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Robert Yee, "The City's Defense: The Bank of England and the Remaking of Economic Governance, 1914-1939" (Cambridge UP, 2025)
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- [00:00]
A
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- [01:07]
B
Hello, everyone, and welcome to the New Books Network. I'm Mark Clobus, and today I'm speaking with Robert Yee, author of the book the City's Defense, the Bank of England and the Remaking of Economic Governance, 1914-1939. Robert, welcome to the New Books Network.
- [01:24]
C
Thank you for having me. It's a pleasure to talk with you today.
- [01:27]
B
Well, it's a pleasure to have you on our podcast. I was wondering if you could start us off by telling our listeners something about yourself.
- [01:34]
C
Sure. So I'm a lecturer right now at Yale, where I teach in the program on ethics, politics, and economics. And I'm mainly interested in economic history, but very specifically the history of finance and central banking. And I'm currently thinking about topics related to economic governance and the international order. So how is the global economy structured? What are the rules that that govern it? And how does it cope with crises? And so all of these ideas and questions are kind of percolating in my research.
- [02:07]
B
I find that's a topic that is of growing interest in recent years. And I was thinking that was reflected in your endnotes as well. But I'm thinking about how it's not a topic you saw as much engagement about, say, a generation ago. It was like, there's Bretton woods and there's the aftermath and we're not going to look at that. And you have a very interesting examination, not of the bank of England generally, but specific more specifically about its role in that process. What led you to choose that as a topic?
- [02:38]
C
Well, I suppose one thing that got me interested in this topic was the idea of economic powers, the rise and fall. We often hear about the rise of China or the dominance of the United States as a kind of global hegemon. But one lingering question I had was not related to not only how do powers rise but also how powers persist, how they maintain their influence over the global economy. And I found Britain particularly interesting in that regard because it became a major economic power in the 19th and early 20th centuries with the Industrial Revolution and the City of London. But as I argue in the book, it sort of maintained this influence much longer than we historians have previously known, partly because of the bank of England's work.
- [03:22]
B
And yet as you explained in the first chapter, it was, it was almost by accident that they fell into this role. I'm reading your description of the pre war bank of England. It seems such a sleepy institution. It's so insular and yet then how quickly it evolves and adapts to that role in a matter of a future years.
- [03:47]
C
Oh absolutely. It begins to look outside of its walls in the City of London and starts to think about what the role of a central bank should be not only in the British economy, but also the global economy. And it begins to hire economists and outside experts and hire people at the bank who had not previously been employed. And so this was a very revolutionary break from its centuries long practice of only hiring from the City of London banks.
- [04:14]
B
I was wondering if you could elaborate a bit upon what the, what the bank of England was like before it undertook that role and what were the forces that led it to adopt this shift. Right.
- [04:26]
C
So the bank of England was very much a sort of small group, small elite group that mostly came from a select few merchant banks in the City of London, Barings Brothers, Morgan Grenfeld, Rothschilds, early in the 19th century it also had representation from some of the larger banks. So thinking of like District bank and others, and the City of London and the bank of England had a very close relationship. They were mostly concerned, the bank of England was mostly concerned with how the City of London coped with financial crises and concerned about the profits generated from financial activities. But it was really the outbreak of the First World War that changed all of this. This was the largest war Europe had yet seen in the first major continental conflict since the Napoleonic wars. And it led to the closure of the London Stock Exchange for an unprecedented six months. And so, as I argue in the book, it was kind of in the aftermath of the 1914 crisis, in the ensuing wartime and immediate post war years, that the bankers began to ask questions about the role of the central bank within the financial system.
- [05:36]
B
It feels like that these were questions that were forced upon them by all these broader changes. And you described that. It wasn't as though the bank of England was operating in this policy vacuum either. Because one of the undercurrents that I enjoyed reading is this competition. Maybe that's a bit of an overstatement, but with the treasury in terms of these roles that the bank of England is stepping into this role at the very same time that the treasury seems to be expanding its influence as a result of the war and the responsibilities it undertook during it in order to manage the economy and help the British win.
- [06:17]
C
Absolutely. So the bank of England is sort of operating in this context in which it grapples with its own rule and contend and seeks to gain power from other institutions. So as you mentioned, the treasury was one important institution. It had almost been an intellectual powerhouse in its own right for much of the 19th and early 20th centuries. The others, of course, are the Federal Reserve in the United States. As it kind of sees the United States as a potentially competing economic power. It seeks to cooperate with, in many ways with the Federal Reserve, but also compete with. And then there are other international organizations such as the League of Nations and foreign governments as well, that it begins to contend with. And it's in this context, sort of the, the outside external forces that motivate the bank of England and its bankers to begin to reevaluate their own purpose. Suddenly they don't. They are not almost allowed to just remain insulated and focus on what happens in the City of London, but they're forced to grapple with the kind of changes to the global economy that have been underway because of the war.
