. After 1833, the Bank began to take a greater role in the management of the government’s other financial affairs (handling the technical aspect of the Exchequer’s office in particular). The Bank also began to realize its role as lender of last resort publicly in the 1830s and 1840s. ₃₅

The focus of those encouraging legal reform of the banking system remained on the connection between the domestic money supply and the foreign exchanges, however. In the debates over the Bank Act of 1844, Peel defined the key problem as overissue. Moreover, he cited the country banks as the source of the problem. The continued weakness of this segment of the financial system added to the urgency of discussions. Between 1839 and 1843, 82 banks had failed (including 29 banks issuing notes). ₃₆ The aim of the 1844 Act was to create a central control over the issues, including those of provincial banks, in order to prevent overissue and any further weakening of the currency on international markets.

The same concerns about the instabilities flowing from the country banks can be found in the records of the Select Committee of the House of Commons on Banks of Issue, which sat in 1840. In questions directed to Samuel Jones Loyd (later Lord Overstone), committee chairman Henry Warburton began with the observation that Loyd had shown how the country banks could withstand pressures put on them by the Bank of England, and then asked Loyd whether he thought the Bank could exercise control over the country banks (Question 2722). Loyd responded that he believed the Bank had ultimate control, but only by enforcing its will on all the other issuers of currency—by tightening the issues of even those banks not guilty of overexpansion. ₃₇

In a subsequent exchange, Warburton asked Loyd if he believed that the government should exercise greater control over note issuance (Question 2725), to which Loyd replied:

It seems to me unavoidable that control, either direct or indirect, must be exercised over all the paper issues of the country. If the control is indirect, of course it is slow, it is also uncertain in its extent, and, in effecting it, there must be an additional and unnecessary pressure upon the community; that would not arise if the control was immediately upon the issues themselves; therefore it appears to me that a direct control is more advantageous to the public interests and more safe for the object in view than an indirect control. ₃₈

Loyd ably presented the Bank’s views, but the committee also heard from country bankers. They based their arguments on the benefits of competition and free markets. Others who also claimed to stand for liberalism argued differently, though, particularly representatives from internationally oriented businesses. Manufacturers such as John Benjamin Smith (of Manchester) linked the need for banking reform with the expansion and liberalization of trade. As he put it, the efforts to expand trade (as shown in the well-known repeal of the Corn Laws) required stable flows of specie, which could only be achieved via a stable domestic monetary system. ₃₉ Here was an argument directly connecting the issue of trade expansion to the need for an international medium of exchange, which could only be provided by making the domestic currency strong enough to be attractive to foreigners.

Although the Parliamentary committees that sat at this time realized that the issue of notes throughout the country had to be brought under central control in order to gain mastery over the foreign exchanges, there were a number of possible ways to achieve that end, including the creation of a new institution with that specific task in mind. Peel wanted to empower the Bank of England rather than create an entirely new institution because, he said, an existing institution adapted for the job would “probably work more smoothly than perfectly novel instruments of greater theoretical perfection.” ₄₀

The fact that the Bank of England was a private institution being adapted for what was increasingly seen as a public duty came up as a point of debate. In the hearings of the Committee of Secrecy on the Bank of England Charter (which sat in 1832), Palmer had argued that the Bank of England, under the control of bankers, would be a better manager of the issue of currency than an agency under direct government control. Palmer cited the tendency for government-run banks of issue elsewhere in Europe to inflate the money supply, and thus reduce the value of the currency. ₄₁ Since banking reform was tied directly to the mission of strengthening the pound to make it an effective international money, Palmer’s argument carried weight. As a result, the Bank of England was given greater public powers without limiting its independence, so that it could more effectively pursue this single goal of strengthening the pound.

The Bank Act of 1844 made the Bank of England a true central bank by changing its powers in relation to other banks within Britain. The Act prevented the creation of further banks of issue (either private or joint-stock), although those banks issuing notes in 1844 were allowed to continue to exercise their existing rights (there were 72 joint-stock and 207 private banks enjoying such privileges at the time). The size of their issues was limited, and the right to two-thirds the size of those issues devolved to the Bank of England if ever the original bank ceased to exercise such rights. (By 1888 the number of joint-stock and private banks of issue in Britain had fallen to 19 and 44, respectively.) ₄₂

The Bank had certain new privileges and duties as well. It was exempted from the Stamp Duty, and was to publish its accounts weekly. Also, the Bank of England now had to purchase all gold offered to it at the fixed price of Bank notes. ₄₃ The Bank was split into two separate departments, one to handle issues, the other deposits. This was one way of separating the Bank’s private and public operations, at least in theory if not in practice. Since the same managers ran both departments, the Bank’s private and public operations were never truly separate.

In terms of the arguments presented in chapter 1, when Britain was undertaking the role of leadership in liberalizing the international economy there was an overexpansion of the currency. The same groups supporting the adoption of these policies also wanted the pound to play a greater role internationally; perhaps there was not a desire for it to be the dominant international currency, but there was certainly a desire to stabilize its international value at a higher level. As proposed in the preceding chapter, these groups made their interests felt. Changes in policy alone had failed to achieve their desired ends, so they pushed for the empowerment of an institution capable of capping liquidity so that confidence would be boosted—and they were able to gather allies who made have had purely domestic reasons for supporting such a change.

One potential opponent to reforms of the banking system (and an enhancement of the Bank of England’s position) was conspicuous by its absence: the Treasury. Currency reforms were undoubtedly eased by the Treasury’s acquiescence, which in turn was due to the restructuring of the state’s fiscal position. The Budget of 1842 included standardization, simplification, and reduction of tariffs, thus causing the Treasury to anticipate a drop in revenues of some £3,780,000 that year. The reintroduction of the income tax was intended to compensate for this shortfall—the first income tax levied in Britain outside of war. The actual revenues lost in 1842 were slightly higher (approximately £3,979,000) due to an error in the timing of tax collection. Once this error was corrected, the following year’s budget produced a surplus of £4,165,000. ₄₄ With this surplus in 1843–1844, the government was able to pay off its “deficiency” bills, and the exchequer’s balances were corrected so that the government did not need to ask the Bank of England for advances in anticipation of taxes (as had been recent practice). Part of the National Debt was converted in 1844 as well, reducing the government’s interest payments. ₄₅ The Treasury therefore had no reason to oppose development of the Bank’s policy tools, the strengthening of the pound, or the tighter credit this would entail.

 

Evolution of the Bank’s Powers

The Bank Act of 1844, which gave the Bank of England control over the supply of sterling, enabled the Bank to strengthen confidence in the pound. The Act established firm limits on the number of notes that the Bank could place in circulation. Expansion beyond those limits was only allowed by permission from the Chancellor of the Exchequer. The Bank got one of its first tests in 1847, when gold exports rose to purchase foodstuffs abroad after a bad harvest. Notes were in short supply as the gold stock fell. Speculation in the railroads and hoarding of notes also began, both putting further pressure on the amount in circulation. When the Bank’s gold reserves fell to dangerously low levels, it went to the government to get permission to issue more notes. The mere allowance to issue more notes, once granted by the government, disspelled the speculative pressures. ₄₆ Thus it did not take the Bank long to discover that it could play a stabilizing role when liquidity needed to be expanded, though this seems to have been largely by accident.

Although this legislation made the Bank responsible for the creation of currency and credit in the country, and thus defines the Bank of England as a central bank, the Bank did not come to shoulder other responsibilities of a modern central bank by design. Instead, as the 1847 episode reveals, it developed additional responsibilities through practice. Through all these legal changes in the Bank’s position, the institution remained a private competitive bank, aimed at turning a profit. ₄₇ The term “central bank” did not even appear in the English language until 1830, and then it was only used to refer to a hypothetical depository of wealth within the context of an ideal socialist community. ₄₈ The critical obligation that we would consider a central bank to observe today, which was missing from the Parliamentary legislation empowering the Bank of England, was the duty to act as the lender of last resort. The Bank had provided some of these functions in its willingness to stabilize the London markets earlier. Yet the empowering legislation was aimed specifically at making the pound stronger, and thus gave the Bank powers to restrict circulation of notes—the legislation in fact severely limited the Bank’s abilities to provide liquidity to other banks during a crisis, though the 1847 experience showed how such restrictions could be lifted when necessary. ₄₉

In an article in The Economist, September 22, 1866, Walter Bagehot suggested that the Bank of England’s primary duty (as shown via the Bank’s own activities that year) was to hold the “sole banking reserve of the country.” ₅₀ Bagehot noted that the division of the Bank into two separate departments might give it conflicting goals. According to his analysis, the Issue Department was ruled by a one-to-one ratio of notes in circulation to gold in reserve, thus limiting any expansion in the currency that would undercut confidence. Yet the Banking Department acted as any private banker would, making loans, taking deposits, and discounting bills. When the goals did come into conflict he clearly believed that the Bank’s true duties lay in the public sphere with the Issue Department’s mandate. ₅₁

In terms of the topics with which we are concerned, the division of duties can be viewed as a split between internal and external objectives. The legislation of the Bank Acts established the importance of focusing on the supply of gold which the Bank held as the guideline for action. This placed priority on the maintenance of the pound’s value, and not only gave the Bank independence from political pressures to ensure that end, but also limited the Bank of England’s own ability to expand the money supply—which hamstrung the Bank’s ability to act as lender-of-last-resort. Without the ability to expand the money supply when necessary, the Bank could not deal with domestic panics as effectively as it could have if its mandate had been centered on domestic concerns. Indeed, the rules reduced the ability to expand liquidity so much that they sacrificed the lender-of-last-resort role in order to create strong confidence in the pound—which is why the Bank had to ask for the rules to be lifted whenever a domestic panic struck.

In order to offset this weakness in the English banking system, private banks had set up their own clearinghouse operation in 1848—a clear indication that the Bank of England was not serving as a lender of last resort. In 1854, joint-stock banks were allowed to join this facility. The Bank of England provided assistance to this effort, in that clearing itself was done via cheques drawn on the bankers’ accounts at the Bank of England. In 1858, clearing of the country banks’ accounts began. Finally, in May 1864 the Bank of England itself joined the clearinghouse association. ₅₂ The development of this aspect of Bank responsibilities was thus the result of practice, not design. If anything, the Bank’s design retarded its development as a lender of last resort by focusing all its policy instruments on the one international goal—strengthening sterling.

