bank rate, the british balance of payments, and the burdens of adjustment, 1870-1914

8/8/2019 Bank RATE, THE BRITISH BALANCE OF PAYMENTS, AND THE BURDENS OF ADJUSTMENT, 1870-1914

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B ANK R AT E , T HE B R I T I S H B AL ANC E OFPAYMENTS, AND THE BURDENS OFADJUSTMENT, 1870-1914By A. G. FORD

THIS paper seeks to examine the view that Britain by her use of BankRate to preserve balance of payments equilibrium thrust the burdens ofreadjustment on to other countries (in particular, the primary producers),at least in the short run, in the golden age of the gold standard before1914. The MacMiUan Report commented that the dominance of Londonmeant that she could 'by the operation of her Bank Rate almost imme-diately adjust her reserve position. Other countries had, therefore, to adjusttheir conditions to hers.'1 Other writers have been more specific, namingthe countries who bore the burdens as the dependent territories and theprimary producing countries,2 and specifying deteriorating terms of tradeand diminishing supplies of British overseas lending as the main instru-ments by which the burdens were shifted. It will be suggested here tha tBritish export industries also suffered, while it was the Bank of Englandand the City of London which were relatively unscathedfrom which thetales of the smooth working of the pre-1914 gold standard doubtlesssprang.

First, the theoretical model underlying tha t view is outlined; then theinteracting behaviour of constituents of the British balance of payments,national income, and Bank Rate are summarized to show the context ofthe operation of Bank Rate, after which particular episodes are discussedand conclusions drawn.If th e Bank of England's Reserve was under strain because of an externalor internal drain of gold and was considered inadequate, the usual, but byno means automa tic, response of the Bank was to raise Bank Rate and tomake it 'effective' (i.e. to bring about an increase in the London MarketRate of Discount). This, together with the use of other (gold) 'devices',was found to relieve the strain on the Reserve and enabled the Bank topreserve convertibility (or specie paym ent) with app aren t ease. In theshort run this increase in short-term interest rates in London enabled theBank to replenish its supplies of gold by influencing internation al borrow -

Command 3807, 1931, p. 125.* e.g. E. Nevin, The Mechanism of Cheap Money, University of Wales Press, 1955, p. 9;A. C. L. Day, Outline of Monetary Economics, Oxford, 1957, p. 491; P. Kenen, BritishMonetary Policy and the Balance of Payments 1951-7, Harvard, 1960, pp. 61-62; R. Triffln,'National central banking and the international economy', Review of Economic Studies,1946-7, p. 61.


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A. G. FOR D 25ing and lending by B ritain , which restric ted o ther people 's ability to acqviiregold from new-mined supplies and which even meant that some lost gold.Increases in interest rates in London could also moderate the pace ofoverseas British inve stme nt principally by checking overseas new issues onthe L ondon S tock Exch ange , which were rendered mo re costly to would-beborrowers, while the risks to underwriters of a failure were increased.Furthermore, an increase in Bank Rate might well affect the optimism oflenders, and lead them to look with more critical eyes on projects whichotherwise might have been well received. In so far as the check to theraising of funds diminished their monetary transfer abroad, the Britishbalance of payments would be improved at least temporarily and thepressure on the B ank of England diminished. Hence a developing co untry,whose flow of expenditure and whose balance of payments had becomeadjusted to a (rising) influx of funds from Britain, would experience animm ediate worsening in its balance of pay me nts, gold might even be lost,development schemes be postponed, and the country might be left withintractable foreign currency payment itemsforeign debt-service pay-mentsmore especially if the borrowing had been (characteristically) inth e form of fixed-interest bearin g securities. Th e strain would be evengreater if the flow of borrowings diminished before t he inv estmen t projectshad matured and exports remained unexpanded.

In this latter case as expenditure financed by such borrowings fell , sowould domestic incomesa fall which would be reinforced by orthodoxmo netary reactions to a ny losses of gold or foreign e xch ange ; in the formercase losses of gold through changed short-term capital movements wouldalso provoke deflationary forces in the affected countries.Bank Rate increases might also provoke strain in others by affectingtheir merchandise sales to Britain. For an increase in short-term interestrates might well induce merchants in the world commodity markets inBritain to run down their stocks. The fall in purchases in the marketsconsequent upon this stock liquidation would cause primary productprices to decline so tha t im port payments by Britain would fall . Secondly,in so far as higher rates in London d amp ed down British home inve stmen t(apart from anything else this was less sensitive to interest rate changesth an overseas investm ent since a much smaller proportion was financed bynew issues) British incomes would fall and hence the volume of importpurchases, while import prices might weaken still more.In Bummary, then, the British balance of payments could improve boththrou gh th e influx of short-term funds from abroad , the check to long-termlending abroad, and through falling import payments, all brought about inthis theoretical model by an increase in Bank Rate. Thus the exchangescould move up to the gold import point, more new-mined gold could be


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26 BANK RA TE AND TH E BURDE NS OF ADJUSTMENT, 1870-1914retained in London and some monetary gold be attracted from otherfinancial centres, from which increased supply the Bank could replenishits Reserve.

