CENTRAL BANKERS IN WARTIME: New research on the Bank of England in the Second World War

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31 Mar 2016

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Brexit is hardly the first time the Bank of England has planned for a future economic crisis or given strident policy advice about the impact of international dealings. As war raged in the centre of London in 1941, there were more than politicians and public servants in the corridors of power. Across the Commonwealth there was a network of central bankers co-opted for the war effort, with the Bank of England, and the interests of Britain at its heart. 

In research to be presented at the Economic History Society’s 2016 annual conference in Cambridge, Miesje de Vogel recounts this story and draws lessons for today. She notes that for years, the Governor of the Bank of England, Montagu Norman, had wanted a chain of central banks stretching across the Dominions to create ‘the smooth working of the world’s financial machinery’:

Returning to the Bretton Woods system of managing the global economy would not guarantee a solution to reserve accumulation and global imbalances; nor would it guarantee more autonomy for national economies. These are among the conclusions of new research that challenges nostalgia for the Bretton Woods period, a time when capital flows were controlled and when countries seemed isolated from global shocks and did not fear competitive devaluations.

‘By the outbreak of war, the ‘unseen web’ of central banks functioning across the Dominions were sharing information and providing policy advice to their governments. In peace this would be largely be advising on exchange rates and interest rate pressures. But with the country and the Commonwealth under threat, this would become so much more.’

In every nation, high-level banking officers were brought in from their central banks to work in the highest levels of policy, actively advising and influencing the economic structures and policies of their nations. Lord Catto worked alongside John Maynard Keynes, giving advice to the Chancellor about wartime controls and managing the growing debt owed to India.

Graham Towers, Governor of the Bank of Canada, outside the sterling area but committed to the Commonwealth, would be the key financial mastermind behind training the much needed supply of Dominion pilots for Bomber Command, and gifting a billion dollars in war supply to the British.

In Australia, those from the Commonwealth Bank worked alongside the Treasurer on reforms that included introducing a federal income tax, advising on post-war reconstruction and committing Australia to freeing up its US dollars not for Australia in wartime, but for Commonwealth materiel needs. Ms de Vogel explains: 

‘They weren’t bound by a national mentality, they would share their ideas and financial strategies for winning the war for the whole of the Commonwealth.’  

‘They would work on rationing and war bonds together, sharing advertising campaigns to keep those at home saving the nation through savings and thrift. Advice to help the war effort and novel solutions could be passed on and given through backdoor channels.’  

These networks could take risks to get international policy advice from leading economists through their banking connections that would otherwise not have the chance to influence the war effort. They kept it going in the face of overwhelming financial pressures generated by Lend Lease, looking for Commonwealth solutions to the problems of future US debt. 

These connections shaped the nature of Commonwealth financial relations post-war. Some would return to their banks; others into the upper echelons of public policy. They would be at the heart of initiatives to minimise British war debt, and bail out the British government when it nearly defaulted in 1947. 

Towers would be the first Canadian sounded out about leading the Bank of England, long before Mark Carney. Overshadowed by the relationship with the United States, this financial network kept the needs of Britain and the Commonwealth paramount in wartime and helped them combat the financial woes of a post-war world.  

Seventy five years later, the sterling area is gone, and other financial relationships have taken precedent over the Commonwealth. But the role of a central bank in a time of significant financial upheaval has not changed. 

It must be more than an independent body – it must provide real advice, collaborate closely on government policy, and develop and maintain strategically important international connections. Rather than pushing the Bank of England out of the debate, the British public would do well to heed its warnings and learn from the examples of history. 


The Unseen Web – Dominion Central Bankers and the Second World War

Contact: Miesje de Vogel – m.devogel@adfa.edu.au

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