Bank Rate Tribunal (Report)

Part of the debate – in the House of Commons at 12:00 am on 3rd February 1958.

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Photo of Mr Niall MacDermot Mr Niall MacDermot , Lewisham North 12:00 am, 3rd February 1958

I am only too happy to accept your invitation to leave the subject, Mr. Speaker. I referred to it only because it comprised almost the whole of the speech of the right hon. and learned Member for Chertsey.

I wish to comment on what seem to me to be some of the more important public consequences which flow from the evidence which was laid before the Tribunal. Before doing so, it is only right that I should say, for my part, that I welcome most sincerely the finding that there was no improper use made of any confidential information disclosed to anyone in connection with the raising of the Bank Rate.

I do so for a number of reasons, but more particularly for two. First, having read, I think, almost all the evidence laid before the Tribunal, it is only right for me to say that I do not see how any other conclusion could have been arrived at on that evidence. It is also right to say that my impression from reading the evidence was that perhaps the two principal characters who were the subject of inquiry, namely, Mr. William Keswick and Lord Kindersley, both appeared to make what in the law we call first-class witnesses. It is quite obvious that they were endeavouring to answer the questions frankly and fearlessly and to assist the Tribunal to get a true picture of what their state of mind was at the relative periods. It is only to be wished, perhaps, that some of the other witnesses, from the Governor of the Bank of England downwards, had given the same assistance to the Tribunal.

The second reason I welcome it is that it is the very fact that the people who were led to act in the way in which they did were honourable men—which makes what I may call "the case against the City" which arises out of this evidence so very much stronger.

I am not referring to the actions of the speculators. To my mind, anyone who at a time of crisis in sterling attempts to speculate in dealings in "gilts" is guilty of conduct which is beneath contempt. I was glad to see the view expressed in a leading article in The Times last Friday that such action undoubtedly would be anti-British. Certainly, judging by some of the evidence that was laid before the Tribunal, that view is not universally held in the City. Among all responsible bodies in the City, however, I think it undoubtedly is held.

Nor am I referring to the letter which I might characterise as Mr. Keswick's agonising reappraisal when he found it necessary to yield to the pressure, to which he had been subjected from Mr. Barton, in Hong Kong, for a long period, to get out of "gilts". I agree by and large with the comments on this aspect that were made by my hon. and learned Friend the Member for Northampton (Mr. Paget).

After all, the much criticised phrase of Mr. Keswick about its being anti-British and derogatory to sterling but that "as long as we are allowed to do it, it makes sense to me"—the fact that he should come to write in those terms at all—shows to my mind that he is a man of exceptional honesty of thought and was stating his predicament—and a very real personal predicament—which he felt as a patriot in having to give that advice. It appears to me, however, to raise the question very acutely whether or not there is something seriously at fault in a system which should put such a man in such a predicament.

What I regard as the most serious aspect of this part of the matter which is raised by the evidence is what I may term the phenomenon of the rush for liquidity which takes place, and has to take place, whenever a serious financial crisis threatens the country. The evidence which was laid before the Tribunal, particularly by the representatives of various merchant banks, has confirmed me in the view, which I have held for many years, that the method of operation of our financial system is one of the major contributory causes to its instability. It has been described by some people as a fraudulent system, and there is something in that charge in that no private individual would be allowed to conduct his operations in the way in which our whole banking system does.

The fact is that our banking system—and in this it does not differ from any other banking system in the capitalist world—is at any moment incapable of meeting its liabilities. I know that all banks can, and do, produce impressive balance sheets to show that their assets exceed in value their liabilities, but the point is that if ever there is a crisis—which in this context means a loss of confidence, in any form, in the banks—they are unable by the nature of the system to realise those assets. There simply is not enough money about to enable the banks to realise their assets so as to meet their obligations if they were ever really pushed to do so.

When the pressure is from outside the country, it is the merchant banks which first feel it. When they feel the pressure against sterling, their whole instinct is to make the dash for liquidity. That operation, if carried to any serious degree, will in itself very seriously contribute to the crisis. Indeed, if it is not stopped, it will bring the whole pack of cards tumbling down to the ground. That is why, when there is pressure of this kind, to save our whole financial structure it is essential for drastic measures to be taken, such as either devaluation or a swingeing increase in the Bank Rate, in order to attempt to restore confidence in those quarters where confidence is being undermined and is, consequently, threatening our financial system.