- [07:24]
B
One of the topics that you address in your book is the effort to re establish the gold standard. And from a British historical perspective, that's typically told as a story of the treasury, of Winston Churchill, the Chancellor, the Exchequer, you're pushing for it, the resistance of John Maynard Keynes and so forth. What you don't oftentimes hear as much about in that is the role of the Bank. In that I was wondering if you'd talk a bit about how the gold standard affected the bank, maybe in effect perhaps diminished the need for that role prior to World War I, and then also the bank's position on the reestablishment of the gold standard in the 1920s.
- [08:11]
C
Yeah, that's a really interesting question. So one motivation I guess I had for that chapter was, you know, it's really easy to look back and kind of denounce the decision to return to the gold standard. You know, how could they do such a silly thing? You know, to paraphrase John Maynard Keynes. And this criticism has led many historians to argue that, you know, people were either too set in their ideology or they tried to impose austerity and hurt the working classes. But I tried to push it back against this kind of standard narrative. You know, I'm not saying the gold standard was a great idea and that it would have even worked under ideal circumstances, but what I'm saying is, for at that time, people had this idea that to resolve the problems of high debts and the hyperinflation that you saw in the European continent, that the gold standard made sense from their point of view. And so my motivation and interest for writing that chapter was to focus on the bank of England's role in defending it as an intellectual exercise against many of its critics, you know, most notably Keynes. And for that reason, the bank of England begins to hire economists and experts who are able to justify the decision. And even after the collapse of the gold standard in September 1931, these economists continue to justify a regime of stable exchange rates and also the bank of England's role in maintaining that system.
- [09:33]
B
That point you just made about how they were beginning to hire economists and other experts is one that recurs throughout your book. And it's something that, when I'm reading it, when I was reading it, I was thinking to myself, really, they needed these people. Because you would think that. I mean, after all, the bank of England had not been created in the 1890s or in the war. It had been created as far back as the 17th century. And yet it's really interesting to consider that it was only in the wake, during the war and afterward. And admittedly, the intellectual environment is very different, but nonetheless, it's only at that point that these bankers, who have functioned perfectly satisfactorily for generations as this insular little club, suddenly feel like they need to start bringing in all these outside experts. What brought about that shift? And to what degree did it. Was it driven by this growing concern about economic governance? And to what degree did the expert, or conversely, to what degree did the experts basically push for a more assertive role in economic governance.
- [10:45]
C
Well, I think you're right to point out the kind of revolutionary aspect to this shift. You know, the bank of England had operated without experts and economists for 200 plus years. And so to bring them into the kind of traditional banking establishment, you know, previously run by elite merchant bankers in the City of London was a major break from standard practice. But it was done mostly because of the, as I mentioned, the kind of difficulties brought about by the First World War and at the pass of the new governor, Governor Montague Norman, who was really keen on elevating the position of the bank of England in economic policy. And so he was rather strategic in this regard because he hired economists in areas outside the Bank's traditional area of expertise. So they hired two economists from the United States who had worked at the or who had knowledge of the Federal Reserve System. They hired one who was an expert in industrial policy, which was a new area for the bank in the interwar years. And they also hired experts from around the British empires that were trying to foster close relations with the British Empire. And so they saw experts as a tool, almost as a way of fostering closer connections with other countries, but also the way of maintaining the City of London's own financial interests.
- [12:18]
B
One of the things that struck me most when I was reading about this move towards acquiring these experts and these economists is how far afield they went. I'm reading about how I would have thought, as you begin to write about this, that in the book that they're going to be turning to people like Keynes, their other, you know, perfectly capable economists and business experts in England, and yet they're going to the continent, they're crossing the pond and bringing over Americans and Canadians to do this. And I kept asking myself this question, why did they feel that they had to go so far afield? Were they. Was there the sense that it simply wasn't a British thing that they were undertaking, or was it appreciation that because they were adopting this much broader perspective, they had to look globally for people to bring in that perspective because they didn't think anybody would provide it within the British Isles itself?