Certain theoretical difficulties arisequite apart from the practicalquestions of whether it did work like this. As has been suggested, theseother countries could experience deflationary forces arising, first, fromthe mo netary stringency which smaller gold imports or even gold e xportswould cause, together w ith induced policy measures to preserve converti-bility (e.g. higher rediscount rates, where central banks existed); secondly,from falling expend iture which had been financed from borrowings a broad ,these now having been cut; thirdly, from falling export proceeds. Thus itis natural to expect their incomes and import purchases to decline, as aresult of which strain on their balances of paym ents would be diminished:in extreme cases, repudiation of overseas debt-service payments wouldfurther redu ce strain. Accordingly, it mus t be assumed in this model th atthe payments made to Britain (for British exports and for 'invisibles') didnot fall to the same extent as British payments fell, otherwise the Britishsituation would have reverted to its earlier position of strain.Indeed, if a cut in British overseas lending of 10 million reduced then-im po rt purchase s by the same figure, it is plausible to thin k t h a t Britishexports would fall by rather less than this figure. Furthermore, if the flowof British lending abroad was concentrated on a particular area, a fall inimport purchases of this absolute value might amount to a 25 to 50 percent cut, while the resultant cut in British exports might only be 5 percen t. If, on the o ther han d, the flow of lending was diffused geograph ically,then this inequality in percentages would be lessened considerably.

It should be clear that no apportioning of the 'strains' and 'burdens'of readjustment can be made a priori and that it is necessary toexamine particular crises or periods of high Bank Rate to evaluate theextent to which various effects operated. Before looking at such episodesit is necessary to discuss the context within which Bank Rate operatedand the reasons for its marked cyclical behaviour.I have argued elsewhere1 that over the period the British balance ofpay m ents was favourable so far as autonomou s items were concerned andhave pointed out the role of the 18-20-year cyclical alternation of homeand overseas investment in explaining how such large overseas lendings,which co nstituted an imm ediate threa t to balance of paym ents equilibrium,could be transferred abroad without straining Britain's adherence to thegold standard . In short, the requisite increased current account surplus(the statistical measure of ex post overseas lending, after allowing for goldmovements) needed to effect the transfer of ex ante overseas lending (over-

1 A. G. Ford, The Gold Standard 1880-1914: Britain and Argentina, Oxford, 1962, ch. iv.


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A. G. FOR D 27seas new issues were the principal component) without permanent loss ofgold, was mainly achieved by a n increase in merchandise expo rts relativelyto imports. For the use mad e by the borrowers of the funds served toincrease directly and indirectly British exports, while the expansionaryincome effects of the latter did not transmit themselves in full measure toimports because the falling trend of home investment dam ped down theseexpansionary movem ents. Likewise when home investment was high, andimports were high relatively to exports, the resultant small surplus oncurrent account could be regarded with equanimity because overseaslending (ex ante) was low. Such particu lar features restricted th e degree ofimbalance which changes in overseas lending might have been expected tobring to the British balance of payments and lessened the task of BankRa te , so much so that it could be said that its main role was short run incharacter. Indeed, it was in the short run th at imbalances occurred, astime was necessary for some of the above processes to operate and asrising (or falling) overseas investment and falling (or rising) home invest-ment did not mesh in precisely, and here the task for Bank Rate becamemore important, and its influence on international capital movementsbecame crucial.The short-run behaviour of the main variables is depicted in Fig. 1,where absolute deviations from trends (nine-year moving averages) arepresented, and in the following discussion, unless otherwise stated, 'rise'in exports, or 'fall' in Bank Rate, means 'rise' or 'fall' as compared withtrend values. Fig. 1 shows the close positive association between deviation sin expo rt (visible and invisible) values, national income, and imp ort valuesand shows how the balance of payments mechanism operatedrisingexp orts bringing rising incomes and rising imports so th at the initial de via-tions in the current account were narrowed, and similarly for fallingexpo rts. Furth ermo re, it is abu nda ntly clear tha t all major booms andslumps in national income were associated with booms and slumps invisible plus invisible exports: the same, however, cannot be said forfluctuations in net home investment which in addition possessed lowerabsolute amplitude than e xpo rts. The correspondence between Bank R atedeviations and incomes and exports is again positive, bu t less close, althoug hit can reasonably be said that Bank Rate fluctuated cyclically. Movementsin the terms of trade (the ratio of export prices divided by import prices)present a varied cyclical pattern, being associated positively with fluctua-

