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Paper entitled ‘Reasons for the immediate Socialisation of the Joint Stock Banks’ [by G. D. H. Cole]

(Typed. The first sheet is a carbon copy.)


Reasons for the immediate Socialisation of the Joint Stock Banks.

I am writing on the assumption that the Labour Party has come back to office with a clear majority and that it intends in the first sessions of Parliament to lay the foundations of a general economic plan of reconstruction and development. If this is so, it appears to me that the immediate Socialisation of the Joint Stock Banks as well as of the Bank of England is bound to be required. I know it is often argued that a Government which had assumed the ownership of the Bank of England could by this means and by the use of emergency decrees exert effective control over the Joint Stock Banks and the City Houses, and compel them to do what it wanted. But for several reasons I do not believe this to be the case.

In the first place I very much doubt the effectiveness of ‘open market operations’ in causing an expansion in industry or in the actual use of credit in face of any hostility to this policy on the part of the Joint Stock Banks. It is true that the Bank of England can by buying securities increase the cash resources of the Joint Stock Banks and so enable them to lend more if they are willing to do so. But it cannot compel them to lend more; and it would be well within the power of the Joint Stock Banks to immobilise the funds so created for a long enough time to defeat the Socialist plan for the stimulation of industry. This would of course involve the Joint Stock Banks in some forgoing of profits through their failure to use the cash resources at their disposal; but this loss would not be too large for them to incur without danger if they saw the prospect by means of it of bringing the Government down. Nor do I think that emergency measures of control could compel the Joint Stock Banks to expand their loans against their will. Control without ownership can be used to prevent people from doing things; but it is very difficult to use it positively to make them do things which they do not want to do.

I know it is suggested that, as far as the financing of the Government’s own schemes is concerned, a refusal by the Joint Stock Banks to advance the necessary funds might be met by a resort to other forms of borrowing, e.g. in the bill market. But this argument seems to be based on a misapprehension. For the funds which are available in the bill market, with the exception of balances belonging to foreign banks in London, come for the most part from the Joint Stock Banks, which lend them to the bill market for relending. It can hardly be supposed that, if the Joint Stock Banks were endeavouring to bring the Government down by a refusal to provide credits directly, they would be prepared to place the necessary sums at the disposal of the bill market for relending, and so to provide indirectly the very resources which they were withholding in a direct sense.

Moreover, if the Government is pursuing a definite economic plan, involving a controlled and equilibrised development of different industries, it is indispensable that it should be in a position to control, not only the total volume of credit available for lending, but also its distribution among the various industries and business firms demanding it. It is, however, quite impossible for a centralised and branchless institution such as the Bank of England to exert this control, or for an organisation to be improved side by side with the Joint Stock Banks for undertaking it. The Joint Stock Banks are the natural agencies for this rationing of credit, and I can see no chance of any National Economic Plan working out successfully unless they are acting in full harmony with it.

Finally, in my view there has been a tendency greatly to exaggerate the stimulative, as distinct from the restrictive, powers which can be exerted by the Central Bank in face of any hostility on the part of the Joint Stock Banks. It is of course essential to take over the Central Bank; but this measure will be ineffective unless it is accompanied by complete socialisation of the Joint Stock Banks as well. Given these two things, I agree that the remaining institutions of the City of London—acceptance, discount and issue houses—can be either controlled or superseded by new State-created institutions without immediate socialisation. But this is only on the assumption that the Joint Stock Banks, as well as the Bank of England, have first been completely acquired.

One last word. Whatever may be the ultimately desirable constitution for a socialised Bank of England, I hope it is clear that during the earlier stages of transition the Bank must be brought directly under the control of the Government and its organs for economic planning, and not entrusted to any representative body of a non-political character, which would not be directly amenable to Government control. In the early stages at any rate the control will have to be political if the Plan is to be worked as a coordinated Government measure.

Letter from G. D. H. Cole to F. W. Pethick-Lawrence

7 Parsifal Road, Hampstead, N.W.6.—Defends his plan of nationalising the joint-stock banks, but acknowledges that, as the Policy Sub-Committee has now reported, the controversy must be turned elsewhere.