- [13:20]
C
Well, they also brought in many economists and statisticians from the British Isles. They found a few who had been trained at LSE as well as Oxbridge. And in many ways there was a lot of pushback against these economists. They clashed frequently with the bankers. They had rather contentious meetings. And I don't want to say that this relationship was a match made in heaven or anything, but they felt that the sort of way to challenge the kind of different theories that were floating around Keynes criticism of the banks was really well known. The treasury had their own host of experts that they wanted to combat and they wanted to find people who knew how the empire and foreign countries worked. And so they felt that in order to bring in this knowledge, they had to find people from these, say, more distant areas and outside the kind of traditional establishment who might be able to offer this sort of intellectual defense of their policies and speak on the level that. And speak on the highly technical level that Keynes and others were talking on.
- [14:37]
B
And that actually brings us back to Norman, because he's a very controversial figure. He has this long tenure as the governor of the bank of England. There's a lot of criticism about him and subsequent works. And yet I was struck by his modesty, if you will, his self awareness that he appreciated that in this environment that he didn't have that knowledge and that he was open to listening to people, not necessarily agreeing with everything that they tell him, but that he was, he recognized his. He seemed to recognize his limitations and wanted to have something that allowed him to go beyond them given these much wider tasks that they now had to tackle.
- [15:22]
C
Absolutely. I mean, Norman is perhaps, you know, one of the most interesting figures in the book. You know, he's almost the quintessential central banker. He has not one, but two grandfathers who had been directors of the bank of England. He had come from a prominent merchant bank in the city, Brown, Shipley and Company. So he's almost like the least likely figure to bring in experts and actually listen to them. And there's this famous quote that a lot of people, a lot of historians cite, which is something like, we have appointed an economic advisor, but he's not here to tell us what to do, but to explain to us why we have done it. And this quote has actually led many historians to claim that Norman was singularly influential and he was the one to make all the important decisions. But really he was just trying to give the illusion that he was the individual solely in power and that the people around him were merely the means to an end. But in reality, he frequently, if we look at the meeting minutes and his diaries and see the people who he met during these sometimes backdoor meetings, we see that he frequently turned to his advisors and he requested information from them and he asked them to represent him in meetings when he couldn't go. And he really relied on this new class of experts, more so than the bankers who had traditionally been employed at the bank, especially in foreign and imperial affairs.
- [16:51]
B
It really does, I think, underscore the challenge, I think, that the bank was having that it seems that Norman had this sense that he couldn't show weakness, he couldn't show that the governor of the bank of England had, and I'm exaggerating here, had no clue what he was doing, but at the same time he recognized that this was untrengular territory. What the bank of England was trying to do was something that they had not done in the 300 plus years of its existence up to that point.
- [17:27]
C
Yes, absolutely. I mean, Norman is in some ways aware of his shortcomings, even though he doesn't really try to acknowledge it. But he's kind of made to confront these issues when he goes before this government committee, the McMillan Committee, which is a hearing of different people from finance and industry. And he's asked by John Mannar, case in this kind of famous inquiry, all these really technical questions about how the bank sets interest rates and how that affects exchange rates and how the gold standard works. And Norman is really, really nervous and he only responds with these really short answers, often saying something along the lines of I don't know or I can't really say how or I have to get back to you on that. And he goes back to the bank of England feeling a bit dejected, and he turns to his deputy governor who then suggests that they send one of his economists, Oliver Sprague, to the committee. And Sprague has a PhD in economics and he's a professor at Harvard and he's really much more knowledgeable about these highly technical questions that Keynes is posing. And so experts almost fill in this kind of intellectual gap at the bank and allows them to respond to public pressures or governments intervent government intervention when tensions get high.
- [18:53]
B
This wasn't the focus of your book, but it did make me think about how what you write about is very much in line with this shift that you're seeing much more generally in the west during this period, how expertise is becoming more prized and indeed even indispensable. The sense that the, you know, the, the clever amateur or the, you know, the, the, the person who just basically kind of, you know, learned it as a trade, that they can't really manage the complexities of the world anymore, that you need these people who have the theories and the math, even if you don't.
- [19:29]
C
Absolutely. It's kind of this point in the, say, late 19th, early 20th centuries in which the professions, the middle class professions are really taking off and you have more professional associations, you have Professional degrees. And so in some ways, all of these changes that are happening at the bank occurs after the First World War, but also amidst the development of the field of economics as a social science. So in these years, when economics really begins to take off as a discipline, PPE becomes a degree at Oxford. And economics is seen as more of a social science that can offer potential policy solutions and help bankers and policy makers make more informed decisions. You know, it's a much. It's a very gradual process. And there's, of course, a lot of reluctance even until today. But we see, what we see in this period is the first, say, entrance of economists and economic technical specialists in government and in central banks.