tions in incomes in th e periods 1874-7, 1888-92, and 1898-1909, andnegatively in th e periods 1877-81 and 1883-8. In th e upswings of thebooms of 1890, 1900, 1907 the terms of trade improved relatively to trend,and deteriorated in the ensuing downswings: they also improved in thedeep slump of 1879, so that generalizations about the cyclical behaviour


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28 BANK RATE AND THE BURDENS OF ADJUSTMENT, 1870-19141870 5 1880 5 1890 5 1900 5 191050 1

25 million

0-2 55 025 million0

-2 525 million0

-2 5

100 million

0-100

percent0

5

1 1 1

\ A \ / v I / Overseasnew issues

VlA/wl| Exports (visible and invisible)% \ Net home- investment\AAAA Net nationalincome

/\ M ,A /w ^ v^ Iank rate-525 million0

-2 5

o [A

prices*prices

Current accountbalance (adjustedfor gold movements)

Absolute deviations from 9-year moving averagesFio. 1


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A. G. FOR D 29of the terms of trade must be handled with caution, although in generalboth expo rt and import prices did fluc tuate positively; with incomes in th etrade cycles.

The one- or two-year lead offluctuations n overseas issues over fluc tua-tions in exports is notew orthy: variations in the pace of ex ante overseaslending had an im por tant cyclical influence in Br itain because of the sensi-tivity of exports to them. Deviations from trend of exports and of thecurrent account balance of paym ents exhibit a broadly positive associationwith the exception of 1881-6 and 1899-1900, but the balance of paymentson current accoun t has big swings in the periods 1874-9 and 1902-9 whenhome investment fluctuations were inversely related to exports, smallswings 1880-1901 when they were positively associated. W ith the excep-tion of 1881-6 it can be said that the current account tended to improverelatively to tre nd in booms, and to deteriorate in slumps, so th at such animprovement was associated w ith a higher Bank Ra te, a deterioration w itha lower Bank Ra te.I have explained elsewhere1 this somewhat unexpected conjuncture foran 'export' economy (where rising export sales would normally be asso-ciated with an improved balance of payments and mo netary ease) of risingexports, a tendency for the current account to improve, and rising BankRa te, and vice versa in slumps, as the result of internal and external strainson the B ank of Eng land's reserve. The former arose because of the internaldrain of sovereigns and notes associated with rising home incomes andexpenditure, while the latt er resulted from a tendency for London's lendingabroad (both short and long) with a given interest-rate struc ture to exceedthe emergent current account surplus so that the 'basic balance' movedinto deficit. Likewise with falling exports and slumps the fall in lendingabroad with a given interest-rate structure exceeded the deterioration inthe current account balance so th at the basic balance moved into surplus,which together with the interna l reflux left the Bank 's reserve in a comfort-

STATISTIOAL SOUBCESSources of series depioted in Fig. 1

U.K. net national income, C. H. Feinstein, 'Income and Investment in the United King-dom, 1856-1914', Economic Journal, June 1961.U.K. net home investment, ibid.Average Bank Rate, W. H. Beveridge, Unemployment, a Problem of Industry, London,1930.Export and import values and prices, and other constituents of the British balance ofpayments on current account, A. H. Imlah, Economic Elements in the Pax Britannica,Harvard, 1958, pp. 72-76 and 95-97.British overseas new issues, C. Hobson, The Export of Capital, Lon don, 1914, p. 219.

1 A. G. Ford, op. oit., ch. iv.


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30 BANK RATE AND THE B URDE NS OF ADJUSTMENT, 1870-1914able state . Hen ce in (export-induced) booms Ban k R ate was raised topro tec t the reserve, while in slump s it was lowered. Thu s because B ritainwas a lending economy as well as an export economy, there emerged thiscyclical parallelism of Bank Ra te, expo rts, national income, and th e currentaccount balance.Furth erm ore, the action taken in raising Bank Rate to reme dy a deficittendency affected international gold flows, in particular those to and fromEu rop e being especially sensitive to Ban k R ate changes, with help on occa-sions from the United States,1 while there appears some evidence of aninverse relationship between changes in Bank Rate and changes in overseasnew issues. The relationship between changes in Bank R ate and changesin home inv estm ent is less clear with no consistent patte rn emerging.

