8: The Government of the Bank of England
The Bank of England is governed by a board of directors, as well as a Governor and Deputy Governor, and the character of this relatively small group of men influences the whole of the business.
Like the board of any corporation, they are elected by the shareholders of the enterprise - which means, in theory, that the management of the BE is subject to change every year. But in practice, it is a lifelong post. Members of the board support one another, and generally guide the discussion preceding each annual election to maintain their positions against challengers, and unless one of them pulls away from the rest and makes a serious misstep, he will generally hold his place until he dies or chooses to resign.
When any vacancy of the board does occur, it is generally the board who chooses a new member, which they do with particular care: they consider the body of candidates and select the one who is most suitable to be a bank director - which is to say, the one who will cause the least friction with the existing board - and throw their support behind him, to the best of their ability, to ensure he is in favor with the shareholders. Historically, this has been very successful, and very few "elections" have ever won except by a candidate recommended by the board.
The age of these men is something to be considered: the Governor has always been replaced by the Deputy Governor, and that vacancy has typically been filled, in turn, but the most senior member of the current board, who has also generally served for about twenty years. Even if a man is relatively young when he is initially appointed to the board, which seems to be their practice and preference, he will be a man of some considerable age before he rises to a leadership position.
Such a procedure has about it the consequence of steadiness: a man is not appointed to the board unless the board believes he will be agreeable to their ideas, cannot remain on the board if he pulls away from the pack in any matter of importance. As such, by the time he rises to a position of authority, he has been groomed over the course of twenty years to think and act in a certain way. There is little danger of a young man, who brings with him fresh and different ideas, of ever getting into a position of influence in the organization.
Another curious fact about the BE is that its directors are not professional bankers. This is common practice in the English banking system, and "a relic of old times," that banks are established by merchants and manufacturers, and that bankers servants hired to do their bidding - and as such anyone who has been employed in the banking industry is considered inferior and unsuitable for a position of leadership in that same industry.
Moreover, they are not banking customers in the traditional sense, who deposit and withdraw in significant amounts, but are themselves merchants and manufacturers of some substance, whose dealings have been in the borrowing and lending of larger sums among themselves. The notion of "investing" 100 pounds and loaning it out in the form of five-pound notes is well beneath their station, so much so that most of them would not have any idea how to manage an exchange operation - though in their position as directors, the minister to those who have such experience, and who know what they are doing, and need no direction from those who know nothing of their business.
As such, the governance of English banking is placed in the hands of aged men of good sense, and an excellent knowledge of business in general, but without any special knowledge of the business over which they govern. Such a situation is unheard of in any other industry, where the stockholders seek to grant leadership to an experienced veteran in the specific field of endeavor in which their corporation is chiefly involved.
It's also noted that, while the board of directors of the BE remains largely fixed, with appointees maintaining their chairs until they retire or die, the top office is rotated every two years. It is not required by the articles of incorporation, and the author does not believe this was the intention of the founders, but it happens to be so: board members regularly rotate into the roles of Director and Deputy, and then back to the board, such that there is no constant leadership in the bank.
In theory, these factors would be devastating to any corporation: to have an aged leadership galvanized against change, composed entirely of men who have no experience in the business they manage, and a constantly shifting chief executive. One could hardly do worse by acting with the full and conscious intention of destroying a firm than to manage it in such manner.
But at the same time, these factors have made the BE a staid and conservative institution. The bank has never in all its history been connected to a significant level of bad debt, nor has their been any suspicion of collusion or corruption among its directors. Nor has the bank involved itself in any risky or dishonorable activity. As it turns out, a successful merchant is an admirable judge of the bill and securities and is especially wary of "dangerous persons" and suspicious investments. Ultimately, the steadiness of the bank is testament to their effectiveness of its leadership.
This is not to say the bank has been universally successful, and some of its policies and practices have been utterly deplorable. But one cannot deny that it has persevered through numerous economic crises and remained even more stable than banks whose leadership are closer to what would seem to be sensible.
Even though the Governer of the BE changes often, there is some continuity in its operations. In this way, it is similar to a department of the government that operates under a minister who is appointed by Parliament, and who is replaced every time there is a change in the political winds, but meanwhile the daily operations are generally carried on by employees who manage all the routine business, and who remain in their positions even as the nominal "head" of the department changes.
It be conceded, however, that the duties of the leadership of the bank are not so great or urgent as those of the State. "Banking never ought to be an exceedingly laborious trade," as the bank merely needs to maintain custody of the funds of its depositors, extending only as much credit as is necessary to generate income that covers its own modest expenses. It may increase or decrease the amount of money it extends as credit, increase or decrease the amount of interest charged of its debtors, and increase or decrease the amount of interest paid to its depositors. The entire duty of a bank is balancing this equation, in which it has direct control over all of the variables save one: the amount depositors contribute to its capital reserves.
The suggestion that a bank would fare better under the authority of a single, permanent director is questionable. Most commercial enterprises begin as the work of a single individual, operating according to his own vision. The great companies of recent centuries, while not founded by one person, were placed in the custody of a single "sovereign executive" who exercised despotic power over the affairs of the company. While this led to consistency of vision and boldness of action, this did not always turn out for the best.