7 Parsifal Road, Hampstead, N.W.6

Dear Pethick Lawrence,

I don’t expect you expected to convince me: at any rate you have not. I should propose to take over the ownership of the J.S.B’s, without for the time disturbing their separate existence, or necessarily changing their managerial personnel, except at the very top. I don’t see any insuperable difficulty in controlling their operations, provided the banks pass as going concerns under public ownership; but I do see quite appalling difficulties in running a Socialist plan for industry in face of the independence and possible hostility of the Joint Stock Banks. However, I understand that your Sub-Committee has now done its report: so that the controversy has now to be transferred elsewhere. I shall hope yet to have a chance of convincing you that I am right—if we mean real Socialism now. Of course, if the Party does not mean that, but only another Government pretty much like the last, that alters the whole thing. In that event, I am afraid I shall not be the only person who will lose interest.

Yours sincerely
G. D. H. Cole

Carbon copy of a letter from F. W. Pethick-Lawrence to G. D. H. Cole

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).



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,

G. D. H. Cole Esq.,
7, Parsifal Road,
London, N.W.6.


† Sic.

Letter from Lord Coleraine to Lord Pethick-Lawrence

43b Sloane Street, S.W.1.—Thanks him for a copy of his speech in the House of Lords withdrawing his motion (see 1/171). Agrees that nationalised industries require capital investment, but believes there must be some check upon their expenditure.

Letter from Hugh Dalton to F. W. Pethick-Lawrence

107 Albert Bridge Road, S.W.11.—Comments on Pethick-Lawrence’s budget proposals, with reference to his own, and recommends measures to be taken if a capital levy is ruled out for the present.



107 Albert Bridge Road, S.W.11.

Dear Pethick Lawrence,

I have nothing that can be called a criticism to make of your Labour Budget proposals. My own reply to Greenwood was less ambitious, as I made no attempt to estimate, or even guess, the revenue yield next year.

Several of my practical proposals, e.g. to halve all the food taxes, agreed with yours. An alternative, roughly equivalent from the revenue point of view, would be to concentrate on the sugar duty & reduce it by 75%.

The loss of annual revenue consequent on a Capital Levy is not easy to estimate. I have worked it out in some detail, so far as the inadequate available statistics allow, in my little book on this subject {1} which is now in the Press, & I don’t think I am far out of agreement with your estimates.

If Capital Levy is ruled out for the moment, the line to take in the House is, I think, simply the need to shift burdens, i.e. lower food taxes & more generous allowances etc for the smaller income tax payer and, on the other hand, more steeply graduated super tax and death duties.

Yours sincerely
Hugh Dalton.


{1} Presumably Principles of Public Finance.

Letter from Hugh Dalton to F. W. Pethick-Lawrence

107 Albert Bridge Road, S.W.11.—Is in favour of stabilising the price level and therefore does not believe the Treasury Minute should be abrogated at present (see 1/192), as it is a defence against inflation.

(Printed letter-head of the London School of Economics, which Dalton has enclosed in square brackets.)



107 Albert Bridge Road, S.W.11.

Dear Pethick Lawrence,

I should like a talk with you sometime before the next Finance Committee meeting. I regret to find that I shall again have to leave early, as I have an engagement at 6.30 on that day to dine with Charles Latham and the London Accountants.

Shortly, my view is the following.

I am in favour of stabilising the price level now & in the near future, though, looking further ahead, I hesitate to commit myself to a definite policy. Many factors seem to me to complicate the distant view.

I am more afraid of inflation in the near future than, I think, you are. I want stabilisation as a defence against the F.B.I., no less than against the old-fashioned deflationist authorities, who are, I think, the weaker of the two possible disturbers of the price level.

I don’t, therefore, feel happy about abrogating the Treasury Minute at this stage. It is our only real defence against inflation at present.

Nor am I so certain as, I think, you are that the Minute will operate to check a healthy, as distinct from a hectic & inflationist, trade revival in the near future.