The influence of Bank Rate alone on import prices, and hence on theterms of trade, tended to be swamped because a rising Bank Rate wasassociated with rising incomes and demand for imports so that importprices rose, especially since the tendency to synchronous cyclical fluctua-tions in Eu rope w as operating, while once income had reached its peak andhad started to fall , so did Bank Rate, import demand, and import prices.Fu rth erm ore , the effect on th e terms of trad e was a compou nd of cyclicallyfluctuating exp ort and im por t prices and any influence of Ba nk R at e herewas tenuous in the extreme so far as shifting the burden of adjustmen t onother people was concerned.In summary, then, the reasons for the cyclical pattern of Bank Ratehave been adduced (there was no thought of deliberate contra-cyclicalmonetary policy!) and the important effects of Bank Rate changes arebelieved to lie in the movement of short-term capital funds to and fromEurope principally (the Bank of France was said to be the Bank of Eng-land's second gold reserve) and on the raising of long-term loans foroverseas borrowers. Fur therm ore, since Britain was a lending and acreditor country, balance of payments adjustment was immediately theeasier for her than a borrowing and debtor country, for it was (and is)always easier to cut a flow of lending abroad than to increase a flow ofborrowing s in time s of difficulty. B ut it must be emph asized tha t, whilea sustained rise in Bank Rate, if it cut overseas lending by making newissues more difficult, b rou gh t immed iate relief with out bu rden to th e Britisheconomy, nevertheless the last rise in Bank Rate to its cyclical peak hadth e less ha pp y result in the n ex t year or so of provok ing a fall in exp orts.4

1 A. G. Ford, op. oit., oh. iii. This is illustrated in Fig. 2, where deviations in exports (visible and invisible) are com-pared w ith dev iations in Ban k R ate lagged one year (i.e. 1890 Bank Ra te deviation beingplotted ag ainst 1891 expo rt deviation). The inverse relationship between exp ort movem entsand the last of the lagged Bank Rate movements to a peak is clear after sustained cyclicalrises in Bank Ra te. (See Fig . 2 opposite.)


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A. Q. FORD 3 1Thu s the balance of pay me nts would then hav e tended to worsen again b utfor th e depressive effects of falling ex por ts on incomes and on im por ts theauto m atic adjustm ent mechan ism. The decline in exports following a de-cline in British overseas lending (which might, or might not, have beencaused by rising Bank Rate) must not be ignored when assessing burdens

1870 5 1880 5 1890 5 190 0 5 1910

+5025 million

0-25- 5 0

+ 1percent

0-I

W U /Exports (visibleand invisible)

V\Bank ra te* lagged one year

Absolute deviations from 9-yea r moving averagesF I G . 2

of adjustm ent. Dom estic unem ploym ent ensued in Britain's industries,bu t rarely was it found on the Co urt of the Ba nk, an d cover-up operationswere speedily arranged in the City in 1890 for the imprudent BaringsBrothers who had so misjudged Argentine prospects.

It has emerged clearly in the previous discussion that, once the Bankfelt i ts Reserve position more satisfactory, Bank Rate was relaxed andthat this relaxation was associated with downward movements in incomethrou gho ut th e period. I t can be deduced from th e former tha t equilibrat-ing flows had ta ken place in the balance of paym ents, and secondly fromthe fact that in general the cuts in Bank Rate were not reversed unt i lactivity revived that the more favourable position was being maintaineddespite lower short-term interest rates which facilitated the reflux ofshort-term funds abroad and enabled the normal continental demands forgold to be satisfied.1

This discussion has shown the limited na ture of the 'strains on to othe rs'1 World trade fell after such peaks, whioh reduced the need for traders to seek accom-modation in London.