 

The Bank of England, Hegemonic Leadership and the Gold Standard

Much of the evidence supporting arguments about British leadership of the open international economic subsystem created in the nineteenth century rest on interpretations of the British role in the Gold Standard. One historian has referred to the City of London’s “Holy Trinity” in the late 1800s: the gold standard, free trade, and the Bank Charter Act. ₅₃ The different aspects of British financial leadership fall into four broad categories. First, Britain was the source of long-term investment internationally; second, in the decades after the 1840s, British investments supported the expansion of trade, especially by financing British exports; third, although Britain did not control the vast supply of the ultimate reserve in the system (gold) directly, it did exercise control over the largest market for gold within Europe thereby influencing other markets; fourth, sterling itself came to be the primary money used internationally. ₅₄

Sterling was ideally placed to serve as the key currency. It was convertible into gold, but more importantly it was not readily susceptible to the confidence–liquidity fluctuations of other currencies. This was because there were plenty of pounds in circulation internationally—put there not so much through the balance of trade as through heavy international lending (both long- and short-term). Britain’s significant role in international investment also gave the Bank of England the ability to exercise some control over international liquidity (if only crudely—it is also important to emphasize that the Bank managed the pound’s value by pursuing policy targets already described; it certainly did not establish targets for international liquidity per se). In the end, the Bank also modified gold standard practices to fit its own needs. ₅₅

In the classical theoretical model, the gold standard provides international order by disciplining the national economies located within the system. It is often argued that this was the case for most countries but not for Britain. The Bank of England was able to run an independent policy. Foreign banks, on the other hand, were sensitive to changes in liquidity in London (because their own position was determined by their supplies of bills of exchange drawn on London, balances with London banks, and the availability of converting other assets into sterling, all of which rested on the tradition of clearing international accounts through London). ₅₆

While it would be difficult to argue that Britain forced other major economic actors to accept the gold standard, these other actors were affected by British practices. They often sought to emulate Britain’s example, and participation in the gold standard was a prerequisite to full access to British capital markets and trade credit. ₅₇ The standard developed around gold as the ultimate international money, as the common form of reserve, and with gold flows intended to be the link between national money supplies (an obvious link between international payments and international trade adjustments). The theoretical application of the gold standard was clean, and fit well with the dominant liberal notions about how markets worked. Central banks and governments were intended to have no discretion in monetary policy, as trade flows determined payments, payments determined gold flows, gold flows determined money supplies, money supplies determined price levels, which in turn affected competitiveness and ultimately, brought trade flows back toward balance.

In fact, British policies did not fit the classical theoretical model of the gold standard, in the sense that the Bank of England did not passively watch as gold flowed in and out of the country. Britain was able to run a continual surplus on current account (i.e. earn money off of short-term financing of trade and the provisions of services, thus drawing in gold or pounds) without ever adjusting its trade practices because these inflows were matched by longer term outflows in the form of portfolio investments. (So while theoretically the gold standard acted as a discipline, forcing countries with a surplus or a deficit in their current account to move closer to a true balance of payments, Britain’s large capital flows could be managed to offset and thus avoid the more painful side-effects of adjustment, such as unemployment). Because London remained the premier commodity and capital market internationally (foreign banks held their liquid deposits there), the Bank of England had the ability to manipulate their holdings via Bank rate. Changes in Bank rate could either pull more capital into Britain or drive investments abroad, as was needed. ₅₈

Such practices developed over time. The Greene-Gibbs policy (so-called because it was developed by Benjamin Buck Greene, Governor of the Bank during 1873–1875, and Henry Hucks Gibbs, deputy governor under Greene and then his successor during 1876–1877) adjusted Bank rate to offset the impact of domestic lending. As lending increased, gold was drawn in from outside to replenish the Bank’s reserves. ₅₉ Bank rate had an impact on other actors not simply by directly affecting their own current economic assessments, but also by altering other actors’ perception of the near future. Changes in Bank rate were seen as indications of the Bank’s own evaluation of the economy, and thus triggered actions by others. ₆₀

The Bank of England used other basic policy instruments for managing Britain’s position on the gold standard. ₆₁ The first was the purchasing and selling of interest-earning assets. The Bank had extensive holdings of such assets, and used these to push the London market in the same direction as Bank rate. The use of these assets for market intervention was known as “making Bank rate effective.” The second technique employed by the Bank of England was manipulation of the gold devices. Although the gold standard appears to be a purely fixed exchange rate system because each participant fixes its currency in terms of a similar asset and therefore fixes currencies’ values relative to each other, the law in Britain was that the Bank of England had to pay a fixed price in terms of gold physically delivered to it—not other currencies. Therefore the cost of actually bringing gold from another country (the expense of transport, insurance, etc.) created a margin of fluctuation in the value of currencies, known as the “gold points.” Changes in the gold points determined whether it was profitable to import or export gold. Since the conditions on which the Bank of England enforced the law concerning the purchasing and selling of gold at a specific price was open to some interpretation, there was the possibility of the Bank reading the letter of the law when it chose—in effect selecting to make transactions in gold easier or more difficult, depending upon its wishes. ₆₂ Since the gold devices could be manipulated in ways that cushioned any impact on domestic industry, they became more and more important from the 1880s onward. ₆₃ The Bank was able to bend the principles of the gold standard to support its policy goals, as did other central banks of the period.

It is also clear from evidence given before committees in Parliament and articles written in The Economist and The Banker that British contemporaries knew international adjustment took place through changes in interest rates, rather than in commodity prices. ₆₄ In another instance, when the Governor of the Bank of England was giving advice to the Americans by testifying before the U.S. National Monetary Commission early in the twentieth century, he described the Bank of England’s action under the gold standard this way: “The Bank rate is raised with the object either of preventing gold from leaving the country, or of attracting gold to the country, and lowered when it is completely out of touch with the market rate and circumstances do not render it necessary to induce import of gold.” This illustrates that the authorities at the Bank of England were well aware of the fact that they were using Bank rate to preserve the Bank’s gold supply, and manipulating the international flow of gold in order to evade the adjustment mechanisms the gold standard called for. ₆₅ This manipulation was done over the short-term, so that current account deficits were dealt with via capital flows. Britain’s version of the gold standard operated not through the impact of shifts in the money supply working through the economy, but rather on the threat of doing so.

While historical research has increasingly made us aware of differences between the theoretical design of the gold standard and its actual operation, there is still debate over whether this evidence supports or disconfirms leadership by Britain. Barry Eichengreen, for one, has noted that Britain’s foreign holdings were much greater than liabilities, and suggests that this would have weakened the Bank of England’s leverage over other countries’ money supplies. ₆₆ This was especially true because British foreign investment tended to be sunk into long-term assets, and thus was not flexible enough for the sort of short-run fine-tuning expected by many explanations that run along the lines just discussed. Instead, Eichengreen stresses the importance of other actors, international negotiation and collaboration during the gold standard’s operations. ₆₇ A similar argument, but one grounded on domestically generated preferences, has been made by J. Lawrence Broz. ₆₈

In Eichengreen’s analysis, the Bank could still provide leadership to central banks because of its unique characteristics—most notably control over the key currency of the gold standard system. The Bank of England was able to affect the creation of credit in the biggest market for international trade finance, and thus provide liquidity to the international system. Since sterling was the main reserve asset, and the most widely accepted vehicle currency, the Bank’s policy movements were followed by other banks. Evidence that the Bank’s changes in the discount rate consistently led other central bank rate changes support Eichengreen’s position. ₆₉ (Yet he downplays the importance of Britain’s position as the main creditor, arguing instead that this was merely coincidental.) ₇₀

In fairness to Eichengreen’s argument, he claimed these pieces of evidence challenged the “simple versions” of hegemonic stability theory. In terms of liberal leadership, it would not be surprising to find cooperation between the leading country and other members of the open economic subsystem. When all realize some benefits from the use of a good such as an international medium of exchange, cooperation to maintain the status quo should not be surprising. Thus his evidence might challenge a view that Britain imposed the gold standard and the role of the pound on others, but it does not disprove that key decisions concerning international monetary relations of the period were made in London, and then supported by decisions made in Paris and elsewhere. ₇₁

Guilio Gallarotti also rejects the application of hegemonic stability theory in this period. He lists three reasons: the laissez-faire attitudes, Britain’s unwillingness to make explicit foreign policy commitments, and the independence of the Bank of England. In other words, he rejects the notion that monetary policy was directed toward the goal of maximizing British power. He adds that British leadership in monetary conferences was missing, and that the Bank of England managed affairs in its own interest, not the wider system’s. ₇₂ While damaging to a Structural Realist argument, these points do not directly address the arguments I have made here. Moreover, Gallarotti concedes that the pound was the most widely used currency, and that its use was related to Britain’s position in trade and finance; London held more drawing power than any other financial center, and thereby could manipulate the gold standard rules better than any other.

Gallarotti also examines evidence for whether or not the Bank of England acted hegemonically during the period of the gold standard, which is closer to the argument I make. He rejects the idea, however, because the Bank of England did not acknowledge public responsibilities (certainly not any international public responsibilities), did not act as a lender of last resort, and served poorly as a manager of crises. Clearly, the Bank could not serve these latter functions, though I link this to the very reason the pound was attractive as an international medium of exchange—which I argue did not occur by accident. Gallarotti concludes with several points that are quite consistent with my arguments: stability of the gold standard was due to collective interests, and hegemonic socialization on the part of Britain. He credits these results to Liberal ideology, which causes him to view the Bank’s role of leadership as “unintended” and non-state. The stability of the gold standard was accidental and largely divorced from institutional arrangements in his account. ₇₃

Whether or not London exercised strong leadership, it is surprising that the gold standard worked as well as it did, given its technical weaknesses. These weaknesses were inherent to a system where the major currencies were tied to a limited commodity. While this gave individuals confidence in the value of currencies, it should also have created a liquidity problem over time, since the determination of international liquidity was capped by the amount of gold available—a weakness that in turn can be understood as the result of the Bank of England’s particular attributes. The supply of gold did not prove to be a barrier because the demand for international money was kept low by the efficiency of the adjustment system. ₇₄ Improvements in the acceptance of international bills of exchange occurred after the 1844 Act. Such bills were a major form of credit drawn up between merchants, which banks might purchase for cash. By the 1850s, London firms began accepting bills drawn by a foreign firm on a business in a third country, opening up even more bills of exchange for discount on the London market. ₇₅ This form of credit expansion beyond the strict support of gold allowed international liquidity to increase to the levels needed to finance the burgeoning volume of trade, but also proved to be a source of the pound’s overhang.

