Explains his objections to Cole’s plan of nationalising the joint-stock banks (see 1/160–1 and cf. 5/43–4 and 5/47–8).
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Transcript
7th. June, 1932.
Dear Cole,
Many thanks for your letter and enclosure. Dalton had already told me that you were going to get into touch with me and I have been looking forward to hearing from you.
Let me begin with the last paragraph in your enclosure. I am in entire agreement with this. I do not think we shall get anywhere at all if we pot† out the Bank of England to some committee or other, and do not leave it under the direct immediate control of the Chancellor of the Exchequer or whatever Cabinet Finance Minister is in control of the banking and credit policy of the country.
Now let us see what this involves. The Bank of England is a gigantic institution whose policy is interwoven with the whole finance of the world, and by long experience there has been built up a tradition of which the Governor of the Bank is the servant and the exponent. His court to a lesser extent has together traditional knowledge which enables them to modify his judgment in carrying out this policy.
According to the ideas which you and I share the Government Finance Minister will have to get on top of all this. He will have no existing civil servants to help him for at the Treasury at the present time there is practically no direct knowledge of banking, either of central banking or joint stock banking; and unless therefore the Minister can himself understand the larger details of central banking he will be merely a tool in the hands of the bankers whom he takes over to do the day to day work. It seems to me to be unquestionable that this is therefore a whole time job and that the bank officials will (however they may be called) have to become in effect civil servants.
Now you want to nationalise simultaneously all the Joint Stock Banks in the country. How is the actual work of governing them going to be done? There are at present as I have already said no civil servants who know practically anything about it. To-day, in the Head Offices alone there are a great number of highly trained bankers who have done this business for years and who handle all the larger detail. Apart from them, there are an immense number of smaller fry who have quite important functions to perform in the different branches up and down the country. If the Government is going to nationalise all the Joint Stock Banks all these officials are going, in effect, to become civil servants; and all the work that they do is going to become government work; and all the major directions of policy in all these things will have to be government business.
I cannot envisage the minister who is controlling the Bank of England having any time or brain left to perform this colossal task for the Joint Stock Banks. You may say perhaps that an additional Minister could be appointed to do this. But this will not really meet the case because however many Ministers be appointed, many of the intricate details will really have to be Cabinet business. You may perhaps alternatively say that only a few really large issues will have to be decided by the Minister, and of course it is true that under no circumstances will every detailed transaction of every individual branch bank have to come before the Minister. Nevertheless I am quite sure that the number of decisions which would have to be taken at the top would be far too numerous to be made a part time job for an already occupied Minister.
My main objection therefore to attempting to nationalise both the Bank of England and the Joint Stock Banks in the first year or two of a Socialist Administration is that it is essential that the work of directing shall be well done. I cannot conceive of a Socialist Government performing effectively the double untried task of managing both the Bank of England and the Joint Stock Banks.
Compared with this major objection other objections are of minor importance: and yet I think they should be stated. However much we short-circuit the procedure, the Bill to nationalise the Bank of England will take a considerable amount of parliamentary time; and there is bound to be a demand for parliamentary time to be available for other measures which the Socialist Government will want to carry. I believe that the inclusion of the Joint Stock Banks will need a further very large part of parliamentary time which the Government would have a difficulty in providing.
There is an argument for taking a bold comprehensive course (this has been metaphorically referred to as not taking two bites at a cherry or not blunting our spearhead). On the other hand there is political wisdom in dividing our enemies. We should get much support to-day for nationalising the Bank of England which would be lost to us if we proposed also to nationalise the Joint Stock Banks. We can afford to take a lesson out of the notebook of our opponents, recollecting the Derby Scheme for Conscription during the War. (Metaphorically, not taking two bites at a cherry does not necessitate eating the whole bag of cherries at once.) We are also entitled to take into account the opposition of the Co-operative Party to nationalising the Co-operative Wholesale Bank, which would of course share the fate of the Joint Stock Banks.
You fear that ownership of the Bank of England alone will not give us the necessary power to cause an expansion in industry because you say that open market transactions alone are not sufficient for this purpose. The real question is however whether all the instruments in the hands of the Bank of England plus all the instruments in the hand of the Government would be sufficient. You do not forget I am sure, that the Government has power to engage in Capital Enterprises on borrowed money. What has prevented the effect of this policy in the past has been that while the Government was pulling this way the Bank of England was pulling the opposite way and deflating, or at any rate, was neutralising the Government’s action owing to its desire either to return to the Gold Standard or to stay on it when it was there. Quite clearly a Government freed from the Gold Standard and with the Bank of England in its control could inflate if it wished to. (Because if it were not so, the Government could win universal popularity by remitting all taxation and borrowing and spend lavishly.) Of course I do not want inflation but stability of the price level.
Finally, you are afraid of an attempt by the Joint Stock Banks to sabotage the credit policy of a Labour Government by not expanding credit when they have the chance. I do not regard this as very likely because all these years some of them have been complaining against the Bank of England and calling upon it to enlarge its basis of credit. But it might happen. I am more afraid that the Joint Stock Banks might misuse the credit provided for them. You suggest that the vague power of control which the Bank of England possesses over the Joint Stock Banks will not be adequate. That is probably true, but this will be augmented by 1—the general power of a Government to get its view enforced and 2) as I envisage it, the special powers of control over the whole finance of the country which I think the Government ought to obtain at the outset. You will perhaps ask what form this general power of control is going to take? My view is that we ought to enact a kind of financial D.O.R.A. But I do not think this is a thing which we should talk about openly. Of course if the worst came to the very worst and we were resisted on all sides, we might be compelled to put D.O.R.A. into operation in the shape of nationalising the Joint Stock Banks. But I think this is very unlikely as the financial magnates of the country really do come to heel to a Government which is determined and which has public opinion behind it: and quite clearly we could not nationalise the Banks unless we had these prerequisites.
Yours sincerely,
[blank]
G. D. H. Cole Esq.,
7, Parsifal Road,
London, N.W.6.
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† Sic.
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