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32 BANK RATE AND THE BURDENS OF ADJUSTMENT, 1870-1914models and the r est of the p aper is devoted to an examination of the after-m a t h of particular crises and the crisis of 1907 in detail .Table I shows wha t happened to th e main British variables after selectedpeaks in annu al average Bank R ate (1873, 1882, 1890, 1907) until the nextt rough in national income was reached (1875, 1885, 1893, 1908). In all

T A B L E IChanges in variables from selected peaks in Bank Rate

A v e r a g e B a n k B a t eV i s i b l e e x po r t v a l ue sV i s i b l e p l us i nv i s i b l ee x p o r t v a l u e sT r a d e U n i o nu n e m p l o y m e n tN a t i o n a l i n o o m eI m p o r t v a l u e sEx po r t pr i c e sImpo r t pr i c e sT e r m s of t r a deH o m e i n v e s t m e n tO v e r se a s i s sue sO v e r s e a s i n v e s t m e n t

187Z-5Abtoluie %

- 1 - 8 0- 3 1- 2 5- 1 - 2- 4 8+ 1- 1 5- 7- 5+ u- 2 0- 3 2

- 3 1 - 6- 1 2 - 2- 6 - 3- 1 - 2- 4 - 2+ 0-3- 1 1 1- 6 1 4-3+ 16-7 36-4 2 6 0

1882-6Absolute %

- 1 1 2- 2 9- 3 0 7 0- 3 8- 3 5- 1 0 13+ 3- 2 3+ 7+ 4

-27-2- 1 2 0-7 -4-7 -2-3 -3-10-0-10-6-13-3+ 3-0 25-5+ 14-0+ 7-0

1890-3AbscluU %

- 1 - 4 5- 4 6- 6 8 6-4- 6 9 10- 6 5 0- 3 77- 4 3

- 3 2 - 2- 1 7 - 4- 1 2 - 7 6-6 4-9- 2 - 8- 5 - 7- 6 - 20- 3 - 9- 7 6 0- 4 3 - 8

1907SAbtoluU %

1-61- 4 9- 6 1 4-1- 1 0 9 41- 3 3 0 4+ 38+ 1

- 3 4 - 9- 1 1 - 5- 7 - 2- 4 - 3 6-4- 7 - 4- 3 - 3-70 3-5+ 47-7+ 0-6

N o t e : A b s o l u t e v a l u e s ( e x c e p t for pr i c e s* une mpl o y me nt , and Ba nk K a t e ) are in mi l l i o n .cases export values fell, the percentage decline in exports being lessenedwhen the invisible elements are incorporated, and clearly provided theprincipal reason for the fall in national income, which declined relativelyless shar ply. Im po rt value s fell on thre e occasions, with a slight rise beingrecorded for 1873-5 when special circumstanc es (i.e. a rise inhome invest-ment) occurred. Expo rt and imp ort price indexes always fell, the t erm s oftrade improving once (1882-5), deteriorating once (1873-5), and remainingunchanged twice. On three occasions home investment declined, but thereactions of overseas issues and overseas investment (ex post) were morevar ied. Issues fell sharply in 1873-5 and 1890-3, both occasions markingth e en d of a long-wave rise (18-year cycle) inoverseas inves tme nt, while th erise no ted in 1882-5 and 1907-8 occurred during the upswing of the over-seas investment 'long' cycle. In 1882-5 and in 1907-8 the declines inimport purchases were offset to some extent by increases in (ex ante) over-seas lending so that supplies of sterling to the primary producers were notso drastically reduced as in the years after 1890,1 while the real strain onprimary producers in the first episode cam e in the years 1875-9.In these international crises the burden of readjustment for the Britisheconomy lay in lower exports which brought lower incomes and more

1 See A. O. Ford, 'Argentina and the Baring crisis of 18901, Oxford Economic Papers,1966, for an account of the strain thrust on Argentina.


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A. G. FO RD 33unemployment, although the relative degree of adjustment was less thanin the case of a primary producing and borrowing economy on whom wascentred a flow of lending from Britain prior to the crisis. For example,while her exports remained unchanged at 25 million, total Argentineim po rts fell from som e 28 million in 1890 to 13 million in 1891, a fall of53 per cent, as incomes in Argentina slumped drastically w ith the cessationof investment activity which had been financed principally by borrowingin Londo n. Although the tend ency towa rds cyclical parallelism in the worldeconomy was an important feature explaining the behaviour of Britishexports, the world trade index showing peaks in 1873, 1883, 1891, and1907,1 nevertheless, i t is important to note that overseas issues hadstarted to fall before each of these peaks in Bank Ra te, exp orts, and worldtrade. From a peak of 117 million in 1872 the y slum ped to 55 million in1873, later to fall to 13-5 million in 1877; after a peak of 60 minion in1881 they slumped somewhat to 45 million in 1883; in 1889 a peak of107 million was reached , falling there after thro ug h 51 million in 1891 to25 million in 1893; 1905 showed a maximum of 110 million, falling to73 million in 1906, and reviving in 1908 and onw ards. On all these occa-sions Bank Rate was still rising (cyclically), and tighter money doubtlessdamped down the pace of overseas lending, although the general state ofconfidence of British lend ers must be reokoned with as an imp orta nt factor.(For example, events in Argentina in 1888-9 undermined their rosyoptimism about Argentine prospects and the troubles of Baring Brotherscompleted the job, with a general revulsion from lending to all primaryproducers.) In th is way, then, the use of Bank Ra te ha d repercussions onBritish expo rts and incomes by cutting down the flow of overseas lendingand hence the ability of other countries to finance their purchases ofBritish expo rts, although at least equal importan ce should be reservedfor the influence of extern al shocks or crises, which in them selves inhibitedoverseas lending by sh attering optimistic expec tations, an d w hich necessi-tated higher Bank Rate to protect London's posi t ion.