Fortuitous circumstances may have helped the gold standard maintain its smooth operations as well. Additional sources of gold were found in the 1840s and then later in the century, so that the world stock of gold increased (though not as rapidly as the world’s economy grew). Also, trade adjustment worked fairly well, though this is perhaps due to the fact that the major European economies were moving in parallel. Some interpret this synchronous movement as evidence that the gold standard bound economies together, even though evidence of any process linking price movements or production levels across economies is rather ambiguous. If one major economy had been on a different trajectory, it undoubtedly would have put pressures on the system of fixed exchange rates, and perhaps undermined the high degree of central bank collaboration observed.

 

The Bank of England, Britain’s Relative Economic Decline, and the Development of an Overhang

By the late 1800s Britain’s currency overhang had begun. Despite the apparently rigid rules of the gold standard, several large countries were holding extensive amounts of currencies as reserves alongside gold and/or silver. While evidence shows that sterling’s position would be challenged by other currencies soon enough, sterling remained the most important single foreign currency in other countries’ reserves prior to World War I. By 1913, sterling holdings clearly outstripped the combined gold reserves of the Bank of England and all other private banks in Britain (by a ratio of at least 2.5 to 1). ₇₆ While other currencies may also have been in oversupply versus gold reserves, Britain’s overhang was far and away the largest.

The intensity of the Bank’s interest in policy decisions regarding the overhang was growing, as the size of the gap between commitments and resources grew. Yet, as long as there were no real alternative financial centers to London, the Bank of England could afford to “do nothing.” At the time, the greatest danger for Britain was that other countries might rather hold gold than sterling. In that case, if the Bank refused to extend credit it would be undermining the system of payments based on sterling. ₇₇ For Britain (or more correctly, the Bank) to maintain its ability to manipulate international credit markets and the gold standard effectively, the desirability of sterling had to be kept up. The Bank therefore continued its previous practices. As the number of pounds in circulation expanded, it became increasingly necessary to support sterling’s value in active policy. The Treasury accepted such actions because for the most part fiscal policy and monetary policy did not clash in the years before World War I. ₇₈ Since these actions overvalued sterling, it has been suggested that they helped cause Britain’s slow growth and declining economic competitiveness after 1900. ₇₉

In the last decades of the nineteenth century Britain’s relative economic position slipped. At the heart of this decline was Britain’s lagging industrial development—other countries were developing and employing new technologies at a faster rate than Britain. The country lagged behind in the adoption of new technologies even though Britain was the foremost source of investment funds—a contrast which has centered explanations for industrial decline on investment policies. Many have argued that investment decisions were driven by biases in the financial institutions. There is evidence suggesting that the old division of London from the country banks separated industrial concerns from the country’s financial core. This was more strongly felt after the economic downturns of the 1870s, when country banks were seriously hurt. ₈₀ This reduced the most accessible source of capital for British industry, at a time when serious foreign competition was rising. This also underscores how relative economic decline caused the domestic consensus behind hegemonic leadership to erode. In the mid-nineteenth century, Britain’s overseas investment generated demand for Britain’s own exports—by the end of the century, however, investments abroad were stimulating industrial competition.

The rise of foreign economic competition is associated with the shift in economic and political power that occurred in the late 1800s and early 1900s; the shift in power is then viewed by many as an underlying cause of World War I. Although this argument is beyond the scope of the analysis here, it is important to note that the process of Britain’s relative economic decline and the emergence of rivals accelerated tremendously once the war began. In monetary affairs, the most significant change was the emergence of New York as a financial center rivaling London in terms of competitiveness and resources. This change had a significant impact on the problems and opportunities Britain and the Bank of England faced in the post-World War I era.

Even before the War had broken out, when international tensions had risen in July 1914, panic swept the continental markets, sending a flood of orders to the London market to sell stock. Prices dropped drastically, which forced the Stock Exchange to close. Banks, too, were under pressure to meet their depositors’ demands for liquidity, but they had nowhere to dispose of their own securities. The banks wound up calling in loans, and paying out in Bank notes; those who received notes then took these to the Bank of England to convert them to gold. As the Bank’s gold reserves fell, it was forced to raise its discount rate from 4 percent to 8 percent. After the fighting started, the Bank had to come to the aid of accepting houses since bills of exchange were increasingly being questioned. ₈₁

Although the Bank weathered the initial crises associated with the outbreak of the war, it had to adapt to the new situation, taking on both internal and external duties. Internally, the Bank had to assist in the alteration of domestic production and distribution. The Bank also helped expand the amount of credit in the financial system to facilitate government policies. The government raised funds through external loans to pay for purchases abroad; funds were easily found because the government was able to buy, borrow or requisition assets owned by Britons but held abroad (under the Defence of the Realm Regulations). ₈₂ The Bank performed these wartime duties with great skill and without encountering significant difficulties.

 

Responding to the Overhang: The Post-War Return to Gold

The official decision to unpeg sterling from the dollar and then from gold was taken in 1919, by Lloyd George and his ministers rather than by the Bank of England’s directors. This first response to overstretch, then, should be seen as a lowering of commitments. Recognizing that the overhang would force a vigorous defense of Britain’s gold reserve, Lloyd George’s government wanted to avoid a policy that might drive up unemployment; it hoped that instead it could break the links to the U.S. dollar and gold, thereby stimulating trade. The two key institutions directly linked to monetary policy, the Treasury and the Bank, now had reasons to feel intensely about the decision. The size of the debts accumulated during the war made the Treasury sensitive to policy changes that might affect the its specific bureaucratic tasks, as well as its broader responsibilities. The Treasury feared that taxes would have to be kept at punishingly high rates if the government were to honor its debts. If the government did not repay its debts promptly, business would lack the capital necessary for investment. Additional borrowing was out of the question, since that would push up interest rates even further, and thus make the existing burdensome debt even harder to carry. ₈₃ Interest payments on government debt had been only a minor concern before the war, but had then risen to about 30 percent of government expenditures.

The Bank of England, on the other hand, knew the extent of the overhang and also knew there was a rival currency available. It saw its main goal as the restoration of the pre-war financial system, with London as the key financial center. Thus the Bank wanted a quick reduction of government debt, a new funding of other short-term debt as soon as possible, and a policy of tight (or “dear”) money. ₈₄ Despite concerns about the government’s debt, the Treasury would accept the Bank’s preference for dear money, because the Bank was able to portray a wide backing for the increase of commitments and resources—as one Treasury official put it in 1920, “the community as a whole stands to gain enormously from the improved standing of British credit.” ₈₅

Another reason why the Treasury was willing to accept the Bank’s preferences on policy in the first few years after the war was because the annual budgets were balanced. The Treasury could be consoled with its projections of the near future. ₈₆ The only real disagreement to emerge between the Bank of England and the Treasury at this time was surprisingly not over goals, but rather over the means employed to bolster confidence in the pound. The Bank wanted to reassert its control over the market, pushing interests rates up. The Treasury was concerned that this would make it difficult to sell new Treasury bills (and other forms of short-term government debt). Because the Bank also had a high degree of institutional independence (it was still a private institution!), commitments were set too high—the result was afterglow. This increase in commitments is best seen in the Cunliffe Commission’s report. Since both institutions feared inflation, their agreement on the need to raise confidence in sterling provided the basis of their advice, as voiced in the Cunliffe Commission. ₈₇

At the end of World War I, Cunliffe stepped down as Governor of the Bank of England in order to chair the Committee on Currency and Foreign Exchange (more commonly referred to as the Cunliffe Commission). The report issued by this committee assumed that the goal of British monetary authorities was as rapid a return to the gold standard as possible. The Committee on Financial Facilities, which reported at this same time, but consisted of representatives from industry and commerce, made the same assumptions. Both committees agreed that the government should stop borrowing money as soon as possible; that Bank rate should be used to stop any drain of gold reserves, as well as snuff out inflation and speculation domestically; that Bank issues beyond the legal limit would be permissible in the short run (as long as the Bank stayed within the parameters of the Act of 1844); and that national gold reserves should be concentrated in the hands of the Bank. ₈₈

The monetary authorities did not initially realize that the financing of the war effort had changed the mix of monetary devices in the London market, and therefore affected the relative utility of different policy instruments. Prior to World War I Treasury bills accounted for at best a meager 1 percent of the market for bills in London, but after the war they accounted for around half that market. Actions used in previous decades to maintain the foreign exchanges (such as relying so heavily on Bank rate) would no longer have the same impact, since Treasury bills were not very good at drawing in foreign deposits. ₈₉ If the Bank were to rely on Bank rate alone to draw in foreign money, or block the expansion of trade credit, it would now have to pull much harder, especially given that a rival source of trade credit and destination for deposits existed in New York. These new factors were not included in the Cunliffe Committee’s analysis.

This mix of goals—the balancing of tight credit with a desire for economic growth—reflected the immediate problems of readjusting to a peacetime economy as well as those which sprang from wartime expenditure and the overhang. The British economy had experienced a short postwar boom when the government (fearful of unemployment) had loosened the wartime controls too quickly. This was followed by a slump in 1920–1922, but the economy had recovered substantially by 1924. The biggest areas of continual problems lay with the export-oriented sectors. Exports in 1924 still equaled a little less than three-fourths those of 1913. ₉₀ The government was therefore keen to develop some policies that would support economic recovery in these sectors.

