(An extract from a book by Jack Lang on the Great Depression in Australia. Lang was Labor Premier of New South Wales from 1925-27 and from 1930-32. Thanks to Peter Myers. – RB)
It was the City of London that had established what was known as the mercantile System out of the industrial revolution. The Victorian era had been one of great commercial expansion. With that rare genius for political invention, Gladstone, Disraeli and other British statesmen sought a substitute for the old system of Crown Colonies. They found it in the British Empire. Their formula was to hand to the colonies the right to govern themselves, providing they did not break the financial nexus with the City of London. The City of London provided all the capital required for the development of the colonies. The City controlled the ships, the wool and wheat exchanges, the insurance houses and all the other machinery of trade and commerce. Self-government for the colonies did not mean financial independence. Just as the Medici Family had been the money-lenders of the Middle Ages, so that their family emblem of the three golden balls became the signpost of the pawn shop, so did the frock-coated gentlemen, who worked in the City, become the money-lenders of the Empire. It was still the day of the country manors, the ducal estates, the hunt clubs and the stately London hide-outs of the aristocracy. They clipped their coupons each quarter and cashed them for their interest on loans raised for “poor colonies.” They collected dividend cheques from companies operating in places they couldn’t even locate on the map.
The Old Lady of Threadneedle Street, as they called the Bank of Engand, presided over the financial dynasty of the Empire. It was supported by the Big Five, the major private banks. If a government in the Dominions or the colonies wanted to raise money, it had to go through approved channels. The financial world was divided into zones of influence. The Houses of Nivison, Rothschild, Barings and Morgan, Grenfell, all had their respective rights. If a government in the colonies wanted to raise money, it could only approach one firm. It had to meet a rigidly controlled scale of underwriting fees. It had to accept the conditions and the interest rates dictated by its London representatives. Every Government had its London agents, who were actually agents for the British investors. There was no room for argument. It was a case of taking it or leaving it. It was useless to try another source. The City had its own underground communication system. It was left to the underwriters to divide up the spoil. They simply produced the clearing house.
In addition there were the big mortgage companies, who had invested in colonial estates, handled colonial primary produce and advanced money to colonial settlers. They were closely allied to the banks. They specialised in mortgages. As they invariably reserved the right to handle all the produce as well, they perfected a form of tied business that left no loopholes for the client. Usually the banks and the mortgage companies had interlocking directorates, who specialised in colonial business. But during the First World War the centre of gravity changed slightly. War finance is always inflationary. That is the only way it is possible to pay for war. It is a non-productive enterprise. So money is pumped into circulation for which there is no corresponding build-up of assets. When the war is over the debt remains, but there is nothing to show for it on the books. It has been dissipated in cannon fodder, in keeping the army in the field and in paying for the havoc generally. So overseas investments in war are not regarded as a good risk. After war, there is invariably a depreciation of the currency. The quickest way to balance the war debt is to depreciate the real value of money. So values rise in terms of nominal currency. That was the borrow-boom cycle of the First World War and the peace that followed.
The City of London came out of the war with the problem of the peace still to be won. Germany, the defeated nation, was supposed to be burdened with reparations that would make her pay the price of defeat. Actually Germany had no intention of paying her reparations and liquidated them as qulckly as possible by a planned, wholesale inflation that destroyed the value of German currency. So the Money Machine had many problems on its hands. In particular there was the problem of Imperial finance. During the war it had got out of hand. Because war loans were not regarded as a good risk the City had refused from the outbreak of war to underwrite Dominion loans. The colonies were told that they should finance their own war requirements. If the Dominions were going to become independent of the City of London, then the entire financial structure would collapse. The urgent problem was to find ways and means of re-establishing the financial supremacy that had been lost during the war.
The City was again ready to lend to the overseas dependencies. But it had to meet a changed set of circumstances, if London was to retain the monopoly of finance. Basically it was a problem of banking. Some formula had to be devised which would enable local institutions to be drawn into the City of London’s net. The financial experts studied the problem deeply. Out of their deliberations emerged the plan to centralise the control of all banking throughout the Empire by channeling it directly into the supervision of the Bank of England. The Bank of England was to become the super Bankers’ Bank. The Bank of England took up the idea of Empire control most enthusiastically. It was even decided to aim at a World Bank, to be run by the League of Nations, which would control the credit of the world. Thc grand idea was that one single Board of Directors would make the decisions which would determine the economic policy of the world. The bankers were to be the supreme rulers. Naturally, the Governor of the Bank of England expected to be at the apex of the system. The Genoa Economic Conference in 1922 took up the idea of this grand form of central banking, and extended its approval.
The British Government called an Imperial Conference. British diplomacy reaches its highest level when it comes to handling visitors. Whether it is a Coronation, a Royal funeral, a visiting monarch, a trade union delegation from the Soviet, or an Imperial Conference, the diplomats know precisely how to handle everything. So they set up a dinner at The Ritz. It was a glittering occasion when all the Orders were worn. The guests were carefully chosen. At the head of the table was Lord Glendyne, of the House of Nivison, the Government’s underwriters. There were directors of all the leading banks, insurance companies and pastoral firms.
But the real work was performed inside the Imperial Conference. Discussions revolved around the future of the Empire as an economic unit. The matter of banking was raised. It was agreed that a Committee should be appointed to investigate the problems of Empire Exchange. Sir Charles Addis was made chairman of the Committee. He was a Director of the Bank of England and the President of the Institute of Bankers. He was also Vice-Chairman of the Bank for International Settlements, and appeared on every important banking committee of that period. It was perhaps also only incidental that Sir Charles happened to be a Director of the Peninsular and Oriental Steam Navigation (P. & O.) Line and of Indian and Chinese banking financial and railway companies. He was just the man for the job ahead. The way was now clear for the Bank of England to take over.
The Economic Conference had decided to bring the Dominion banks under the control of the Bank of England. The idea of a world-wide system of central banks was the core of the plan. The British Government had set up a Currency and Exchange Commission to work out the details. It comprised Lord Cunliffe, Governor of the Bank of England, Lord Inchcape, Chairman of the P. & O. Shipping Line, R. W. Jeans, of the Bank of Australasia, Sir Charles Addis, of the Bank of England, Sir John Cadbury, Secretary to the Treasury, and R. H. Goschen, Chairman of the Bankers’ Clearing Committee. The Committee had recommended a reduction in the amount of credit. It urged a form of deflation. It had intimated that Government borrowing should cease at the earliest possible moment. It said that credit expansion was threatening Britain’s national solvency. Cheap money and the increase in the note issue were undermining the commercial fabric of the country. They said that gold currency should not be used again. Instead the gold reserve should be used as a basis for the note issue.
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