The crisis of 1907, which has long been known as an example of theefficacy of Bank Rate in protecting the Bank's Reserve, will now beexamined in some detail . The immed iate causes of strain on the Ba nk'sposition in 1906 an d 1907 arose from unu sual A merican dem and s for gold inconnexion with their domestic financial troubles and stringencies of 1906and 1907. Bank Rate (annual averages) rose from 3-01 per cent in 1905 to4-31 in 1906 an d to 4-61 in 1907, thereafter declining to 3-0 per ce nt in 1908,2

1 Index quoted by J. Tinbergen, Business Cycles in the U nited Kingdom 1870-1914,Amsterdam, 1951, table IA .* Acute pressure was experienced in late Oct. 1007 so that Bank Rate was hastily raisedfrom 4J per cent on 31 Oct. to reach 7 per cent by 7 Nov. and maintained there until2 Jan. 1908 when it was gradually reduced to 3 per cent by 19 Mar. 1908.4520.1 D


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34 BANK RATE AND THE BURDENS OF ADJUSTMENT, 1870-1914and Table II illustrates the influence of this on the London marketrate of discount. Furthermore, the comparative behaviour of this ratewith the Paris market ra te of discount and the 'rest of world' rat e1 reveals

TABLE IIShort-term interest rates (per cent)

19031904190519061907190819091910

(1 )Averageshort-terminterest ratein London3- 42-72- 64- 04- 52-32- 33- 2

(2 )Averageshort-terminterest ratein Paris2-722 1 32-162-693-372-091-712-41

(3 )Averageshort-terminterest ratein 'World14 1 13-813-744-625-294-033-644-12

(4 )

DifferentialUH2)+ 0-68+ 0-67+ 0-44+ 1-31+ 1-13+0-21+ 0-59+ 0-79

(6 )

DifferentialdH3)- 0 - 7 1- 1 1 1- 1 1 4- 0 - 6 2- 0 - 7 9- 1 - 7 3- 1 - 3 4- 0 - 9 2

Sources: (1) and (3) J. Tinbergen, op. oit . , table I A ; (2) H. Whit, The French InternationalAccounts 1880-1913, Harvard, 1933 , pp. 3 4 2 - 3 .TABLE III

U.K. net gold movement ( million)

19031904190519061907190819091910

(1 )Total

+ 0-9+ 0-8+ 7-7+ 3-4+ 6-2- 3 - 8+ 7-4+ 6-4

(2)Europe

- 9 - 8- 1 5 - 8- 1 2 - 3+ 0-2+ 2-4- 3 1 0- 1 6 1- 9 - 9

(3)U.S.A.

- 3 - 8- 0 - 7- 1 - 8- 1 4 1- 1 7 - 7- 0 6+ 2-9+ 3-9

(4)America

- 2 - 6- 5 - 5- 6 - 6- 6 - 2 7-7- 6 - 3- 1 0 - 5- 2 - 5

(5 )Egyptand India- 2 - 9+ 1-0+ 2-9- 7 - 1- 6 - 5+ 0-1- 3 - 6- 1 7 - 1

(6)Residual+ 0-2- 4 1+ 0-3- 1 - 5+ 1-6- 1 1- 1 - 6- 4 - 8

(7)Goldproducers+ 19-8+ 161+ 25-1+ 321+ 34-1+ 351+ 36-3+ 36-8

Source: Board of Trade Annual Abstracts of Statistics.Notes: Europe comprises France , Hol land, Germany, and Austro-Hungary; SouthAmerica Braz i l , Argent ina , and Uru guay ; go ld producers South A fr ica , Rh odes ia , A ustra l ia ,N e w Z e a l a n d ; R e s i d u a l = ( l ) - [ ( 2 ) + ( 3 ) + (4) + (5) + (7)] ; + denote8 net import;-net export.that the customary excess of London over Paris widened, and the custom-ary excess of the 'rest of world' rate over London narrowed, thus makingLondon relatively less attractive to short-term (overseas) borrowers andmore attractive to overseas lenders.The influence of these changed differentials between short-term interestrates (as a result of Bank Rate policies) on gold movements into and outof Britain is illustrated in Table m, which is used to provide a broadimpression of what happened rather than anexact account because of the

1 It is perhaps mis leading to use th is , as it comprises an average of U.S.A. , Germany,F r a n c e , and the U .S .A . c o m p o n e n t was abnormally high at this crisis .