As we see from the evidence, the pressure for such action comes most strongly from the banks themselves. It is that which accounts for the fact that in this case Lord Kindersley came dashing back from Canada, terminating his holiday there earlier than he had intended, to press for a strong increase in the Bank Rate. My fears in this respect are in no way alleviated by the statement from the former Chancellor of the Exchequer, the right hon. Member for Monmouth (Mr. P. Thorneycroft), which he gave us this afternoon, that there is no legal power whatever in the Government to control the level of bank advances. It is for that reason that it is necessary for a Chancellor of the Exchequer to invite the co-operation of the banks to restrict the level of bank advances.

That means that there is no power in the Government to restrict the level of bank deposits. That means that there is no legal power in the Government to restrict the extent to which the banking system superimposes bank money—bank credit—on top of the ordinary lawful currency of the land. It is a very serious disclosure indeed if the fact is that the Government of the country do not have the legal power to control the quantity of money.

We know that the whole purpose of the conglomeration of financial measures that the former Chancellor of the Exchequer adopted was to control the supply of money, and yet we hear him confess today that the Government legally do not have the power to do that. For my part, I welcome the news that the whole question of the relationship of the central bank to the Government will be submitted for the consideration of the Radcliffe Commission.

Turning specifically to the matters relating to Lord Kindersley, I should like to comment very briefly upon them to this effect. Reference was made this afternoon by my right hon. Friend the Member for Huyton to the surprising coincidence of the heavy sales of "gilts" by the three concerns with which Lord Kindersley was connected. Of course, the Tribunal's inquiry was directed to finding out whether that coincidence was due to any improper disclosure by Lord Kindersley of the Government's decision to raise the Bank Rate. It seems to me on the evidence that clearly it was not. Equally clearly, however, it seems to me that the reason for that coincidence is that long before the Government had decided to raise the Bank Rate, Lord Kindersley was a firm and fervent advocate of its being raised. That becomes clear from Lord Kindersley's own evidence in dealing with the matter of the Royal Exchange Assurance.

Lord Kindersley returned to this country on 24th August. He spent the first weekend in reading papers. The first meeting he attended was that of the Court of Treasury of the Royal Exchange on 28th August. With great frankness, he tells us that he gave a lecture on what he considered to be the seriousness of the situation and the fact that the Royal Exchange Assurance would be well advised, as a matter of investment policy, to "get liquid" as quickly as possible. That advice was heard by Mr. Cooper, who had interrupted his holiday especially to attend the meeting.

The next thing to happen was that on 2nd September Lord Kindersley saw the Deputy-Governor of the Bank of England, the Governor being away on holiday, and conveyed to the Deputy-Governor the serious views which he had brought back with him from Canada and said that he considered that the Bank Rate had got to be raised and raised properly. If those were his views when speaking to Mr. Mynors, it is to be assumed that he represented them to his fellow directors in Lazards and no doubt to some, if not to all, on the Board of the British Match Corporation and others of his business associates. This was drastic action which he considered necessary and no doubt he was bringing all proper pressure on the Government to see that that action was taken. It is in those circumstances that there appears to me to be a complete air of unreality about the discussions which took place in the few days before the Bank Rate was raised and when the actual decisions were made as to what to sell and how much to sell.

Lord Kindersley, again with his great frankness, described what took place on 18th September at the Court of the Royal Exchange. Mr. Cooper, having got back from his holiday, at once gave effect to the injunction he had received on the 28th from Lord Kindersley to see how they could get liquid. Until Lord Kindersley gave his evidence, the whole tenor of the evidence up to that point had been that careful calculations had been made as to exactly how much cash was likely to be required by the Royal Exchange in the near future and that it had been agreed to raise only such money as was necessary for that purpose.