- [20:37]
B
Up till now, we've been focused upon how the bank acquires the armature, if you will, to the tools, to the knowledge to exert this role in economic governance. I'd like to shift our focus a little bit to some of the ways in which they exerted that and what it was they were trying to do. You spend a good part of your book talking about efforts to set up more central banks around the world. And here you talk about Otto Niemeyer and Henry. Is it Strakash or Strakash?
- [21:12]
C
Strakash, Strakos.
- [21:14]
B
Figures. Two attempts. I get it wrong. Strakash and Niemeyer and what they were doing. I was wondering if you could elaborate upon the role that these experts in the bank are playing in setting up these other central banks and why it was that they were setting up these banks. Particularly with regard to how it was supposed to aid their effort to manage the broader economy.
- [21:38]
C
Right. So as the bank of England sees the troubles posed by the First World War of high national debts, unstable exchange rates and the collapse of the European economy, they begin to think of different ways of reviving kind of the pre war state of economic stability. The so called first age of globalization. And one of the solutions that they come up with is the idea of establishing central banks around the world, especially in the British Empire, but also outside the Empire, in countries that are willing and able to tie their currencies to a set value of gold and by extension, a set value of sterling. And so the bank of England turns to experts who are sent on these overseas missions to create new central banks, implement policy and fiscal reforms, and tie their currencies to the pound. And so, as you mentioned, one of these figures was a man by the name of Henry Sakis. He was Austrian by birth, and he had been on the board of a major mining corporation in South Africa. And so what he offered the bank were the connections and the insights into much more localized economic conditions that City of London bankers didn't know about these far flung places. And he was the one who went on missions to Austria and Hungary and South Africa where he negotiated with foreign bankers and government officials to create their own central bank. And he believed that creating a central bank would be fundamentally in the interests of these countries trying to stabilize their economies. And if they created a new central bank and tied their currencies to the pound, and they would in the end be able to access much larger loans in London on the London money market at lower interest rates if they followed these recommendations.
- [23:31]
B
It's interesting to think though, about another dimension of this, because what you're describing is something that I would have expected perhaps a bit more in the post war era in terms of the recognition that these countries are going off in their own direction. It's interesting to read this and see it as a effort by the bank of England to expand their influence when it seems as though establishing these banks was some sort of session of influence. I mean, wasn't the bank of England in effect conceding some control over the empire by allowing not just South Africa and Canada to develop central banks, but also India as well?
- [24:15]
C
Yes, that's absolutely right. In some ways this points to how the bank of England is not the sole controller of everything that's happening, but it's sort of adapting to the changing circumstances as they arise. So they see the Dominion, so Canva, South Africa, Australia, New Zealand as well as India. They see these places gaining more political independence as well as economic independence. And so they recognize that they can't sort of impose their policies over these nations. They can't direct economic policy however they want. Rather, they have to work with kind of the national governments and try to show how it's actually in their best interest to follow their recommendations. And so for that reason they send these experts on overseas missions where they have to meet with government officials and meet with local bankers who understand how the foreign financial system work. And it's through these negotiations that they're able to kind of come up with a sort of alliance of interest between City of London interests, which is maintaining the prominence and use of the pound sterling abroad, and foreign financial interests, which is kind of recovering from the devastation of the war as well as the ensuing Great Depression. And so it's after the Great Depression in which we see many new central banks appear actually in the British Empire.
- [25:42]
B
Now, what we describe can be reasonably understood as the bank of England operating within its valleyweight. It's helping expand economic governance through its role as a central banker and helping other central banks get established. You also describe though, that they're getting involved in industrial policy. And I thought this was really interesting because this is one where there's so many more competing interests who are maybe not as accommodating of the bank of England's role. I was wondering if you could explain what was driving that and what led them. What were they seeking to accomplish by doing so?
- [26:27]
C
Yeah, that's a great question. I mean, industrial policy is really another revolutionary for the bank because virtually no central bank then and even very few today are heavily involved directly with intervening in industry. And so it's seen as kind of this radical break from tradition. But the bank of England basically sees that the concerns of Britain's declining industries, especially faced with growing global competition and later with the rise of tariffs, this leads to major unemployment, social instability. And the bank of England is not particularly concerned about the actual performance of industry in itself, but they believe that declining industries would be unable to pay their debts, they would have to default. And this would ultimately be much more disruptive for the financial sector in the City of London. And so for these reasons they actually turned to another economist from the University of Manchester named Henry Clay, who helps them devise an industrial policy. And so what he advises the bank to do is kind of turn to a policy of rationalization that is kind of merging and closing unproductive firms and providing support mechanisms for different firms, facilitating loans and extending credit. And they do this through a number of different projects. The bank sets up a number of different subsidiaries so that these projects don't end up on their own balance sheets. And they're able to amass the loans not only from their own reserves, but they're able to acquire funding from the private banks who invest in these projects because they believe that saving the industrial sector would help preserve the stability of the financial sector.