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36 BANK RAT E AND TH E BU RDEN S OF ADJUSTMENT, 1870-1914Likewise, as Hawtrey points out, 1 in the crucial week ending 6 Novem-ber 1907 ther e had been a net intern al reflux of 3million, which helped tooffset the ex ports of gold of over 6 million, and he re m a r k s : ' . . . i t is morelikely that this reflux was the result of deliberate action by the joint-stockbanks , and sprang from a desire to enable the Bank of Englan d to avoid afurther rise in Bank Rate. '

TABLE IV( i ) (2)

.3

63

(3 )

fei-5

(4) (6) (6) (V) (8)

I(9) (10)

million (-1880 = 100-) (1907 = 100) million190419051906190719081909

651117380118151

521574641712661674

182118451939203519261973

481487623554613633

848489939087

747578817879

113113114115116109

79869310094100

.5282118154156136

167167147113109112

Table IV presents the main variables for the British economy so thattheir reactions in this crisis may be traced; all show peaks in 1907, withthe notable exceptions of overseas issues (1905) and net home investmentwhich had reached its previous peak in 1900, thereafter exhibiting aslightly declining tendency which quickened after 1905. It is unlikely thatthe rise in Bank Rate in 1906 had much influence on these magnitudes, asit was only raised to 5 per cent in October, and later to 6 per c ent afterreaching its 'usual ' autumnal 4 per cent in September, although in theearlier part of the year it had fallen only to 3^ as compared with 2\ percen t in 1905. Nevertheless, expectations of home entrepreneurs an d lendersmay well have experienced a jolt after the stringency of late 1906 and theworrying reports from the United States in 1907, so that plans wereshelved.2As early as M ay 1907 th e index of wholesale prices reached its max imumof 82-4, falling to 78-8 by O ctober, while the May figure of u nem ploy me ntof 2-8 per ce nt ha d risen to 4-2 per ce nt by O ctober.3 Export prices reached

1 A Century of Bank R ate, London, 1938, pp. 116-17.1 The Economist's 'Inquiry into the effects of dear money on home trade' (23 and 30 Nov .1907) bears this interpretation out and makes it clear that businessmen were more con-cerned about the U.S.A. crisis than higher Bank Rate. See A. Q. Ford, The Gold Standard18S0-1914, Oxford, 1962, pp. 45-48. R. Hawtrey, op. cit., pp. 116-17.


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A. G. FOR D 37their peak in July a nd began to fall in Septem ber; imp ort prices ceased torise by Septem ber.1 Henc e it can be concluded tha t activity in Britain ha dpassed its peak before the crucial crisis week and 7 per cen t Ban k R ate inNovem ber. The prox ima te cause of this slackening activity w as the fallinghome investment ex pend iture after 1906, while the Am erican unce rtaintiesin the second half of 1907 doubtless affected the placing of fresh orders.Furthermore, overseas issues in 1906 and 1907 were some 3040 millionbelow 1905 levels so that the ability of (primary producing) borrowers toplace (increased) orders was restricted . W hile deliveries of exp orts wereat a peak in 1907, it seems reasonable to conclude that fresh orders weredeclining in the latter part of the year, to be reflected in lower exports in1908. World tra de slum ped b y 6 per cent in 1908 as compared w ith 1907,and this, coupled with the decline in ex ante British long-term overseaslending, is sufficient to explain the 11-5 per cent decline in merchandiseexport values, or the 7-5 per cent decline when invisible exports are con-sidered, which together with falling home investment (previously offset byrising exp ort values) caused incom es and em ploym ent to fall in 1908, whilea 7-5 per cent fall in import values also followed.