When we come to Lord Kindersley's evidence, again we have a very much franker picture about how that discussion began with Mr. Cooper giving a description of the general situation—Lord Kindersley thought that he said that it was "lousy" and that he did not see how it could get any better and that they had better raise enough cash to meet all their liabilities, "plus". That is brought out in reply to Question 7482. Lord Kindersley explained that when that discussion took place, his colleagues looked to him to initiate an open discussion and he explained that at that moment his lips were sealed, because he then knew the definite date on which the Bank Rate was to be raised and by how much. He said that he had to keep "mum" or, to use another colloquialism used by Lord Weekes, "po-faced" that day.

In a situation with Lord Kindersley urging them to get liquid and then sitting, "po-faced," it needs no great intuition or intelligence on the part of his colleagues on Lazards or on the Court of the Royal Exchange to size up the situation and what they ought to do. I dwell on this matter only because it appears to me to bring out fairly vividly the artificiality of considering whether there was any direct leak by Lord Kindersley that the decision had been taken to raise the Bank Rate by 2 per cent. and, secondly, the undesirability of this dual position of bank directors with the Court of the Bank of England holding active directorships in public companies in the City at the same time.

Although I will not attempt to give all the relevant citations, there is abundant evidence from many witnesses that this dual position leads to situations of embarrassment. Lord Kindersley has what he considers to be a simple solution. In reply to Question 7518 he said: …I have been in a very awkward situation many a time. What he says he does is to …avoid discussion like the plague. Then, if he finds that he cannot avoid discussion, he says that it is "very simple" to say to himself, "If you had not been given this information by the Governor of the Bank of England, what would you say to these chaps?" He says that he finds that a simple test to apply, but it appears to me that that under-rates the capacity of all of us, more particularly the more extrovert, for self-deception. One would like to know the number of occasions on which Lord Kindersley, applying that test, has found it necessary to give advice different from that which he would have given had he been free to use the information he had received from the Governor.

Mr. Keswick faces this problem much more squarely and much more intellectually honestly. His dilemma was that he had to give some advice to his colleagues in Hong Kong. He was under an obligation to do so. He also had information which he had received confidentially and which was bound to influence his judgment. To go back to the beginning of the matter, Mr. Barton of Jardine Matheson had been pressing from Hong Kong for some time for the firm to get out of "gilts". He made it clear in his letter written on his way to or from a holiday in Tokyo that he was afraid of devaluation and because of that he wanted to get out of "gilts".

He asked for advice and comments from Mr. William Keswick. Having received the Deputy-Governor's letter on 2nd September, whatever he may have heard from the depressing Nigel, from that letter alone Mr. Keswick had confidential information which showed him quite clearly that for the time being at least there was to be no devaluation, but that there were to be stringent measures, the exact nature of which he did not yet know, which were obviously to be taken to prevent devaluation taking place.

He could not give a dishonest answer to Hong Kong. Had he been dishonest, he might have suggested to Hong Kong that there would be devaluation and that they would have to sell "gilts". That would have achieved the same results, but he was not that kind of man and he had to give an answer which he thought honest, which was that there would be no devaluation, for the time being at least.

However, he could not leave the matter there, because he would have been deceiving and giving a false picture to Mr. Barton in Hong Kong. He had to go on and advise him that in spite of the fact that there was to be no devaluation, he must sell "gilts." He had to give reasons, and this is where his predicament began to be embarrassing, because he could not state the specific measures which he thought might be taken and which would lead to the conclusion that one should sell.

Far from any intention to disclose the likelihood of a Bank Rate increase in that letter, Mr. Keswick in his own mind was doing everything he possibly could to avoid disclosing that. It so happens that he failed and that Mr. Barton read the letter in the sense that the Bank Rate was to be increased. I accept the Tribunal's view that that result was not what Mr. Keswick was trying to achieve and that in fact he was trying to achieve the contrary. The position for him was difficult, because if he was to give advice to sell, it followed in those circumstances that he must use the knowledge which he had had, in a sense, from confidential sources.