To mitigate the danger of placing supreme power in the hands of one individual, many firms develop written statements of intent, a sort of constitution that guides and restricts the power of leadership, and created a division between the executives who run the daily affairs and the boards who determine the course of the company. This has even gone to the extreme of companies in which the chairman was only a nominal head "chosen for show" while the company was administered by other leaders who, in turn, took their orders from the board.
Another reason to resist the notion of having a permanent bank governor is that it would place an extreme level of power in the hands of one man. Such a man would be "lord mayor" of the financial industry, and wield terrible power, by virtue of his control over capital, over the fortunes of a great many. Such power leads by a short course to corruption, as the favor of such a man could grant prosperity or his disfavor could be ruinous, and the ability to wield such power in an arbitrary manner would lead to a sort of tyranny.
To rise to such a level, an individual must have support - and to have support, he must in turn make promises to benefit his supporters. This is next of kin to politics - or as the author puts it "something like the evils of an American presidential election." That is, the stockholders who support a candidate seek to gain favors beyond their due, and will seek to elect a governor that will provide them. While it is only natural for investors to seek to gain by their own investment, the desire of some to profit more than others leads to negative consequences for all.
Also, those who aspire to high positions often are driven by their ambition rather than their capability. That is, those who seek positions of leadership are characterized as being vain and lazy, who cover the dignity and personal rewards of such a post. Those best equipped to manage a bank are men of "gravity and method," who are attentive to the necessary but unglamorous tasks of running a bank. "A vain and shallow person in authority ... may do infinite evil in no long time." The damage such a man does is seldom discovered until a time of crisis has arisen, by which time "very large figures will be required to reckon the evil he has done."'
Much of this can be avoided by appointment of a court of directors, whose collective power is estimable, but whose individual power is balanced by their fellows and by their number diffuse the prestige of high office. The nominal leader of such a group would have administrative control, but would lack the power to impose his will upon the board, and any decisions would receive the consideration of all.
The author considers the Bank of France, which is in a similar position of the Bank of England in that it manages the capital resources of the state, but entirely different in its administration. The BF is, in effect, a branch of the government itself, whose director is appointed by the State. As such, who are in favor with the government are granted the leadership of the bank as any other position of titular prestige, and the director of the BF has not historically been granted to "a very competent person." The effectiveness of this process is best evidenced not by any criticism of the director, but by the actions of the French people, who do not trust their banking system at all, but rather choose to keep their own cash in a vault in their homes rather than entrust it to the banks of their own nation.
All of this considered, it becomes clear that we must abandon the notion of improving the government of the BE by appointing a permanent governor: even if we could avoid choosing a bad one, even a good man would be curdled by the office.
The author looks to the political system, in which many nominal rulers are supported by a permanent secretary - and while the head of a cabinet may be changed at whim of parliament, the secretary remains. Being a subordinate position, they pay and prestige of the office are not so much as to attract "the most dangerous class of people" who are primarily driven by their vanity and avarice to seek prestigious and well-paying position, but it would likely be enough to attract an individual of sufficient competence. And since such a secretary is subordinate to whatever figurehead is in command at any given time, he would not likely have a degree of personal power that would lead to corruption.
Undoubtedly, this position should be held by a trained banker, as banking itself is a skill of some delicateness. Banking itself runs on a very slim profit margin, between the interest that must be paid to depositors to attract their funds and the interest that can be charged to a responsible applicant for the credit extended. The margin is much thinner, and the position of the bank more precarious, than in any other form of commerce, such that an individual who lacks training and experience in banking lacks the discipline to manage it effectively, and there is little room for error.
It is also recommended that the leadership of a bank give their whole time to the business of the bank and be forbidden to engage in any other concern. This is a weakness of the BE, as its board is composed of merchants whose minds are primarily occupied with their separate affairs, and who may yield, and historically have yielded, to the temptation to manage the bank in a manner that favors their other concerns to the detriment of the bank itself. A man whose sole business is banking will make the bank his sole concern, not subordinate to any other interest.
The author also advocates a more egalitarian status for such a position: "He must not have to say 'sir' to the governor" nor remain a silent and subservient, but to speak freely and refute any bad idea proposed by the governor of the bank. "Business can only be sufficiently discussed by persons who can say very much what they like, very much as they like, to one another, and not be hidden in respectful expressions or enfeebled buy affected doubt."
The governors of the BE are "not profoundly skilled in banking" but are merely cautious merchants whose prime objective is better characterized as avoiding failure rather than striving to succeed, and as such they have sought to pursue the safest course. This considered, it would be likely that whomever holds the post would heed a trusted advisor within the bank, though tending to err on the side of discretion. In effect, the "skilled counselor" would effectively rule the bank, though he would need to convince an unskilled governor of the wisdom of his advice.
While the appointment of a "permanent and skilled authority" as Deputy Governor is likely the most effective reform for the bank, there are other points that are also considered to be defective.
- Foremost among them would be for the BE to cease its practice of excluding bankers from the board, the reasons for excluding their participation being contrary to good sense.
- The author also takes objection to the way in which the bank's treasury committee is staffed: it is clearly an election by seniority, and has little to do with competence.
- The board of directors is also too large: 24 in number, plus the governor and deputy governor. The board cannot be convened more than once a week for a very short time, between 90 minutes and two hours. Nothing of importance can be adequately discussed among so many people in so short an amount of time.
- The constitution of the BE itself should be altered, as the existing one is outdated and focuses overmuch on its business with the government, whereas the current majority of its business is with the private sector.