Negotiating nationalisation

Austen Saunders

1 March 2021 was the 75th anniversary of the Bank of England’s nationalisation. While its stock formerly passed into public ownership in 1946, Lord Catto (the Governor) and Hugh Dalton (the Chancellor of the Exchequer) had negotiated the terms of the Bank’s nationalisation the summer before. During these negotiations Catto lobbied for the Bank not to be given more powers to regulate banks. Why? The answer hinges on how the Bank understood its role. And it helps explain why, as David Kynaston sees it, the Bank and the government ‘missed a historic opportunity’ to comprehensively redefine the Bank’s responsibilities.

Behind-the-scenes negotiations about the Bank’s powers took place after Labour’s landslide victory in the 1945 General Election. Its manifesto included a promise to nationalise the Bank. Until then, the Bank had been owned by private shareholders although, in reality, it had been run for decades as a quasi-public institution. Shareholders received a fixed dividend and had no more say over the running of the Bank than holders of government debt had over the composition of the Cabinet.

The negotiations went smoothly on the whole but, according to records in the Bank’s archives, Catto declared himself during one meeting at the Treasury to be ‘strongly against any legislation giving powers to regulate the banks’. Catto was not thinking of a regulatory regime like those in place around the world today. It would be several decades before they began to develop. What he was worried about were targeted powers which would let a government directly control banks.

Figure 1: Lord Catto

Bank of England Archive, Staff C3 – Catto.

It was no secret that the new government wanted to exercise more influence over the banking sector. Its MPs held it partly responsible for the economic slumps of the 1920s and 1930s. They also blamed the Bank itself for a series of policy blunders which had brought down Ramsay MacDonald’s government in 1931. Nationalisation promised reform with a dose of revenge. Their manifesto had therefore pledged that the banking sector’s activities would in future be ‘harmonised with industrial needs’. What would that mean in practice?

Catto was alarmed when the Treasury suggested giving the Bank powers ‘to make regulations governing the proportion of assets of different descriptions to be held by banks’. It is not clear how the Treasury thought these powers would be used, but the Bank’s response was sharp. It said that creating them ‘would have the effect of seriously disturbing confidence among the depositors in the Joint Stock Banks’ and that ‘it would be unwise to make any specific reference to ‘assets’ or to ‘investment in Government securities’.

The danger the Bank foresaw was that depositors would lose confidence in banks if they thought they were being forced to hold assets they didn’t want or to funnel lending to favoured industries. Whether or not their fears were justified, depositors wanted to feel that their money was safe. The Bank believed that it could better provide this reassurance if its formal regulatory powers were left vague: it didn’t want to be seen as a tool for implementing government policies which might conflict with depositors’ interests. It preferred to appear as a disinterested third party, directing the banking community as a neutral umpire.

Curiously, however, the Bank argued that if regulations were required after all, ‘it would be preferable that such regulations should be made by the Treasury rather than by the Bank’. It is not immediately apparent that this would have made depositors less nervous if the ultimate effect on banks’ balances sheets was the same. The Bank here seems to have thought that, with a huge majority in the House of Commons to back him, Dalton could be confident of getting his policies implemented without having to rely on the Bank of England. Catto did not want to become Dalton’s enforcer. As he wrote at the time in a letter to the permanent secretary to the Treasury: ‘the Bank has always worked with the ‘velvet glove’. It will continue to do so. But if the necessity arises, the ‘iron hand’ of the Treasury could then be inside the ‘velvet glove’! I should hope and believe, however, the necessity would rarely, if ever, arise’.

Figure 2: A letter from Lord Catto to Sir Edward Bridges, the permanent secretary to the Treasury

Bank of England Archive, ADM 11/1 (42)).

Catto got his way and the powers that frightened him so much disappeared from the draft Bill. This was partly because Dalton needed the Governor’s support to make sure nationalisation appeared uncontroversial. But it helped that Catto was able to combine his determination to preserve the Bank’s traditional, informal powers for supervising the financial sector with a willingness to redefine the Bank as an institution which Dalton could use to implement his other economic policies. According to Labour’s 1945 manifesto these included nationalisation of some key industries but, for most of the economy, continued private ownership subject to ‘public supervision of monopolies and cartels’.

Such ‘public supervision’ is exactly what the Bank was repositioned to provide when the Bank of England Act was passed in 1946. The Act transferred legal ownership of the Bank of England to the state, but day-to-day operational matters were almost unaffected and the Bank kept its de facto autonomy. Meanwhile the final text of the Bank of England Act included a provision that the Bank could make ‘requests or recommendations’ to banks ‘if they think it necessary in the public interest’ (which sounded reassuringly similar to what the Bank had always done anyway). Along with the formal transfer of ownership from shareholders to the state, this provision allowed the Bank to represent itself as an agency for ‘public supervision’ of the banking sector on behalf of the government, able to influence the banking sector, but at arm’s length from Whitehall and Downing Street.

This was a new chapter in a long story. For 250 years, the Bank had been repeatedly renegotiating its relationship with successive governments. The Bank had, in that time, developed a tradition of believing that it was uniquely able to meet both the changing needs of the state and the broader public good by maintaining a clear separation between itself and the government of the day. It saw its job as mediating between governments and the world of money. This is why Catto expressed a hope that ‘directions and regulations will never be needed and that the Treasury and the Bank will be able, without them, to obtain from the Banking Community, as in the past, all the co-operation necessary to conform to Government policy’.

The Bank’s origins were as a solution to this very problem of mediation. It had been founded in 1694 as one of a novel set of institutional arrangements established after the Glorious Revolution of 1688 which, together, mediated a new sort of relationship between King and subjects. This new relationship allowed the state to more easily borrow money for William III’s wars with France. Since then, the Bank had helped governments borrow money for successive wars and, later, public services. In the 19th and 20th centuries it helped governments regulate the supply of money in the UK by maintaining the gold standard and then managing sterling’s participation in the Bretton Woods system.

The underlying principle was in each case the same: governments had fiscal and economic objectives and having an institution like the Bank of England at hand helped them to achieve those objectives. Its mediating position between governments and markets was what made it so helpful. And each time a new government arrived with new objectives, the Bank adapted to meet them.

In 1945 the negotiations between the Bank and the government led to a new relationship acceptable to both parties. Catto was able to avoid being given the formal powers he found so alarming but, after nationalisation, the Bank understood its role and was willing to use its influence to convince the banking sector to act in accordance with government priorities. The Bank, for example, set up the Industrial and Commercial Finance Corporation to channel funding to SMEs after Catto twisted arms to get the big banks to back it. The government was therefore able to rely on the Bank to deliver aspects of its economic policy. The Bank, meanwhile, once again demonstrated an ability to repurpose itself to serve the state whilst maintaining its historic mediating role.

Austen Saunders works in the Bank’s Policy Strategy and Implementation Division.

If you want to get in touch, please email us at or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge — or support — prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.