Ex po rt volumes fell by 8 per ce nt between 1907 and 1908, imp ort vol-umes showing a 4 per cent fall, while both e xport and impo rt price indexesdeclined by some 4 per cent so that the net barter terms of trade wereunchang ed. However, between 1905 and 1907 the terms of trad e improvedby 2 poin ts, and in the ensu ing slump from 1907 to 1909 the y worsened b y6 points as expo rt prices fell more tha n impo rt prices (Im lah's estima tes).Such behaviour emerges because all the sub-components of a British e xpo rtprice index showed in thi s period strong cyclical correspondence, while onlythe ind ustrial raw m aterial (e.g. wool, cotton, metals, and ores) componentsin the imp ort index showed such correspon dence, grain s, flour, and foodstuffsshowing little or no correspondence.2As a result of these chang ed lows n paym ents the Bri tish current accountsurplus d iminished from 159 million in 1907 to 148 million in 1908, andif gold movements a re taken into consideration th e ex post estimates of netoverseas investm ent remained unchanged . Although import values de-clined b y 41million be tween 1907 and 1908, this decline in the supplies ofsterling earned largely by primary producers was offset by an increase inoverseas new issues of 38 million in 1908, and of 71 million in 1909, over1907 levels, again mainly for developing primary pro ducers. Fu rtherm ore,in 1908 it would appe ar th at th e British balance of autonom ous pay me ntswas in deficit after the cuts in Bank Rate since gold was exported, from

1 Silverman, 'Index numbers of British export and import prices 1880-1913', Review ofEconomic Statistics, 1930, p. 142. These refer to wholesale prices.* See Silverman, op. cit., for the sub-components on which this judgement is made.


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38 BANK RATE AND THE BURDENS OF ADJUSTMENT, 187&-19Hwhich facts it may beconcluded that there was no shortage of sterlingafter the crisis and it should be remembered that short-term interestrates dropped sharply early in 1908. Lastly the terms of trade did notmove against the primary producers, indeed by 1909 they had movedsharply in their favour. In this episode, at least, it must be concluded th atthe use of Bank Rate to protect the Bank of England's Reserve had onlyvery limited adverse effects on primary producers, while such hardships asBritain suffered can be attributed only in part to Bank Rate and themovements it induced inoverseas issues.

If, on the other hand, this crisis had shaken the confidence of Britishlenders (that it did not is perhaps attribu table to the fact that as distinctfrom 1890 the crisis did not occur in the area where the bulk of the borrow-ing was directed) and if overseas new issues had not recovered with theensuing decline in Bank Ra te, then a different judgement would have hadto be made regarding hardships for primary producers and British exportswould no t have recovered so well after 1909. This leads to a more generalpoint: if high Bank Rate and external events in the borrowers led to a fallin new overseas lending and sha ttered confidence so th at long-term lendingabroad did not revive when Bank Ra te was reduced, then real strain andbalance of payments difficulties were thrust on the borrowing primaryproducers. Such difficulties, as I have argued elsewhere,1 are more properlyconsidered as p ar t of a crisis of externallyfinancedeconomic developmentunder private enterprise conditions. For such was the prinoipal type oflendingfixed interest bearing securities of various typesthat as theflow of lending to a primary producer built up so its overseas debt-servicecharges rose to form a formidable foreign currency payment item in itsinternational accounts. If the flow of funds was cut suddenly and if theinvestmen t projects had no t yet m atured (substantial time was needed tobuild ports, railways, and then to prepare soil or mines) so that exportsremained unexpanded, the meeting of overseas debt-service paymentsmeant, in such circumstances, sharp cuts in imports which were to beachieved by cuts inincomes, if balance of paym ents equilibrium and ad-herence to the gold standard were to be m aintained.Argentina, as a borrowing primary producer, provides several instances ofthis varied pat tern of even ts: in 1890-1with falling borrowing, unexpandedexports, heavy overseas debt-service payments, severe strain ensued; in1906-7 no fall in Argentine new issues occurred, while exports rose, andreal incomes rose without any hindrance; on the other hand, in 1912-13when Bank Rate was high and monetary stringency acute inEurope as aresult of the Balkan war scares, a sharp fall innew issues and borrowingabroad took place, at a time when the rate of expansion of exports was

1 'Argentina and the Baring orisia of 1890', Oxford Economic Papers, 1956.


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A. G. FO RD 39severely slackening . Gold mo ved ou t in 1913 an d a recession developedwhich was magnified into a severe slump in early 1914 when the harvestwas a failure.

Thu s I conclude with a plea th at such generalizations need more investi-gation, and that more attention needs to be paid to particular oiroum-stances and to repercussion effects when British overseas lending wasaffected.

University of Leicester

bank rate, the british balance of payments, and the burdens of adjustment, 1870-1914

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