I cannot do better than use his own words, because he sets the dilemma with immense clarity. During his thorough cross-examination by the Attorney-General, the following was said: And of course you had taken your decision with knowledge of what he had written to you on the 3rd September?—Yes. That made it more difficult still, did it not?—I do not think so. Can I tell you my attitude to that? Certainly.—When I wrote that letter"— this is dealing with the letter from the Deputy-Governor— I had to ask myself two questions; one, what was the objective of the Deputy-Governor writing to me a manuscript letter which you know about. It certainly was not to ask advice or consultation, because he said: 'Destroy it. I do not want an answer.' It is inconceivable to me that he was giving me a tip, because he wrote the same letter, I believe, or similar letters to other directors, and a copy was kept in spite of being asked to destroy it I do not think he was asked to what that had reference. I cannot believe that he wished—and I can only put it in this way—to put me in baulk, so that I could have no freedom of action whatsoever, so I took it at its face value in the simplest way that it was a courtesy letter to a fellow-director, telling me about the situation, that remedies were being considered, that the Governor was away, and there was no need for me to return. That is what I thought the objective of that letter to me was That is the first consideration I had to make, and that is what I did. The second is: Should I, or should I not be influenced by that letter? My decision, right or wrong was this that he wrote to me on the 3rd and I went to London on the 16th—badgered by requests and talks with my brother about whether we should sell, or whether we should not sell—and at that time I decided, rightly or wrong, that I had not had any more communications from the Deputy-Governor that the news was stale, written on the 3rd (I took my decision on the 16th) it was unconfirmed and tentative. I also could not at that time, go to the Deputy-Governor and say: 'What is the position, because I want to advise my colleague whether to sell or not to sell?' It would have put him, I believe, in a most impossible situation. Nor could I, at that time, have written to Barton and said: 'I cannot advise you.' So I took the action that you all know about, and those are the reasons for my taking them. If I had to do it again, I would not act differently in any way. He had explained a little earlier that he had taken great pains to complete his letter and draft a telegram before lunch on the Monday, because he was going to the Bank to see the Deputy-Governor at lunch-time and he obviously suspected that he would know something not merely unconfirmed and tentative but confirmed and definite, and from that time on he would consider himself silenced.

Mr. Keswick's solution is to say, "If the information which I receive is tentative, I consider that I am not in baulk and that I am free to discharge my duty to my company and give advice." He does not pretend that he can exclude from his mind the tentative information that he may receive, albeit confidentially. On the other hand, he says that if the information is specific he declares his interest, which means that he tells his predicament to the Governor. The Governor, in his evidence, told us that in those circumstances his advice would be to forget the letter or the telegram. But if Mr. Keswick is to act upon that advice it means that he must fail in his duty to his company, because it is precisely in this situation that he is required to give the advice which, as he says elsewhere, he is paid to give. It is precisely in such a crisis of sterling that the directors in Hong Kong want to know what Mr. Keswick—who has the feel of the London market—thinks is the right action to take, and in that situation he is compelled to resolve the conflict in such a way that he is unable to give advice.

Quite apart from the risks as to the inferences which might be drawn from such a silence, this goes to the root of the difficulty of this dual position. It is not, as the Lord Privy Seal suggested, the common and familiar situation which applies throughout the public service—the conflict between private advantage and public duty. That problem is as old as the hills, and easy of solution. The person involved says, "If I find that I have some information which I have received in the course of my public duty and a situation arises when I have to take a decision where my personal interest is involved, I subordinate it and, if need be, suffer a loss which I should not otherwise have suffered, because I am prevented from acting in my private sphere by my public knowledge."

But this is not that situation. In this case, the man concerned has two public duties—one to the Government and the State, and the other to a public company. He may have no financial interest in the question of what advice he should give to Hong Kong; that would depend upon his shareholding. He would have a duty to give the information and if he failed to do it he would not be giving that which he contracted to give when he assumed his directorship and took up that position. That appears to be the crux of the problem, and the reason why it is not fair to any of the institutions concerned, let alone the persons, to continue it any longer.

I want to raise two other matters. First, there is the decision of the Chancellor to see the representatives of the Press, of the Conservative Central Office and of industry in advance—and here I make no distinction between trade unions, employers' federations and the rest. I cannot for the life of me see what the necessity was, on this occasion, to see these people in order to give them this information. I know that it helps to promote good relations and that one can help people to feel that one is being courteous by taking them into one's confidence. That is the only possible justification that I can see for this procedure.

