Why the City owes a queer fish a debt

On a foggy night on the Southampton quayside in August 1932 there lurked a cloaked figure all in black. He was pacing, waiting to board a liner for the United States. It was Montagu Norman, the longest serving governor of the Bank of England, travelling incognito as Professor Clarence Skinner.

The economic historian Sidney Pollard wrote of Norman: "That poor, tortured, and mentally unstable governor, notoriously unable to collaborate with any one on equal terms, going 'ill' whenever the difficulties brought on by his policies caused a crisis, inarticulate as to his ideas and a resounding failure as to his practice... It is hardly conceivable that a political leader could have got away with such a massive failure." Norman is a central figure in the drama surrounding monetary policy in Britain in 1914-45, the period of David Kynaston's latest volume on the history of the City of London.

The world economy really came into being in the last half of the 19th century with increasing trade, capital flows and huge migrations of labour. But it all came to a halt when war broke out in 1914. Trade patterns were distorted and trade shrank. International flows of labour ceased. War loans replaced capital simply seeking its best return. The gold standard came to an end.

After the war, all the problems generated by this upheaval persisted or created new ones. War debts and reparations payments, mixed with hyper-inflation in a world without a satisfactory international monetary system, exacerbated distrust and eventually produced the Great Depression in the US and most other countries. Fascism, communism and the old liberal order fought for dominance or survival, culminating in the second world war.

The Bank of England and its governor were at the centre of it all. The bank was a private institution, but it recognised its huge public responsibility. Whatever independence of action it might have had in the 19th century was lost in 1914 and, in many respects, did not return after the war. By this time it had accepted that while it remained operationally distinct from government, the Treasury controlled policy.

And yet the vilification of Norman has been unrelenting. He has been accused of ignorance, inability to communicate or work with others, making huge policy mistakes and behaving in a way damaging to the national interest. How much of this is true or fair has long been lost from sight. Few have been prepared to make a case for his rehabilitation - certainly not Kynaston.

Norman certainly cut an unusual figure and began life in the bank with few friends. Walter Cunliffe, whom Norman was to replace as governor, once passed him in the corridor and said loudly, "There goes that queer-looking fish with the ginger beard again." Norman was keen on discipline in monetary and financial matters and saw the return to a gold standard as an obligation and the way to restore sound money. He established good relations with Benjamin Strong of the recently founded USFederal Reserve and cannot be held responsible for other countries returning to gold at advantageous parities. Almost everyone agreed on a return to some form of gold standard, even if the parity received insufficient discussion.

Apart from external finance, the big issue running through the period was the City's role in relation to the rest of the economy. What responsibility did it have? This is related to external finance because Norman saw his responsibility as providing sound money and stable exchange rates so that the economy could achieve whatever it might.

But the principal attack has been on the lack of interest shown by the City and, more specifically, the banks in financing British industry. The banking system is portrayed as a cartel from as far back as the 19th century and as failing hopelessly in what critics feel it should have achieved. The danger here is of the "nirvana" approach: compare what happened with some hypothetical ideal and then call the difference failure; press on by explaining that failure in terms of defective personalities or whatever. Yet Norman was responsible for a range of initiatives in support of industry and for prompting commercial banks to action. And closer examination of what the banks actually did has largely exculpated them from the principal charges against them.

Behind such charges there is frequently a tone of condescension. The City is about money-making, which is intrinsically suspect and contemptible. Kynaston cites Conrad Russell, who left the City after the war and set up as a small farmer, quoting him as saying that he felt food production was useful, whereas "I don't think that a place like the Stock Exchange ought really to exist". Well, as one might say, get real. Did Russell ever wonder how savers got their money to investors?

This is the third volume in a quartet of books that runs from 1815 to the present. Kynaston's gift lies in bringing to life the day-to-day business of the City, putting flesh on the dry bones of finance. One feels one has got to know some of the key figures and the kinds of people working in the different institutions. It is an entertaining account.

And yet, if the institutions were as hopeless and the personalities as defective as is often implied, what is remarkable is that the City has strengthened its position as an international financial centre and resisted most rivals that have come along since 1945.

Forrest Capie is professor of economic history, City University Business School.