September 8, 2017 / 10:59 AM / 10 months ago

Breakingviews - Review: Bank of England's present echoes in past

LONDON (Reuters Breakingviews) - The debates that swirl around the Bank of England today have echoed throughout its past. Familiar themes recur in “Till Time’s Last Sand”, David Kynaston’s magisterial history of the 323-year-old institution’s evolution from government lender to modern central bank. Contemporary arguments over independence, the right approach to monetary policy, bank bailouts and the City of London’s future turn out to be as timeworn as the Old Lady of Threadneedle Street herself.

City workers walk past the Bank of England in the City of London, Britain, March 29, 2016. REUTERS/Toby Melville/File Photo

In many ways the bank today is unrecognisable from the “quasi-accidental institution” that was granted an 11-year charter in 1694. At that time, the private bank’s main purpose was to lend to the British government at an interest rate of 8 percent. The early risks were not solely financial: within a year, its first deputy governor had his head blown off by a French cannon ball at the Siege of Namur.

By 1776 the bank was so well established that the economist Adam Smith described it as a “great engine of state”. However, the outlines of the modern state-owned body that fixes UK monetary policy and regulates financial institutions were still hard to divine. The early bank competed with private lenders, but also helped them out when they got into trouble. Its part-time directors were mostly wealthy merchants – a far cry from the trained economists who dominate the Bank of England’s upper ranks today.

Even so, several contemporary themes stand out in Kynaston’s vivid narrative, which draws on extensive access to bank archives. The first is a complex and interdependent relationship with the British government. A private institution until it was nationalised in 1946, the bank nonetheless always enjoyed a privileged status that elevated it above regular lenders. Even as a state-owned body, it has rarely missed an opportunity to assert its autonomy, and discreetly lobbied for independence for at least a decade before the newly elected Labour government handed it full control of monetary policy in 1997.

Excessive influence over Britain’s economy and society is another refrain. The 19th century critics who complained the bank was putting the interests of international finance ahead of domestic industry would probably conclude that little has changed today. Britain’s position in the global economy and London’s status as a major financial centre are recurring concerns.

Then there is its far from perfect oversight of other financial institutions. Students of the turmoil of 2007-2008 will find much that is familiar in the crises that punctuated the bank’s earlier history. The loose lending that led to the failure in 1866 of Overend Gurney, a so-called discounting house, recalls the run on Northern Rock a century and a half later. The state-sponsored rescue of merchant bank Barings in 1890 is reminiscent of the 2008 bailouts of Royal Bank of Scotland and Lloyds – though in the latter case taxpayers wrote a much, much larger cheque.

Kynaston, who has written authoritative histories of the City of London and of post-war Britain, brings these episodes to life by quoting extensively from internal bank correspondence. He sketches vivid portraits of key characters such as Montagu Norman, the Bank’s domineering governor in the interwar era, who travelled on London’s underground with his ticket stuck in the band of his hat, bowing his head on exiting for the collector to remove it. Junior employees are not neglected: the author sifts through letters and diary entries for anecdotes that illuminate the lives of an army of clerks and cashiers.

There are darker subjects too, such as Norman’s anti-Semitism and his pro-German stance in the prelude to World War Two. And though access to the archives ends in 1997, the book concludes with a detailed examination of the central bank’s role in the financial crisis that began a decade later. Former Governor Mervyn King is rightly criticised for his dogmatic and academic approach, which contributed to the bank’s failure to anticipate the looming disaster. Particularly devastating is the observation that, in 34 speeches between 2000 and 2006, King mentioned the words “banks” or “banking” only 24 times.

Current Governor Mark Carney exemplifies the themes of continuity and change. The Canadian has sought to modernise the bank’s management, including an overdue push to appoint more women to its senior ranks. That hasn’t stopped accusations that he has kept monetary policy too loose, that the regulatory demands on private banks are too tight, that the central bank is not sufficiently accountable to government, or that London’s status as a global financial centre is in doubt. Carney can at least be reassured that these charges would have been familiar to most of his predecessors.


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