Meanwhile, the Bank and the Treasury wished to prevent inflation since it was feared that a devaluation of sterling would undermine the real value of Britain’s income from overseas investments, which were often denominated in sterling and set at fixed amounts. Without detailed examination, it was assumed that inflation hurt the internationally oriented service sectors, too. While it may have driven foreigners to switch assets into dollars, inflation might not have affected the service sectors as negatively as supposed since these sectors earned commissions. Commissions are usually charged as percentages of transactions, and therefore would have been pulled along by any general price rise. ₉₁ As long as the Bank and the Treasury continued to define inflation as the most pressing threat, policy would be aimed at bolstering sterling’s international value despite the costs—afterglow. ₉₂

This afterglow continued as long as the Treasury and the Bank remained in general agreement. For instance, even in the period known as the “policy deadlock” (1922–1923), when high unemployment created pressures on the elected officials to restrain further deflationary efforts, monetary policy stayed targeted on bolstering sterling. Monetary authorities were unwilling to allow a reflation to reduce unemployment, since that might spark inflation and undercut the pound’s value. A weakening of sterling was considered a dire threat, since a fall in confidence in the currency would encourage other countries to release their holdings of pounds and shift into stronger currencies—a trickle that could turn into a flood. Systemic considerations, especially the existence of a rival currency (the U.S. dollar was especially attractive), determined the intensity of the Bank’s interest in sterling’s strength. Sectoral interests did not yet play a direct role in these decisions, because the Treasury was not yet interested in mounting opposition to the Bank’s policies. ₉₃ It is possible to see, however, how the Bank and the Treasury were already basing their preferences on the interests of domestic constituencies. Most crudely, the Bank was pursuing policies necessary for the health of the City, whereas the Treasury was more sensitive to levels of employment.

Of course, it is hard to measure how other factors (such as ideology or simple institutional inertia) entered into these decisions. The goal of reattaining the gold standard (and doing so at the old rate of $4.86 = £1) was persuasive because of the belief, based on considerable experience, that the standard and Britain’s adjustment mechanisms had worked smoothly and swiftly. Sterling’s value had effectively been fixed for almost a century (since 1821), and the other major currencies had not changed in value much in the thirty years prior to 1914. These experiences and beliefs restricted the range of options explored, even when officials accepted that the transition to such a high exchange rate would be difficult. ₉₄ It is also apparent that decisionmakers without rigid or sophisticated ideas on financial policy, such as Winston Churchill (whose only belief about financial policy when he took on the duty of Chancellor of the Exchequer was that it should support free trade), never seriously questioned the wisdom of returning to the old parity. ₉₅

These beliefs could very well have muted any sectoral opposition to a return to gold at a high valuation of sterling as the best response to the gap between currency in circulation and reserves. For instance, representatives of the Federation of British Industry speaking before the Chamberlain-Bradbury Committee in 1924 argued in favor of a return to the gold standard “in the interests both of the financial position of this country and also for its advantages and benefits to the industry and business of this country.” They also stated, however, that “a British initiative in restoring the gold standard at an early date...would be premature and inadvisable,” precisely because it would hurt exports and increase unemployment. In any case, the primary focus among decisionmakers should have been the details of the timing of any revaluation (at least as much as choice of exchange rate levels or management criteria, which were the object of lengthy debates in 1924–1925). ₉₆

No strains developed between the Treasury and the Bank of England on these issues, because, I would argue, the government’s annual budgets were still in surplus. Both institutions agreed on a return to gold—leaders in both believed reestablishing the gold standard was the best route to improving trade and employment, and failed to pay enough attention to the adjustments involved. Rather than understanding the gold standard and the parity as means to an end, the return to gold became an end in itself. Policymakers seemed to have shared a common goal—the defense of London as the premier international financial center, which they understood also meant maintaining sterling in its international role. ₉₇ Thus sectoral influences do not seem to have had an impact on the institutions’ policy positions at this point in time, in the sense that lobbying was not explicit or direct. Instead, the original disagreement between the two monetary authorities arose over a bureaucratic issue: the methods of achieving the agreed upon goals. ₉₈ Where the Bank wished to employ higher interest rates to strengthen the pound, the Treasury was concerned with the greater payments on government debt this would engender; debt service charges had been only 11 percent of government expenditures in 1913, but then rose to 24 percent in 1920 and were over 40 percent by 1930.

If anything, the evidence suggests that interests voiced by a common constituency (the City) may have dominated both institutions, but bureaucratic politics led to a division. The public airing of this division in institutional views opened the way for others to enter the debate over monetary policy, and this in turn created the opportunity for the institutions to mobilize groups for political action in ways that were never possible in the pre-World War I era. ₉₉ As the Treasury gathered greater support, it was able to dominate decisions on policy instruments, but the Bank defended the commitment to gold. The two began running competing policies—what I labeled a worsening of overstretch. Unsurprisingly, the Treasury also moved to reduce the independence of the Bank. This struggle would continue from the mid-1920s right on through the 1930s.

Given the consistency of monetary policy goals over time and the continuation of policy instruments from the earlier era, it should come as no surprise that the Bank considered its primary duty to be the maintenance of the international exchange value of sterling. ₁₀₀ The overhang wasn’t getting smaller, either; the Macmillan Committee would estimate that in December 1928, Britain’s net short-term sterling obligations were four times gold reserves. ₁₀₁ Though the Bank and the Treasury were not acting totally independent of each other, coordination between the two was largely missing in the early post-World War I years. The Bank did not tell the Treasury of all its resources or actions in the 1920s. The Treasury had to move through Parliament to coerce the Bank into greater cooperation. The Currency and Bank Notes Act of 1928 gave the Treasury access to more information on the foreign exchange reserves held in the Bank’s Issue Department. (Parliament did not give the Treasury equal insight into the Banking Department’s substantial foreign currency holdings, which the Bank was already employing in exchange rate interventions.) ₁₀₂

The Bank was developing alternative avenues for action, which meant it could avoid reliance on the government. When the question of going back on the gold standard arose in the early 1920s, Bank Governor Montagu Norman worked in close coordination with the New York Federal Reserve Bank, often with little or no political guidance from elected officials. Norman achieved some coordination of British and American monetary policies. While the Fed relaxed interest rates in New York, the Bank of England followed stronger money policies in London thereby adjusting the exchange relations between the two markets. Foreign borrowing focused on New York, making it easier for Britain to keep sterling’s value high and hence resume participation on the gold standard. ₁₀₃

Just as in the years before World War I, the high value of sterling during the 1920s is associated with Britain’s broader economic woes. Some authors point out that the high pound did not necessarily cause so many problems, but merely foreclosed certain options thereby making fundamental problems more difficult to resolve. ₁₀₄ Only after about 1928 was there wider recognition that the greatest difficulty came from the combination of deflation at home plus the overvaluation of the pound. Decisionmakers apparently did not realize that growth would be prevented by international constraints if the domestic economy was not insulated in some way. ₁₀₅

The Treasury’s vulnerability to broader societal pressures began to play an important role in the dynamics between the two institutions once Britain returned to the gold standard in 1925, though these concerns were not necessarily linked to the lobbying activities of any specific sectors. By 1928, stronger deflationary policies on the part of the Bank were blocked by the Treasury, which feared that rising unemployment would cross the threshold of political and fiscal acceptability. One of the new major expenditures adding to the Treasury’s worries was the unemployment insurance fund. The Treasury averted more extreme use of Bank rate, taking that out of the Bank’s hands as a short-term policy instrument. The Bank responded by turning to international cooperation more and more. ₁₀₆

This highlights an interesting reaction to worsening afterglow: bureaucratic politics increases, as the Treasury undercuts the resources devoted to defending commitments but the institution associated with leadership (in this case the central bank) continues to support the international commitments. In order to keep its own policy running, the central bank must make its own policy instruments as effective as possible. It therefore turns to greater international cooperation with other central banks; bureaucratic splits in the declining hegemon therefore get internationalized.

Bureaucratic splits were not the only kind to open up after 1925. Once Britain returned to the gold standard at a high valuation of sterling, some sectors realized they were being hurt by the Bank’s policies. As the Westminister Bank Review conceded in 1929, in monetary policy, the interests of finance and industry were no longer similar. ₁₀₇ Yet the evidence on whether the Bank was really willing to sacrifice British industry to stay on the gold standard at this valuation is mixed—in discussions with French central bankers in May 1927, Montagu Norman threatened to take Britain off the gold standard again if staying on meant the destruction of the competitiveness of British industry. When defending the exchange rate in the later months of 1928, the Bank (under pressure from the Treasury, of course) chose not to use Bank rate because of the further harm it might cause British industry. Instead Norman used moral suasion and direct intervention in the exchange markets (especially employing foreign currencies like the U.S. dollar) to maintain sterling’s international standing. ₁₀₈

Yet in public Norman still argued that industry and finance shared interests, as can be seen in his testimony before the Macmillan Committee. When asked by Macmillan himself in the Committee’s hearings in March 1930 whether “the advantages of maintaining the international position outweigh in the public interest the internal disadvantages which may accrue from the use of means at your disposal,” Norman replied that

... the disadvantages of the internal position are relatively small compared with the advantages to the external position...we are still to a large extent international bankers. We have great international trade and commerce out of which I believe considerable profit accrues to the country; we do maintain huge international markets...and the confidence and credit which go with them, are in the long run greatly to the interest of finance and commerce. ₁₀₉

The Macmillan Committee’s conclusions reflected this answer, for the Committee’s report rejected the use of devaluation on the grounds that such an act would undermine faith in sterling, and Britain’s “international trade, commerce and finance are based on confidence.” The Committee reached this conclusion even though it heard from a wider array of views than the Cunliffe Commission, and was certainly much more interested in finding a solution to Britain’s monetary woes that would satisfy both industry and finance. As it stated in its report, “It is not our case that industry should be sacrificed to finance.” ₁₁₀ In short, the period from 1925 to 1930 must be seen as a period when the afterglow was worsening, commitments were set too high, and it was impossible to find the resources to meet them. Despite the Committee’s recommendations to continue with the overvalued pound, Britain would soon devalue the pound.