There was no specific action that any of these people could take in the twenty-four hours before the public announcement, and if they had attempted to take it they would have been misled, because they were given only partial information. This was an attempt to build up a general atmosphere of good will and confidence. But if that is all that was to be gained, and one puts into the balance against it the great risk involved in seeing these people, and the possibility—to put it no higher—of an accidental or negligent leakage by one of them, it surely cannot be the right thing to do.

The Lord Privy Seal said that this kind of deliberate and confidential communication was on quite a different level from an accidental or negligent communication, but if 15 or 20 people are to be given confidential information the risk of precisely that sort of accidental communication by one of them is enormously increased. The Chancellor was misrepresenting the position, because, although he was purporting to take these people into his confidence he was not doing so; he was not telling them the most vital measure of the lot.

Let us consider the evidence, and see what might have happened—the possibility that some of these people might have come away concluding that this obviously meant that the Chancellor would raise the Bank Rate and they would not be under any oath of silence to keep quiet about that conclusion. I confess that I find it exceedingly difficult to understand the working of Sir William Haley's mind—no doubt due to the mediocrity of my own—when he heard the measures which the Chancellor was proposing to take.

Apparently he was compelled to ask the Chancellor about interest rates. What the purpose of that question was, other than in relation to the Bank Rate, I do not understand, but Sir William says that he was not thinking of the Bank Rate but of something more long-term. The answer he got was, "I cannot discuss that now." Quite clearly the Chancellor thought that he could not discuss the matter then because he thought that the question was directed to the Bank Rate. Surely that is a perilous situation straight away.

Once he is asked that question—especially a Chancellor who had so notoriously been publicly opposing any rise in the Bank Rate; there was evidence that he had addressed a luncheon of bankers only a few weeks before, in which he spent the whole of his speech explaining why the Bank Rate should not be raised—if he turns round and says, "I cannot discuss that now," it can only mean, "Because it is precisely that type of secret information which I am not in a position to discuss."

Sir William Haley says that he went back to his office and discussed the matter with his assistant editor and said, …if that was all he is going to do, God help us. I do not know what else, other than raising the Bank Rate, Sir William could have had in mind; but, as I say, I do not understand his evidence.

Mr. Bareau, of the News Chronicle, said that he walked out of the Chancellor's room and immediately asked Mr. Leslie a question about the Bank Rate. I do not know what answer he expected to get or what weight he thought he could attach to the answer. He says that he was very cleverly led off the scent. If he had been on the right scent, would not he have expected attempts to lead him off it? Was he to judge whether he was on the right scent by judging how clever was the attempt to lead him off? I confess that I find Mr. Bareau's reaction over this exceedingly naive. Perhaps that is not surprising, considering that he was on his way to a Liberal Party conference, but I think this shows the dangers involved in this kind of procedure.

The position of Mr. Gampell of Reuters has been dealt with. The next morning he was asked by Mr. Turner to express his view on the likelihood of devaluation, and he said that there would not be any devaluation. Then he said, rather curiously: Why don't you read the morning papers? Mr. Turner apparently took this to be a reference to the prediction in the Daily Telegraph that morning that there was to be a rise in the Bank Rate and so he hurriedly rang up his friend in the Bank of India to say that there was a strong rumour in the City that the Bank Rate was to be raised. That shows the danger involved in the Chancellor having these sort of conversations with representatives of the Press.

Mr. Pollock's reaction when he saw the Minister of Labour and National Service was that when he got back to his office and his assistant asked, "What about the Bank Rate?" he said, "Nothing was said about that because obviously there is going to be a rise in the Bank Rate". He had formed that opinion, he says, independently. There again is an instance of the fact that what precisely was supposed not to be disclosed could be referred to in such a way as to lead people who were listening to think that it was a pointer from what had been said by the Chancellor.

We come now to the Tory Central Office, and I have not heard in this debate any kind of explanation which appears to me to make sense of why it was necessary to see representatives of the Tory Central Office, still less why it was necessary to give them any document—still less what on earth they wanted the document for, or what they did with the document when they got it. Apparently Mr. Dear went home and slept on it. He folded it up and put it in his wallet. He read it so carefully that he did not notice that two inches were cut off the bottom. The only person who saw it outside the Tory Central Office, Sir George Coldstream, did notice it. But is it safe to rely on the stupidity of members of the Tory Central Office and assume that there are no risks involved in that kind of action, when clearly, some people reading that document might conclude from the way it was cast that it was leading up to a "bull point" at the end and that the "bull point" had been cut off which must mean, and could only mean, a rise in the Bank Rate?

