BANK RATE, THE BRITISH BALANCE OFPAYMENTS, AND THE BURDENS OFADJUSTMENT, 1870-1914

Abstract

THIS paper seeks to examine the view that Britain by her use of Bank Rate to preserve balance of payments equilibrium thrust the burdens of readjustment on to other countries (in particular, the primary producers), at least in the short run, in the golden age of the gold standard before 1914. The MacMillan Report commented that the dominance of London meant that she could 'by the operation of her Bank Rate almost immediatelyadjust her reserve position. Other countries had, therefore, to adjust their conditions to hers.'1 Other writers have been more specific, naming the countries who bore the burdens as the dependent territories and the primary producing countries,2 and specifying deteriorating terms of trade and diminishing supplies of British overseas lending as the main instruments by which the burdens were shifted. It will be suggested here that British export industries also suffered, while it was the Bank of England and the City of London which were relatively unscathed-from which the tales of the smooth working of the pre-1914 gold standard doubtless sprang. First, the theoretical model underlying that view is outlined; then the interacting behaviour of constituents of the British balance of payments, national income, and Bank Rate are summarized to show the context of the operation of Bank Rate, after which particular episodes are discussed and conclusions drawn. If the Bank of England's Reserve was under strain because of an external or internal drain of gold and was considered inadequate, the usual, but by no means automatic, response of the Bank was to raise Bank Rate and to make it 'effective' (i.e. to bring about an increase in the London Market Rate of Discount). This, together with the use of other (gold) 'devices', was found to relieve the strain on the Reserve and enabled the Bank to preserve convertibility (or specie payment) with apparent ease. In the short run this increase in short-term interest rates in London enabled the Bank to replenish its supplies of gold by influencing international borrow-