 

Off Gold Again—The Devaluation of 1931

If Britain’s return to the gold standard in 1925, with all its economic and political repercussions, represents afterglow, and then that afterglow worsened in the second half of the 1920s, what drove the decision to go off gold in 1931? Why did Britain leave the gold standard, and begin to attempt a partial adjustment out of the leadership role (i.e. lowering commitments to a more sustainable level)? One part of the answer stresses that a balance of concerns was finally struck which favored domestic concerns rather than international objectives. Lowering the exchange rate would reduce confidence (possibly initiating a withdrawal of foreign holdings from London), raise the cost of living (by causing imports to rise in price), lower the value of investments abroad, and lessen the gains from the balance of payments because export revenues would fall in value, but would also have provided looser credit for industrial investment and retooling, which might stimulate employment. Once the Great Depression began, the most pressing economic objective should have been to raise domestic prices (especially because of the size of the national debt, and the rigidity of the wage structure). ₁₁₁

The events can be more clearly understood by adding in the institutional interests at stake—British monetary policy in the 1930s was driven by the ways in which systemic shifts and changing domestic pressures manifested in and intensified bureaucratic politics. The Treasury’s position in favor of devaluation can best be understood by appreciating its obligations to handle government debts, alongside concerns about the domestic economy. Specific sectoral pressures on the Treasury are hard to illustrate, let alone use to prove they shaped policy. The nature of the debt was an especially important consideration for the Treasury’s evaluation of exchange rate policy. Naturally, the Treasury was concerned with government debts owed to British citizens, but large amounts were also owed to the Americans. International debt (or debt service) payments to Britain were made in pounds, whereas the debts Britain owed to U.S. bankers had to be repaid in dollars. ₁₁₂ This meant a devaluation, which, while it might help exports and therefore employment, would not actually fit the Treasury’s narrower bureaucratic interests; it would make the government’s own international debts more difficult to service. Also, the drop in economic activity forced high payments from the unemployment insurance fund in 1930–1931, which pushed the government’s annual budget into deficit for the first time in a decade (excluding the year of the general strike, 1926). ₁₁₃ The Treasury therefore sought a way to stimulate the domestic economy without devaluing the pound—it needed new policy instruments to separate out what were essentially conflicting goals under the gold standard. It also wanted some ways of reducing the Bank’s institutional independence, so that the Bank could not pursue a different policy.

Of course, when devaluation came, it was due much less to the victory of the Treasury over the Bank on the appropriate level of commitments than it was to the simple fact that commitments were unsustainable. ₁₁₄ Those commitments were questioned by a run on liquidity on the continent, which encouraged those holding pounds to redeem them for gold. This was an acute problem because the Bank’s resources were slim, and the French central bank was known to desire an expansion of its gold reserves. While it is possible that the Bank of England could have offset some of the pressures on its reserves in the late summer of 1931 by raising Bank rate, it apparently chose not to because of the sorry state in which British industry found itself at this time. ₁₁₅ Thus the Bank too was worried about the fate of industry, although its threshold for pain in those sectors was decidedly higher than the Treasury’s.

The move off of gold gave policymakers several surprises. Some of the fears that had inhibited policy earlier proved to be unfounded. When the pound was taken off gold and devalued, it may in fact have helped Britain’s service account, by making it easier for foreigners to pay back debts in sterling that they otherwise might have defaulted on. ₁₁₆ (Note, however, that this is in the context of the Great Depression, not in the conditions of the early 1920s.) Similarly, the freeing up of international constraints made it possible to push interest rates down domestically and thereby relieve some of the burden of debt-service in the government budget. Pushing market interest rates down eliminated the attractiveness of rival investments, making the conversion of war debts at lower interest rates possible. In 1932, all but 8 percent of some £2 billion of securities (on which the government was paying 5 percent interest) were converted into securities at 3.5 percent interest. Debt service as a percentage of national income fell from 8.3 percent in 1932 to 4.6 percent in 1935. ₁₁₇

The depreciation of sterling undertaken in September 1931, coupled with the reestablishment of the tariff, finally freed monetary authorities to institute counter-cyclical policies to assist the economy in recovery from the Great Depression. ₁₁₈ This is also associated with the ascendance of the Treasury as a monetary authority relative to the Bank of England, because the Treasury was now free to pursue a policy mix that satisfied its own desires—lower interest rates at home, but some support for the international value of sterling. The greater role of the Treasury is seen in the creation of the Exchange Equalization Account (EEA). ₁₁₉ The creation of the EEA gave the Treasury its own instrument to control the exchanges, reducing the independence of the Bank, and showing a shift in the balance of policymaking powers toward the Treasury.

 

The Exchange Equalization Account and the Treasury’s Ascendance in the Bureaucratic Struggle

The EEA was initially developed to give the monetary authorities greater resources to use when intervening in exchange markets. The account was a more powerful instrument than previous policy tools in a number of ways. The assets in the account (foreign currency) were better suited to direct intervention in the market; the amount set aside for such actions was larger than ever before. Because the EEA was under the direction of the Treasury, it did not have to publish statistics concerning its size at regular intervals, thus hiding both its strength and the direction of its actions. Previously the Bank had begun to use interventions to adjust the exchange rate rather than rely on Bank rate alone. The EEA was a better tool for dealing with speculators, though, since speculators could learn little as to the responsiveness of the EEA or to the EEA’s weakness, whereas the weekly publication of the Bank’s statistics gave speculators insight into the Bank’s activities. ₁₂₀

When the pound was taken off the gold standard, and then fell in value, the Bank had decided that it had not fallen enough. It therefore intervened by selling pounds to push the value below $4. It then began cooperating with the Treasury, since it not only wanted to accumulate foreign exchange for future interventions, but also desired a place to hide the money from its published accounts. The most convenient place was with the Treasury’s Exchange Account (a forerunner to the EEA, which had housed the Treasury’s accumulation of dollars used for repaying debts to the Americans). ₁₂₁ The Bank was also hampered by its existing rules, for any losses accumulated via intervention in foreign currencies would be chalked up against the Banking Department, and thus be a loss to the private operations of the Bank, whereas holding the foreign exchange in the Issue Department would mean having to publish changes in the accounts, therefore signaling to speculators when and where the Bank was moving. ₁₂₂

By some accounts, the EEA was a one-way mechanism: designed only to prevent the appreciation of the pound after it had been taken off the gold standard. Yet the two institutions saw the goals of intervention via the EEA in rather different light. The Bank thought the EEA should be used to “lean against the wind,” that is, to stabilize the market, rather than to direct the value of sterling in any particular direction. The Treasury, on the other hand, wanted to use the EEA to block any appreciation in the value of the pound. ₁₂₃

Already, it can be seen that the use of intervention was preferred to raising the Bank rate while the economy was in such bad shape. By developing new capabilities around this policy instrument, monetary authorities broke the link between the exchange rate target and the domestic economic environment. Having done so, they were almost free to run reflationary monetary policies—though one external constraint remained: foreign debt. Monetary authorities therefore had to balance prevention of an appreciation of the pound with the acquisition of gold and foreign exchange to pay off debts owed to the U.S. and France. The Bank maintained a relatively high interest rate to draw money in, but then used intervention in the exchange markets to offset any pressures for the pound to rise. Once those foreign debts were reduced (by March 1932), the Bank reduced interest rates, and the amount of intervention in exchange markets fell. ₁₂₄

This was, however, only a partial adjustment; commitments were lowered, but so were resources, so that the gap between the two remained. Questions about commitments remained as well. According to contemporary accounts, the Treasury and the Bank disagreed over future policy, since the Bank preferred a return to fixed exchange rates sooner than the Treasury. Paul Einzig described this disagreement as a “tug of war” and an “open secret.” ₁₂₅ More importantly, the development of the EEA gave authorities a new more powerful weapon to use to manage the foreign exchanges; and it placed that weapon in the hands of the Treasury, thus shifting the distribution of power and responsibility between these two institutions. The Bank had been weakened during the continual series of financial crises in 1931, so that the Bank and its core constituency (the London bankers) now understood that they would have to rely on the Treasury’s support if faced with a financial collapse. The Bank could not ignore the Treasury’s importance in foreign monetary matters. ₁₂₆ The Treasury was now the more powerful of the two institutions, while the independence of the Bank was reduced.

The EEA was under the Treasury’s control, although its actions were made with the Bank acting as the Treasury’s agent. Meetings between Bank and Treasury officials were held regularly on Friday afternoons, with the Treasury setting the target exchange rate for the EEA upon the advice of the Bank. In theory, this meant the Treasury could offset decisions the Bank made by itself, but in fact the two institutions initially agreed on the approximate targets. ₁₂₇ While there was evidence cited earlier that the Bank’s Governor, Montagu Norman, had opposed raising Bank rate to new heights in the late 1920s and early 1930s, this should not be inferred as a preference for lower interest rates. In fact, evidence suggests that he opposed the government’s policy of cheap money pursued in the 1930s, but the Bank was simply unable to mount effective opposition. After the EEA was established, whenever policy preferences clashed the Treasury tended to win. ₁₂₈ Disagreements continued to be the order of the day.