I fear that I have detained the House for too long, but I wish to close with a few comments—I will make them as brief as I can—on the procedure of these tribunals, which has been referred to by my hon. and learned Friend the Member for Northampton. I entirely agree with the comment of my hon. and learned Friend that the procedure before these tribunals puts the Attorney-General in a hopelessly embarrassing position. The right hon. and learned Gentleman has to decide whom to cross-examine and how strongly to press his cross-examination. It is a very difficult and embarrassing position, particularly when political personalities are involved, as they nearly always are at these inquiries. If he presses his cross-examination too far, he will create animosity among his friends. If he does not press it far enough, he will create animosity among his opponents. No doubt the Attorney-General may draw some comfort from the fact that he has been criticised on both scores; though perhaps the criticism that he went too far would come more from financial circles and the criticisms that he did not go far enough from political circles.

The fact that such criticisms are made shows what an intolerably difficult position the right hon. and learned Gentleman is in. After all, one of the main objects of these inquiries, apart from attempting to get at the truth, is to convince the public that the truth is being successfully arrived at. Where the person who has the main conduct of the evidence is put in this embarrassing situation, it is difficult to convey that impression to the public.

Secondly, there is the point that it is something quite foreign to our whole judicial system. We do not like and are not used to this inquisitorial system, and that again was pointed out by my hon. and learned Friend. We prefer the system of examination and cross-examination. To attempt satisfactorily to combine both in one person seems to me to be impossible.

The essence of examination-in-chief is that the advocate must not lead the witness. There are very good reasons for this. Very frequently a witness does not come up to proof; in other words, he does not give his evidence in accordance with the statement obtained from him by the solicitor. Then, the Tribunal is able to form an impression of the witness by the fact that he is giving the answers, and that the words are not being put into his mouth; and the witness feels that he is being allowed to tell his own story.

As the Attorney-General made clear in an intervention earlier this afternoon, he was bound to take all this evidence-in-chief in the form of leading questions. He was bound to take all the witnesses through their statements because later he was to cross-examine on those statements and he would have been put in a very difficult and almost impossible situation in attempting later to cross-examine unless he did it in that form.

The result was that the whole essence and value of the examination-in-chief went, and we see in the case of Mr. Ellis the difficulties into which counsel got when he sought to depart from that practice. Mr. Rodger Winn was not examining Mr. Ellis in that form and the result was that he found himself, at a very early stage, involved in cross-examining the witness. Having read the evidence, I must say that Mr. Winn has my complete sympathy, but I am sure that Mr. Ellis came out of the box quite convinced that he had not been given any sort of chance at all to tell his own story, and that again is unsatisfactory.

The most difficult part of it is the dilemma of the Attorney-General to know who to cross-examine. No doubt he felt he ought not to cross-examine anybody against whom, as it were, he had not opened a case before the Tribunal. Unless, as it were, metaphorically he has put the person in the dock at the outset, he ought not to turn round and cross-examine him. One can see again in the case of Mr. Ellis what happened when that was done. Mr. Ellis wanted to be represented and felt that he had been treated unjustly. It seems to me, therefore, that further consideration ought to be given to the question of the proper procedure before these tribunals.

I put forward, very tentatively, a suggestion that the procedure might be improved by, in effect, having two Crown Counsel employed. One—let it be the Attorney-General—should act as Sir Donald Somerville, as he then was, acted in the 1936 Tribunal merely laying the evidence before the Court and taking in chief those witnesses who are not represented by counsel. Those witnesses who are so represented, that is to say, interested parties, could be taken in chief in the ordinary way by their own counsel. Then let the witnesses be cross-examined by a quite separate, independent, non-political silk of distinction and ability. Let him have a roving commission to do impartially all the cross-examination. In that way it will not be left, as it was at many times in the course of this inquiry, to the Tribunal itself to do the cross-examining, which is unsatisfactory from every point of view and is liable to give witnesses the impression that the Tribunal is hostile towards them. I apologise for having occupied the House for so long.