- [28:15]
B
I was thinking you see that as well when they get involved in the currency exchange, a question of the 1930s, where they're not just seeking to figure out what the post gold standard world is going to look like after Britain goes back off the gold standard. But also they're doing it with this. Like, for example, they're extending loans to the Germans. And I read that, I'm thinking really they're giving loans to the Nazi regime. And as you explain, they may not want to do this, but they recognize that this is going to ensure that the Germans keep paying British businesses the Monies that those businesses are owed.
- [28:54]
C
Yeah, so the bank of England sees a kind of financial instability on the continent and really tries to adapt to what they see as kind of unstable regimes. And so in the years before the outbreak of the Second World War, they come up with a policy called exchange control, which involves putting heavy restrictions on conversions out of the currency. And what's interesting, I found in the archives that the bank of England was really the only supporter of this policy. So they get opposition from Keynes and the treasury and the League of Nations and the British government, but they argue that they're the ones who have the technical knowledge to kind of solve the ongoing problems in the late 1930s. And so eventually it's because of their persuasion and their kind of efforts to justify that exchange controls actually adopted in early 1939, months before the outbreak of war on the continent. And as a result, Britain becomes relatively well prepared for the outbreak of war.
- [30:01]
B
It seems that they've by 1939 acquired this confidence that they really seem to not have 20 years previously. How does that embrace of expertise and the, and the adoption of this more, you know, maybe aggressive policy shape their role not just during the Second World War, but also after the war as well, when they're nationalized?
- [30:30]
C
Yeah, that's a great question. I mean, so a lot of people will kind of point to the nationalization in the 1940s and the kind of relative decline of the British economy in the post war years as a kind of a sign of weakness or kind of decline and fall narrative. And I don't wholly dismiss all of the quantitative evidence and the kind of the rising of the United States as a major economic power. But for me, what I find interesting is not necessarily the decline in fallen era, but actually how Britain actually remains a major player in the financial system and the bank is able to actually maintain Sterling's relevance. You know, even today London is still a major financial center and even surpasses New York in foreign exchange transactions. And so how is a pound able to maintain its kind of reserve currency status, you know, despite all the devastating devaluations of the post war years? The IMF loan in the 1970s, it's through the kind of authority and the new responsibilities that the central bank cemented for itself in the interwar years that allows it to not only maintain its own influence in the post war years, but also stabilize the British financial system up until today.
- [32:00]
B
So to what degree does the bank of England then get a lot of credit for defining or redefining the, the practice of Central banking not just in Britain, obviously, but also throughout the world itself.
- [32:13]
C
Yeah, that's a great question. I mean, in many ways I see the bank of England, especially In the early 20th century, as a major pioneer in many of these areas. You know, it starts to turn to economists and statisticians and quantitative tools to help them analyze this thing we call the macro economy. You know, much earlier than other central banks and much earlier than the kind of post war institutions of the Bretton woods, institutions of the IMF and the World Bank. And in some ways I find this story interesting because it sort of challenges our traditional understanding of what central banks are meant to do and how these responsibilities change over time. It's not just the case that central banks must be confined to only monetary policy, only setting interest rates and only targeting a certain amount of money supply in circulation, but that they're flexible institutions that they're able to change with the ongoing evolution of the world economy, the geoeconomic tensions, financial crises and other threats to the financial system. And ultimately, the way it adapts is reflective of how much authority it can command, especially based on who it hires.
- [33:31]
B
We appreciate the time you've taken to speak with us, but before we go, could you tell us what you're working on now?
- [33:36]
C
Right, so I'm thinking still more about this kind of rise and fall of economic powers. And I'm interested in thinking about how Germany became a major economic power on the European continent. And I'm interested in thinking about how it was able to do so by using different economic tools, regulations, interventions in the economy, and how it was able to build up both this industrial and financial base simultaneously. And so I'm thinking about a project that carries from the mid 19th to the mid 20th centuries, but with kind of ongoing implications today. And thinking about how Germany, even today, continues to be the depending on the metric number three or number four in global number three or number four in the global economy. And so that's my current project.
- [34:29]
B
Well, it sounds like a fascinating project. I look forward to seeing the results.
- [34:32]
C
Thank you. Really appreciate it.
- [34:34]
B
Robert, thank you very much for taking some time out of your schedule to speak with us. I hope you have a wonderful day.
- [34:39]
C
Thank you, Mark. You as well.