In determining whether the development of the EEA really weakened the position of the Bank and gave the Treasury practical control over policy, it is important to reflect upon the range of choices possible in 1931. If the EEA was simply a way to strengthen the monetary authorities’ ability to act on exchange markets, and there was no division of interests between the Treasury and the Bank, there was a more direct path available. The Macmillan Committee had earlier recommended that the Bank of England’s two departments be consolidated to increase the amount of reserves available to the Bank for short-term intervention in markets—along the same lines as was actually undertaken in practice with the EEA. The fact that the Bank was not modified and left in control—instead the new instrument was developed under the management of the Treasury—suggests that not only the strength of the instrument, but also the intended direction of its use, were chosen on purpose. The creation of the EEA gave monetary authorities a more powerful, flexible tool for intervention, while it also gave the Treasury a permanent say in the formation and execution of external monetary policy. ₁₂₉

Norman still voiced his opposition to cheap money, and argued for a return to fixed exchange rates. This highly visible politicking for a policy that was not widely popular outside of the financial sector caused some observers to fret over the future independence of the Bank of England. ₁₃₀ Einzig gave Norman the benefit of the doubt, and claimed that Norman was concerned with more than the interests of the financial sectors. On the other side, the Treasury argued against exchange rate stabilization. In a note to the Chancellor of the Exchequer designed to counter any claims made by Bank officials, Frederick Phillips of the Treasury argued the “we have far more to lose, and are more likely to lose, from a setback in our internal recovery than we are likely to gain in the field of foreign trade.” ₁₃₁

By some accounts, the EEA failed to achieve its intended goal. If one believes that the EEA’s aim was more than merely to block appreciation of the pound, then it did indeed fail, since the pound did not depreciate considerably between 1932–1939. ₁₃₂ Once again, it is important to recognize that the Treasury was interested in both internal and external goals, since the pound rose above a value one might have expected if authorities were pursuing purely internal goals. This was true even after the government’s international debts had ceased to be a significant factor, suggesting that the Bank still held some independence. Of course it is also worth noting that the Treasury, too, still had some concerns about confidence in the pound, even after the link to gold was broken. ₁₃₃

 

The Continuing Battle over Resources and Commitments in the Post-World War II Era

Susan Strange was one of the earliest writers to focus on the Bank of England’s role in an argument along the lines of the afterglow hypothesis. Strange’s main thesis was that Britain’s weak and unstable balance of payments after World War II could be attributed to the failure of policies to adjust in the face of sterling’s continued decline versus the dollar. As the British Empire disintegrated, and the U.S. took over the top financial and political position of the liberal subsystem, policies were never fully altered away from the role of financial leadership. This can be seen after World War II in evidence such as the Treasury’s memorandum to the Radcliffe Committee. The memorandum stressed three major factors in Britain’s external monetary position: the international status of sterling, the importance of British overseas investments, and the inadequate ratio of British monetary assets to liabilities. These factors emphasized two goals for monetary authorities in international operations: defense of confidence in sterling, and the earning of an adequate external surplus (both to be achieved by leaving the City to its own devices, and allowing a freely operating capital market). ₁₃₄ These goals remained the same for years.

Peter Katzenstein seconded Strange’s views when he pointed out that Britain’s definition of policy goals in the postwar period has reflected the “banker’s” view rather than a “business” perspective. He also expressly cites the Bank of England as the continued source of the point of view, although he does not offer any specific explanation for why the Bank would continue to push for a strong currency. ₁₃₅ The implied argument conforms with Krasner’s explicit one, that the Bank’s directors (being drawn from the City) naturally chose policies that reflected the financial sector’s interests. The Court of Directors governs the Bank of England. Krasner suggested that this body provided the link between the City and the Bank, which explains the Bank’s bias toward the interests of the internationally oriented sectors. The Court consists of a Governor and a Deputy Governor, who each serve five-year terms, and sixteen Directors, each serving four-year terms which are staggered so that approximately a quarter retire each year. All are appointed by the Crown. No member may be an alien, nor a minister of the Crown, nor be a member of the House of Commons, nor be in the paid employment of a government department. ₁₃₆ Prior to 1945, the Court was clearly dominated by individuals drawn from the financial sectors.

It is also obvious that a certain amount of care has been taken to ensure that the Bank of England would not be dominated by the wrong sorts of outside influences once it was made a purely public institution. From 1946 on, it has been customary to have at least one director representing the unions, and it is not considered good taste to represent specific interests. ₁₃₇ Yet it may not be necessary to go to such lengths to show that the Bank defended policies of interest to the financial sector—it was, after all, pursuing core institutional missions that had been defined by this constituency. Even with the alterations in the Bank’s formal independence in 1946, the Bank and the Treasury would seem to have represented the City. The analysis of the policy changes in the 1920s and 1930s suggests that the choice between afterglow or adjustment is closely associated with bureaucratic politics, since the timing of both the Bank’s and the Treasury’s actions can be better understood through the interaction of systemic and sectoral pressures which exacerbate bureaucratic conflicts. When the Treasury had large debts to service and the annual budget was in deficit while unemployment was on the rise, it challenged the Bank of England’s control over monetary affairs. In the absence of such compelling bureaucratic duties and pressures from domestic constituencies, the Treasury allowed the Bank to dominate policy.

 

Conclusions: Institutional Empowerment and the Causes of Afterglow

As the first part of this chapter illustrates, there is evidence to support the initial stages in the afterglow hypothesis. While the Bank of England was originally established as a conduit for making private funds available to the government, it was only empowered as a central bank once Britain sought to lead the liberalization of the international economy. The Bank of England was transformed into a central bank when its powers were enhanced in the Bank Acts of 1833 and 1844, which were intended to give the Bank control over the domestic monetary system in order to strengthen the pound internationally. The pressures for this increase in the Bank’s powers came from the internationally oriented sectors, as well as from those sectors interested in market integration both internationally and domestically, as well as powerful groups simply interested in raising the value of the pound.

The Bank used its powers to develop sterling into the key currency of the international system. It provided a model for other countries to emulate, then cooperated with the key central banks of the gold standard era. Through wisdom, good fortune, or some combination of the two, the gold standard functioned smoothly from the 1870s right up to World War I, although weaknesses were already apparent. Most important, a currency overhang developed. The war changed the international monetary system, Britain’s position in it, and the Bank’s own strength. Britain was still an important financial intermediary, but now owed money internationally. Internal financing of the war had led to an expansion of Treasury bills in the market, which weakened the Bank’s use of interest rates to control the exchange rate. A rival financial center had developed in New York; external financing of the war had led not only to indebtedness vis-à-vis New York, but also to the selling off of British overseas assets, which had reduced the international income from these investments.

As a country, Britain failed to adjust rationally to the new situation, partially because the Bank of England and the Treasury both believed a return to the gold standard at a high valuation would benefit the internationally oriented service sectors. Commitments (in the form of the pound’s value) were set too high. Sectoral interests are persuasive for explaining the Bank’s position; the Treasury’s views may have reflected the interests of the City, but it also had to respond to broader demands. Yet the two institutions presented a united front until the issue of debt drove them apart. Bureaucratic politics, as seen in the early fight over different policy instruments, opened up the door for other domestic interests to join the fray. Monetary policy became more openly politicized once the government’s budget moved into deficit in 1930. While the Treasury was able to exert dominance in the decisions on policy by mustering greater political support for its policies, the independence of the Bank allowed it to pursue the policies it wished, even counter to the Treasury’s goals. This encouraged the Treasury to find ways to reduce the Bank’s independence. The Bank responded by seeking bureaucratic allies in other countries to enhance the effectiveness of its own tools. The fight over policy instruments led to the development of the EEA, at the very time when the Treasury was under pressure to act in quite a decidedly different direction from the Bank’s desired ends. Once the matter of debt service was reduced, the Treasury continued to support a policy of cheap money and resisted a return to a fixed exchange rate in opposition to the Bank because it wanted domestic reflation. As recovery proceeded, the grounds for reconciliation of institutional goals were laid. Britain’s path from doing nothing about its overhang (prior to World War I, when the Bank defended the exchange rate but the Treasury had no reason to resist such a policy), to afterglow, then on to partial adjustment is depicted in figure 6.

Figure 6: Britain’s Responses to the Currency Overhang After World War I

The evidence also supports notions of path-dependency. The particular policy instruments available to the Bank, created in the period of British liberal leadership, were inappropriate for the problems of the 1920s. With a bureaucratic rival operating under a different mandate (the Treasury), debates over monetary policy created an opening for sectoral interests to be heard; because the rival institution had more resources (once the Bank of England’s international bureaucratic allies proved unreliable) policies consistent with wider domestic interests were pursued (granting that these policies were still heavily in favor of the City).

What makes this story of greater interest though, is how it contrasts with the similar case of the U.S. monetary authorities in the late 1960s and early 1970s. In that instance, the two most important institutions, the Federal Reserve and the Treasury, were in agreement on how to respond to an overhang with the dollar as both placed greater importance on domestic objectives rather than international priorities. To understand why, we now turn to the creation of the Fed, and the forces driving the U.S. toward leadership of international liberalization in the first decades of the twentieth century.

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Endnotes

Note 1: For more details, see Douglass North and Barry Weingast, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” Journal of Economic History 49 (December 1989).  Back.

Note 2: John Guiseppi, The Bank of England, A History from Its Foundation in 1694 (Chicago: Henry Regnery Co., 1966), p. 23.  Back.

Note 3: Andreas Michael Andréadès, History of the Bank of England, 1640–1903 (New York: Augustus M. Kelley, 1966 [reprint of 1908 original]), p. 45. The following paragraphs also draw from this work, especially pp. 68–69, 88.  Back.

Note 4: Ibid., pp. 90–94, 96–98.  Back.

Note 5: Bills of exchange circulated as credit; they are claims on forthcoming shipments of goods, which could be passed from one merchant to another, with the value of the bill depending on the changing future value of the goods in question. See Andréadès, History of the Bank of England, pp. 73–74.  Back.

Note 6: Ibid., pp. 104–112.  Back.

Note 7: Ibid., pp. 84–85.  Back.

Note 8: Ibid., pp. 120–124, and Guiseppi, The Bank of England, p. 37.  Back.

Note 9: Andréadès, History of the Bank of England, pp. 128–131, 134–137.  Back.

Note 10: Ibid., pp. 147–148 and 154–155.  Back.

Note 11: See Robert V. Eagley and V. Kerry Smith, “Domestic and International Integration of the London Money Market, 1731–1789,” Journal of Economic History 36 (1) (March 1976): 198, 207 and 210 in particular; and Larry Neal, The Rise of Financial Capitalism: International Capital Markets in the Age of Reason (New York: Cambridge University Press, 1990).  Back.

Note 12: Andréadès, History of the Bank of England, p. 80.  Back.

Note 13: See the description given in David Kynaston, The City of London: Volume I—A World of Its Own 1815–1890 (London: Chatto, 1994), pp. 13–14, and Andréadès, History of the Bank of England, p. 158.  Back.

Note 14: Issues were considered liabilities against the Bank itself rather than against depositors, and thus the limit of the Bank’s issue was determined by the Bank’s own assets, which meant not only deposits but also the Bank’s own capital and profit. See Andréadès, History of the Bank of England, pp. 81–83.  Back.

