Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers, Barry Eichengreen from the University of California Berkeley, looks back at Montagu Norman’s time as governor.
Montagu Norman’s aura is palpable at St. Clere. It is said that Norman spent many of his weekends and holidays at his estate in Kent, overseeing improvements and admiring the vistas. His legacy is, if anything, even more prominent at the Bank of England. Norman supervised the design of the present Bank building. His portrait, along with those of the other members of his Court, was displayed on the first-floor landing in the Bank’s main atrium; he is only a handful of governors so honored. The Bank’s recent St. Clere workshop thus provided an opportunity to ponder some of the enduring themes and legacies of Norman’s quarter-century as governor.
It will not surprise the reader that many of these, to my mind, revolve around the decision to return to the gold standard at the prewar parity in 1925 and abandonment of that arrangement in 1931.
- Norman’s support for returning to the gold standard, and for doing so at sterling’s prewar parity (prewar gold content and therefore exchange rate against the dollar) is a reminder of the importance of a nominal anchor, but of a nominal anchor appropriate to the circumstances of the day. Fixing sterling to gold at the pre-war rate, most economic historians agree, was not the ideal anchor in the changed economic, financial and political circumstances of the 1920s.
- Norman and the Bank based their support for returning to gold at the prewar parity on questions of credibility. Returning at the prewar parity was a way of indicating the priority the Government and the Bank attached to restoring London’s traditional position as an international financial center, a priority signaled by committing to value the county’s international financial obligations at their historic rate. But this decision is also a reminder that credibility must be earned; it can’t be purchased simply by pegging the exchange rate. The credibility of a monetary policy regime must be rooted in the support of not just the financial community but of society as a whole, which that regime is intended to serve.
- Norman’s period is a reminder of the politically fraught nature of central bank independence. In the 1920s, the Treasury regularly objected to increases in bank rate and lobbied actively for reductions to ease the task of servicing a heavier public debt. When Otto Niemeyer noted in 1929 that “in prewar days a change in bank rate was no more regarded as the business of the Treasury than the colour which the bank painted its front door,” he was drawing a contrast with the more politicized 1920s.
- Norman’s tenure is a reminder – a negative reminder – of the importance of central bank communication. The governor was famously cryptic, even inarticulate, when explaining the Bank’s strategies and operating procedures to the Macmillan Committee. His failure to better justify and defend the Bank’s policies, notably in this venue where he cut such a sharp contrast with John Maynard Keynes, did not engender confidence in the institution when its reserves and the sterling parity of which it was custodian came under attack in 1931.
- The Bank under Norman seems to have been reluctant to respond proactively to events. Between 1925 and 1931, bank rate was changed only half as frequently as over the six-year period preceding World War I or between 1890 and 1913 on average. The Bank then refrained from raising the rate or taking other decisive steps for fully six weeks prior to the final decision to suspend gold convertibility on September 19, 1931, despite seeing its reserves steadily drain away. (Norman did negotiate credits with foreign central banks in July, but these were less than helpful, as described below.) In fairness, Norman was out of commission in August; having succumbed to exhaustion, he was recuperating in Canada. But the Bank’s inability to defend the sterling parity must be understood in terms of its reactive posture and general reluctance to act – facts of which market participants were aware.
- Then there was the Bank’s reluctance to immediately utilize credit lines that Norman negotiated with the Federal Reserve and the Bank of France, instead letting the sterling exchange rate weaken. This may have been intended to pressure the Labour Government to agree on budget cuts designed to reassure international investors. If so, the tactic did not work and, by allowing the exchange rate to weaken, only demoralized market sentiment further. The Bank of England’s mandate was to defend sterling and, if it concluded that defense was futile, to ask to be relieved of its obligation to sell gold at a fixed price, as it ultimately did on September 19th. It either should have done so earlier, if it concluded that the effort was futile, or else mounted a stout defense.
- Norman’s experience is a reminder of the importance of central bankers sticking to their knitting. The Governor and the Bank were strangely engaged in various schemes for rationalizing the steel and cotton industries in the 1920s. Andy Haldane has suggested that Norman may have been motivated by concern that disorderly failures of cotton concerns could destabilize the financial system. But an argument can be made that the Bank allowed itself to be drawn into government efforts to restore the competitiveness of the staple trades. Norman may have seen this as a way of deflecting criticism of central bank policy for aggravating unemployment. But these industrial-policy initiatives complicated matters when it emerged in 1929 that another ambitious scheme for rationalizing the steel industry, that of financier Clarence Hatry, had run aground with destabilizing financial consequences.
- The period of Norman’s governorship may be best known for central bank cooperation, based initially on personal relationships, most famously between Norman and Benjamin Strong, governor of the Federal Reserve Bank of New York, but increasingly mediated by institutions such as the League of Nations and the Bank for International Settlements. But owing to political complications – reparations, proposals for an Austro-German customs union, and Germany’s so-called pocket battleships – the Bank of France was reluctant to help the Reichsbank in the summer of 1931 when push came to shove. The Federal Reserve, jealous of its balance sheet, hesitated to stump up more cash when reserves began to drain away from the Bank of England. Even “successful” examples of central bank cooperation – interest rate cuts by the Federal Reserve Bank of New York to help the Bank of England back onto the gold standard in 1925 and then again in 1927 to help it stay there – can be criticized, if you think that the gold standard was a mixed blessing or that the 1927 interest rate cut fueled an unsustainable Wall Street boom.
Thus, Montagu Norman’s years at the Bank of England were shaped by themes and issues that will resonate with modern central bankers, starting with the importance of monetary-policy credibility, the challenge of communication, and the fraught nature of central bank independence, but extending to the limits of the central bank’s mandate and questions about the nature of international policy coordination. It’s been 50 years since the last full-scale biography of Norman, and that one is itself out of print. Perhaps the time has come for another.
Barry Eichengreen is a professor at the University of California.