Keynes said a few months ago at a Committee, of which I am a member, that he thought there was a good deal of margin in the situation, even with the Treasury Minute unchanged. In addition to the margin in the Currency Note Issue, he attached importance to the prospect, with reviving trade, of a more rapid circulation of bank deposits. I would add another factor, pointing in the same direction, namely the prospect of an increase in trade credits (between business men,—I don’t mean bank credits), as confidence grows.

Further, our situation may be eased by a rise in American prices, sufficient to restore the pre-war parity of exchange & lead to British imports of American gold. This has been long in coming, but it may come quickly, if the Federal Reserve Board’s stabilising policy gives way before the strong forces opposed to it.

My present feeling, therefore, is to pronounce in favour of a stable price level as our immediate objective, without committing ourselves to anything very general in the way of economic principles, & not to mention explicitly the Treasury Minute. Nor would I say that a future rise in bank rate is undesirable. If prices continue to rise as they have been doing lately, it may be desirable to raise bank rate in order to secure stability. My belief, (in opposition to that of others, I hear) is that you can stabilise any level of price you choose, & that there is no causal relation between the level chosen & the volume of unemployment.

If, for the time being, we could get the Govt to agree to stabilisation of the price level as a principle, and, implicitly, to whatever measures may be required to secure it, I should feel satisfied.

But I wouldn’t meet trouble half way, or give any encouragement to profiteers, by proclaiming in advance that more money shall be printed than the Treasury Minute allows.

Yours sincerely
Hugh Dalton.

Letter from Hugh Dalton to F. W. Pethick-Lawrence

107 Albert Bridge Road, S.W.11.—Is glad Pethick-Lawrence agrees with the line he took in the New Leader and would like to discuss the problem with him. Encourages him to address the Indian Majlis at Cambridge. Explains why he joined the Inter-Parliamentary Union. Has been preparing evidence for the Debt and Taxation Committee on points not connected with the capital levy, but will give evidence on the levy later and hopes that Pethick-Lawrence will do the same

Letter from Hugh Dalton to F. W. Pethick-Lawrence

West Leaze, Aldbourne, Wiltshire.—Discusses his correspondence about Thompson and the Budapest Legation, and refers to the forthcoming party conference.



West Leaze, Aldbourne, Wiltshire
Sept 24th 1934.

Dear Pethick,

I have been thinking about the Budapest Legation trouble, on which Hankinson has also written to me. As you know, I got in touch with the F. O. about it in July & I have a letter which I will show you, in confidence, at Southport. I don’t think there is ground for anticipating that Thompson will be reinstated. Technically, of course, he was not dismissed, but his engagement was terminated, as, under his contract of service, was always possible,—his was not an established post—on grounds of economy. Hankinson holds strong views on the merits of ths case, & on the Vice-Consul. In his last letter to me he is again rather rash in his statements, & he should, I think, be careful not to lay himself open, by what he says or writes to others, to a charge of slander or libel. But I think you had better see my letter from the F. O. & have a talk with me at Southport. I doubt whether further representation by Hankinson to the F. O. would be of any utility to Thompson, & whether they might not, in view of H’s strong views on this particular matter, diminish his possible influence on other questions connected with Hungary, on which, of course, we know him to be well informed. I feel it rather difficult to convey this to Hankinson directly. As he is an old personal friend of yours, perhaps you would convey to him something of what I have written, & perhaps you could add that you & I are going to have a talk about the case at Southport.

I have not answered his letter, owing to a sense of the difficulties which I have mentioned. But I do not wish to seem discourteous, & I should be very much obliged if you could let him know that I am in communication with you about his letter & about the case itself.

I think we shall have a good conference at Southport. The Socialist League have ridiculously overreached themselves and are likely, on all the main issues which they have raised, to be put to flight.

I think that the tactics used of old by Fabius Cunctator will be seen, when Southport is over, to have been the right ones to employ against them.

You speak of “autumn chores”. I am doing some too, digging holes in the chalk and carting good earth, and manure, and rot heaps, for the planting of new trees & shrubs! I find that this keeps me pretty fit.

With all good wishes,

Yours ever
Hugh Dalton.

[Added at the head of the letter:] P.S. Hankinson tells me that he put his view of the case to the F. O. Inspector who came out to Budapest. There is nothing more that he could tell the F. O. in London.

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