Note 15: Ibid., pp. 170–171. For the numbers of country banks in existence at various times, see p. 219; also see Elmer Wood, English Theories of Central Banking Control 1819–1858 (Cambridge: Harvard University Press, 1939), p. 13.  Back.

Note 16: Andréadès, History of the Bank of England, pp. 172–173.  Back.

Note 17: Frank W. Fetter, Development of British Monetary Orthodoxy, 1797–1875 (Cambridge: Harvard University Press, 1965), pp. 22–23.  Back.

Note 18: Ibid., pp. 64, 142–143. For a broader description of the situation, see Chapter 6 in Kynaston, The City of London: Volume I.  Back.

Note 19: J. K. Horsefield, “The Duties of a Banker, I: The 18th Century View,” and “The Origins of the Bank Charter Act, 1844,” in Papers in English Monetary History, eds. T. S. Ashton and R. S. Sayers (Oxford: Clarendon Press, 1953), pp. 1–2, 6–7 and 115.  Back.

Note 20: Michael Collins, “Monetary Policy and the Supply of Trade Credit, 1830–1844,” Economica 45 (November 1978): 380, 386.  Back.

Note 21: Wood, English Theories of Central Banking, pp. 3–4, 16, 24.  Back.

Note 22: Fetter, Development of British Monetary Orthodoxy, pp. 147, 173–174.  Back.

Note 23: Andréadès, History of the Bank of England, pp. 172–173.  Back.

Note 24: T. E. Gregory, ed., Select Statutes, Documents and Reports Relating to British Banking, 1832–1928, Volume I (London: Oxford University Press, 1929), pp. x–xi.  Back.

Note 25: J. F. Rees, A Short Fiscal and Financial History of England, 1815–1918 (London: Methuen, 1921), p. 69; and Kynaston, The City of London: Volume I, Chapter 6.  Back.

Note 26: As cited in Bruce D. Smith, “Legal Restrictions, `Sunspots,’ and Peel’s Bank Act: The Real Bills Doctrine versus the Quantity Theory Reconsidered,” Journal of Political Economy 96 (1) (February 1988): 7.  Back.

Note 27: See J. Lawrence Broz, “The Positive Externalities of National Behavior: Systemic Stability Under the Classical Gold Standard,” paper presented at the International Studies Association meeting in Washington, D.C., March 1994, and also The International Origins of the Federal Reserve System (Ithaca: Cornell University Press, 1997), pp. 225–227.  Back.

Note 28: Kynaston, The City of London: Volume I, pp. 84–85.  Back.

Note 29: A. B. Cramp, Opinion on Bank Rate, 1822–1860 (London: G. Bell & Sons, 1962), p. 8.  Back.

Note 30: Vera C. Smith, The Rationale of Central Banking (London: P. S. King, 1936), p. 12.  Back.

Note 31: Andréadès, History of the Bank of England, pp. 261–262.  Back.

Note 32: Collins, “Monetary Policy and the Supply of Trade Credit, 1830–1844,” p. 379.  Back.

Note 33: Ibid., p. 384.  Back.

Note 34: T. E. Gregory, ed., Select Statutes, Documents and Reports Relating to British Banking, 1832–1928, Volume II (London: Oxford University Press, 1929), pp. 227–228.  Back.

Note 35: Guiseppi, The Bank of England, p. 95.  Back.

Note 36: Andréadès, History of the Bank of England, pp. 285–287.  Back.

Note 37: Gregory, ed., Select Statutes, Documents and Reports, Volume I, pp. 34–35.  Back.

Note 38: Ibid.  Back.

Note 39: Fetter, Development of British Monetary Orthodoxy, p. 176.  Back.

Note 40: Andréadès, History of the Bank of England, p. 288.  Back.

Note 41: Gregory, ed., Select Statutes, Documents and Reports, Volume I, p. 18.  Back.

Note 42: Andréadès, History of the Bank of England, pp. 172–173. As just an aside, the Bank did not receive a true monopoly over note issue until the Currency and Bank-Notes Act of 1928 officially transferred the power to issue currency from the Treasury to the Bank. See BIS, Eight European Central Banks (London: Allen & Unwin, 1963), p. 104.  Back.

Note 43: Andréadès, History of the Bank of England, pp. 288–290.  Back.

Note 44: Rees, A Short Fiscal and Financial History of England, pp. 90–92. It would be interesting to see if the Treasury had blocked earlier reform efforts aimed at strengthening the pound.  Back.

Note 45: Ibid., pp. 94–95.  Back.

Note 46: Andréadès, History of the Bank of England, p. 342; Kynaston, The City of London: Volume I, pp. 158–160; and Kenneth W. Dam, The Rules of the Game (Chicago: University of Chicago Press, 1982), p. 27.  Back.

Note 47: The Bank would remain a quasi-public institution until it was nationalized in 1946.  Back.

Note 48: Guiseppi, The Bank of England, p. 95.  Back.

Note 49: In Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (New York: Oxford University Press, 1992), Barry Eichengreen argues that the Bank of England’s activities do not show evidence of hegemonic leadership because it failed to act as a lender of last resort internationally; I would not dispute the evidence, but would argue that this definition is too narrow. If anything, the evidence here shows that the Bank of England was empowered with the tools to make sterling stronger to serve as an international money, and therefore its lender of last resort functions on the domestic side were curtailed. Without sterling’s international role in place, it would make no sense to operate as an international lender of last resort; Eichengreen’s point is well taken, and stresses my observation that the Bank of England achieved this first step only by sacrificing its abilities to perform the second. Also see Rudiger Dornbusch and Jacob Frenkel, “The Bank of England in the Crisis of 1847,” in A Retrospective on the Classical Gold Standard, 1821–1931, ed. Michael C. Bordo and Anna J. Schwartz (Chicago: University of Chicago Press, 1984).  Back.

Note 50: Guiseppi, The Bank of England, p. 121.  Back.

Note 51: Michael C. Bordo, “The Gold Standard: The Traditional Approach,” in A Retrospective on the Classical Gold Standard, 1821–1931, eds. Michael C. Bordo and Anna J. Schwartz (Chicago: University of Chicago Press, 1984): 45.  Back.

Note 52: Guiseppi, The Bank of England, pp. 122–123.  Back.

Note 53: Kynaston, The City of London: Volume I, pp. 166.  Back.

Note 54: These points are all considered integral parts of the gold standard. See Marcello de Cecco Money and Empire: The International Gold Standard, 1890–1914 (Oxford: Basil Blackwell), pp. 20–21, and also Charles P. Kindleberger in “The Functioning of Financial Centers: Britain in the Nineteenth Century, the United States Since 1945,” in Princeton Essays in International Finance No. 157 (September 1985): 7–18.  Back.

Note 55: W. M. Scammell, The Stability of the International Monetary System (Totowa, N.J.: Rowman & Littlefield, 1987), p. 32, and also Alec Cairncross and Barry Eichengreen, Sterling in Decline: The Devaluations of 1931, 1949 and 1967 (Oxford: Basil Blackwell, 1983), p. 11.  Back.

Note 56: Wood, English Theories of Central Banking, pp. 8–9.  Back.

Note 57: Barry Eichengreen, “Hegemonic Stability Theories of the International Monetary System,” in Can Nations Agree? Issues in International Cooperation (Washington: Brookings Institution, 1989), p. 260.  Back.

Note 58: D. E. Moggridge, British Monetary Policy 1924–1931: The Norman Conquest of $4.86 (New York: Cambridge University Press, 1972), pp. 5–7; also see John Dutton, “The Bank of England and the Rules of the Game under the International Gold Standard: New Evidence,” in A Retrospective on the Classical Gold Standard, 1821–1931, eds. Michael C. Bordo and Anna J. Schwartz (Chicago: University of Chicago Press, 1984), p. 173.  Back.

Note 59: Kynaston, The City of London: Volume I, pp. 332.  Back.

Note 60: Cramp, Opinion on Bank Rate, 1822–1860, p. 91.  Back.

Note 61: This and the following paragraphs are based on Dutton, “The Bank of England and the Rules of the Game,” pp. 177–178. Dutton also shows that the Bank occasionally ran counter-cyclical policies (pp. 191–192).  Back.

Note 62: Dam, Rules of the Game, pp. 27–28.  Back.

Note 63: See W. M. Scammell, “The Working of the Gold Standard,” Yorkshire Bulletin of Economic and Social Research, (May 1965): 113.  Back.

Note 64: Fetter, Development of British Monetary Orthodoxy, p. 227.  Back.

Note 65: As quoted in Robert C. West, Banking Reform and the Federal Reserve, 1863–1923 (Ithaca: Cornell University Press, 1974), pp. 168–169.  Back.

Note 66: Barry Eichengreen, “Conducting the International Orchestra: Bank of England Leadership under the Classical Gold Standard,” Journal of International Money and Finance 6 (March 1987): 6.  Back.

Note 67: Ibid., p. 7, and also Eichengreen, “Hegemonic Stability Theories of the International Monetary System,” p. 258.  Back.

Note 68: See “The Positive Externalities of National Behavior: Systemic Stability Under the Classical Gold Standard”; Guilio Gallarotti makes similar claims in The Anatomy of an International Monetary Regime, The Classical Gold Standard, 1880–1914 (New York: Oxford University Press, 1995).  Back.

Note 69: For a fuller appreciation of this point and the evidence which undermines it, see his “Editor’s Introduction,” in The Gold Standard in Theory and History (New York: Methuen, 1985), pp. 16–17.  Back.

Note 70: Others have cited the Bank’s control over the policies of Britain’s colonies as a key source of monetary strength. Within the British Empire, the Bank of England was the only central bank until the 1920s. While the Dominions may have been politically autonomous in many ways, they did not have control over (nor any knowledge of) their international reserves, since these were held by private commercial banks. See L. S. Pressnell, `’1925: The Burden of Sterling,” Economic History Review (2nd Ser.) 31 (1) (1978): 69.  Back.

Note 71: Broz argues that the stability of the gold standard was actually due to a coincidence of interests—Britain provided a key currency with high confidence, while France and other European powers provided the gold necessary for liquidity in times of need. See “The Positive Externalities of National Behavior.”  Back.

Note 72: Gallarotti, The Anatomy of an International Monetary Regime, pp. 7–9. I am afraid I do not understand the basis for Gallarotti’s investigations in Chapter 3. He argues that British leadership in monetary conferences in the second half of the century should have been exhibited. It would seem first necessary to show that Britain stood to gain by transforming the regime and by making the regime explicit. The evidence he presents illustrates that the conferences were called by countries seeking assistance in moving from a bimetallic standard to the gold standard; Britain mainly resisted bearing these costs and the transitions occurred.  Back.

Note 73: Ibid. Rejection of Britain’s role as leader hinges on how one specifies leadership. Interestingly, he writes that “Great Britain played a central role within the collective core. To the extent that Great Britain was best at recycling capital, we can say that it was a stabilizing force within the core as well as the international monetary system.” p. 196, and then on the next page, “The British functioned efficiently as the hub of global adjustment.” In “The scramble for gold: monetary regime transformation in the 1870s,” in Monetary Regimes in Transition, eds. Michael D. Bordo and Forrest Capie (New York: Cambridge University Press, 1994), pp. 18–20, he follows Schumpeter, who stressed that others followed Britain’s example: “The status of gold derived disproportionately from the British example.” As I hope to have shown, Britain got to this position on purpose, and did so by developing the pound’s attractiveness, a goal that had dominated the institutional transformation of the Bank of England. For the need to include nonstructural variables in any argument about hegemonic leadership, see pp. 220–223. For this last point on the lack of a role for institutions in Gallarotti’s interpretation of the gold standard, see p. 112.  Back.

Note 74: Scammell, The Stability of the International Monetary System, p. 19.  Back.

Note 75: E. Victor Morgan, The Theory and Practice of Central Banking 1797–1913 (New York: Augustus M. Kelley, 1965 [reprint of 1943 edition]), pp. 166–167. Eichengreen also cites the importance of sterling as an additional reserve under the later years of the gold standard, see “Hegemonic Stability Theories of the International Monetary System,” p. 273.  Back.

Note 76: Peter Lindert, “Key Currencies and Gold, 1900–1913,” Princeton Studies in International Finance No. 24 (August 1969).  Back.

Note 77: Wood, English Theories of Central Banking, pp. 8–9.  Back.

Note 78: Ursula Hicks, The Finance of British Government, 1920–1936 (Oxford: Clarendon Press, 1970 [reprint of 1938 original]), p. 310, points out four reasons: the national debt was light, the gold standard made monetary policy appear unmanipulable, the price system was stable, and the Bank of England remained a private institution.  Back.

Note 79: For an excellent overview, see Eichengreen, “Hegemonic Stability Theories of the International Monetary System,” pp. 284–285.  Back.

Note 80: Bernard Elbaum and William Lazonick, “The Decline of the British Economy: An Institutional Perspective,” Journal of Economic History 44 (2) (June 1984), p. 570.  Back.

Note 81: Rees, A Short Fiscal and Financial History of England, pp. 204–206.  Back.

Note 82: Ibid., pp. 217–218.  Back.

Note 83: Susan Howson, Domestic Monetary Management in Britain 1919–1938 (New York: Cambridge University Press, 1975), pp. 11–13.  Back.

Note 84: Ibid., p. 14.  Back.

Note 85: Ibid., p. 25.  Back.

Note 86: Eichengreen, Golden Fetters, pp. 113, 283.  Back.

Note 87: Howson, Domestic Monetary Management in Britain 1919–1938, p. 28.  Back.

Note 88: Guiseppi, The Bank of England, p. 147.  Back.

Note 89: D. E. Moggridge, The Return to Gold, 1925: The Formulation of Economic Policy and its Critics (London: Cambridge University Press, 1969), p. 23; Cairncross and Eichengreen, Sterling in Decline, pp. 50–51, Hicks, The Finance of British Government, p. 359.  Back.

Note 90: Moggridge, British Monetary Policy 1924–1931, pp. 28–29; Howson, Domestic Monetary Management in Britain 1919–1938, p. 24.  Back.

Note 91: Moggridge, The Return to Gold, 1925, p. 21.  Back.

Note 92: Howson, Domestic Monetary Management in Britain 1919–1938, p. 1.  Back.

Note 93: Pressnell, “1925: The Burden of Sterling,” p. 76. This also fits with the arguments of Beth Simmons, who notes that domestic factors had a more important role to play in interwar monetary policy, but only took on a prominent role in countries where central banks were not very independent. See Who Adjusts? (Princeton: Princeton University Press, 1994), p. 4.  Back.

Note 94: Moggridge, British Monetary Policy 1924–1931, pp. 3–4, and The Return to Gold, 1925, p. 65; also see Cairncross and Eichengreen, Sterling in Decline, p. 29.  Back.

Note 95: Moggridge, British Monetary Policy 1924–1931, pp. 57–58.  Back.

Note 96: Ibid., pp. 46, 86–87.  Back.

Note 97: Ibid., pp. 99–100.  Back.

Note 98: Howson, Domestic Monetary Management in Britain 1919–1938, pp. 36, 141.  Back.

Note 99: Cairncross and Eichengreen, Sterling in Decline, p. 41.  Back.

Note 100: Moggridge, British Monetary Policy 1924–1931, p. 145.  Back.

Note 101: Ian M. Drummond, The Floating Pound and the Sterling Area, 1931–1939 (New York: Cambridge University Press, 1981), p. 5.  Back.

Note 102: Moggridge, British Monetary Policy 1924–1931, pp. 160–161.  Back.

Note 103: Susan Strange, Sterling and British Policy: A Political Study of an International Currency in Decline (New York: Oxford University Press, 1971), p. 50; Howson, Domestic Monetary Management in Britain 1919–1938, p. 56.  Back.

Note 104: Elbaum and Lazonick, “The Decline of the British Economy,” p. 581.  Back.

Note 105: Moggridge, British Monetary Policy 1924–1931, pp. 236–237.  Back.

Note 106: Ibid.; Howson, Domestic Monetary Management in Britain 1919–1938, p. 9.  Back.

Note 107: As cited in Cairncross and Eichengreen, Sterling in Decline, p. 38.  Back.

Note 108: Cairncross and Eichengreen, Sterling in Decline, pp. 46–47.  Back.

Note 109: As quoted in Cairncross and Eichengreen, Sterling in Decline, p. 54.  Back.

Note 110: The quote is from a reprint of the report in A Retrospective on the Classical Gold Standard, 1821–1931, eds. Michael C. Bordo and Anna J. Schwartz (Chicago: University of Chicago Press, 1984), p. 195. Also see Cairncross and Eichengreen, Sterling in Decline, pp. 60–61; and M. June Flanders, International Monetary Economics, Between the Classical and the New Classical (New York: Cambridge University Press, 1989), pp.87–88, 100.  Back.

Note 111: Howson, Domestic Monetary Management in Britain 1919–1938, pp. 85–86.  Back.

Note 112: Cairncross and Eichengreen, Sterling in Decline, pp. 60–61.  Back.

Note 113: Eichengreen, Golden Fetters, p. 283.  Back.

Note 114: Simmons identifies some of the reasons Britain’s commitment to gold was no longer credible, and hence came under market pressure. See Who Adjusts?, p. 21.  Back.

Note 115: Cairncross and Eichengreen, Sterling in Decline, pp. 62–64.  Back.

Note 116: See the position taken by Cairncross and Eichengreen, Sterling in Decline, p. 93.  Back.

Note 117: Cairncross and Eichengreen, Sterling in Decline, pp. 100–101; Hicks, The Finance of British Government, p. 364.  Back.

Note 118: Howson, Domestic Monetary Management in Britain 1919–1938, p. 111.  Back.

Note 119: Howson, Domestic Monetary Management in Britain 1919–1938, p. 142.  Back.

Note 120: N. F. Hall, The Exchange Equalisation Account (London: Macmillan, 1935), p. 23.  Back.

Note 121: Susan Howson, “Sterling’s Managed Float: The Operations of the Exchange Equalisation Account, 1932–39,” Princeton Studies in International Finance No. 46 (November 1980), pp. 5–6.  Back.

Note 122: Ibid., pp. 7–8.  Back.

Note 123: Cairncross and Eichengreen, Sterling in Decline, p. 89; Lowell M. Pumphery, “The Exchange Equalization Account of Great Britain, 1932–1939,” American Economic Review 32 (4) (December 1942): 804.  Back.

Note 124: Edward Nevin, “The Origins of Cheap Money, 1931–1932,” Economica (1953): 25, 36; Hicks, The Finance of British Government, p. 362.  Back.

Note 125: Bankers, Statesmen and Economists (London: 1935), pp. 2, 37–38.  Back.

Note 126: Ibid., pp. 36–37.  Back.

Note 127: Ibid.; Howson, “Sterling’s Managed Float,” pp. 15–17.  Back.

Note 128: Paul Einzig, Bankers, Statesmen and Economists (London: Macmillan, 1935), pp. 38, 54.  Back.

Note 129: Hall, The Exchange Equalisation Account, pp. 31, 43–44.  Back.

Note 130: Einzig, Bankers, Statesmen and Economists, pp. 39–41.  Back.

Note 131: As quoted in Howson, “Sterling’s Managed Float,” p. 25.  Back.

Note 132: Pumphery, “The Exchange Equalization Account,” p. 807.  Back.

Note 133: Howson, “Sterling’s Managed Float,” p. 53; Drummond, The Floating Pound, p. 22.  Back.

Note 134: Strange, Sterling and British Policy, pp. 302–303.  Back.

Note 135: Peter J. Katzenstein, “Conclusion: Domestic Structures of Foreign Economic Policy,” in Betweeen Power and Plenty, Foreign Economic Policies of Advanced Industrial States, ed. Peter J. Katzenstein (Madison: University of Wisconsin Press, 1978), p. 309.  Back.

Note 136: BIS, Eight European Central Banks, pp. 99–100.  Back.

Note 137: Ibid.