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Abstract
From September 1919, the world price of gold was ‘fixed’ daily in London by a small group of licensed traders. The arrangement was not ideal, as it advantaged the traders concerned, but it was seen by the Bank of England at the time as critical to British economy recovery and to the maintenance of London’s position as a world trading centre. This article examines the available archival evidence on whether direct knowledge of the workings of the mechanism enabled Mocatta and Goldsmid, traders central to the operations of the ‘gold fix’, to earn unusually high profits across the interwar period.
Acknowledgements
I would like to thank the anonymous referees and Bob Greenhill for their helpful advice on earlier versions of the paper.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1. Green, The World of Gold, 105.
2. Ferguson, The Ascent, 20–22; Marx Volume 1 1976, 229–230.
3. Bernstein, The Power of Gold, p. 1; Green, The World of Gold, p. 11.
4. ibid, 1–4, 53; ibid, 11–15, 22–23.
5. A modified version of the gold standard in which notes were redeemed for 400 ounce bullion bars; Green, The World of Gold, 17. It was not until 1944 that international currency exchange was put on a new and more permanent basis.
6. See Keynes, Essays in Persuasion, 47.
7. By 1914, China was the only major nation still on a silver standard; Green, The World of Gold, 41. Even under the gold standard there was in fact ‘a little play in the price structure’ as the buying and selling prices were slightly different; the foreign exchange rate was ‘expected to move only between those two prices, giving the Bank of England some scope for open market operations’; Sayers, The Bank of England, 47–50. See also Marcuzzo and Rosselli, “Profitability”; Collins, Money and Banking.
8. Bernstein, The Power of Gold, 257–258, 289.
9. Green, The World of Gold, 16. In 1872 Germany started to sell silver and buy gold on a huge scale, an example that was followed by a number of other European countries. See also Green, New World of Gold, xx; Green, Precious Heritage, 26; Clarke, The City, 48–49; Marx, Capital (Vol. 2), 545.
10. Brokers differ from dealers in that they act ‘strictly as agents for investors and do not assume risk’; Ugolini, The Bank of England, 2–4. See also Hennessy, A Domestic History, 244; Bernstein, The Power of Gold, 228–229; Green, The World of Gold, 40, and The New World of Gold, 18–21, 30–31; Fischer, The Great Wave, 184. Estimates of gold production levels are approximate, due to uncertainties over Russian output levels, but see Nurkse, “The Gold Exchange,” 220.
11. Blagg, “The Royal Mint,” 4.
12. Ally, “War and Gold”, 225. ‘Britain in theory kept full convertibility but made the export of gold so difficult that effectively the gold standard ceased to work’, although it was not until 1919 that the export of gold was officially prohibited; Green, The World of Gold, 42.
13. Stock Exchange dealings had to be for cash, with no ‘carrying over’ from one fortnightly account to another, new issues required Treasury sanction, much of the acceptance business of the merchant banks dried up and the commodity markets were closed; Billings and Capie, “Financial Crisis,” 194; Eichengreen, Golden Fetters, 67–73; Cooper, “Fettered to Gold?,” 2121; Kynaston, City of London (Vol. III), 462.
14. Ally, “War and Gold”, 225–227; Balachandran, “Power and Markets,” 323.
15. Ally, “War and Gold,” 237–238; Blagg, “Gold Refining,” 97–98; Ferguson, The House of Rothschild, 462; Balachandran, “Power and Markets,” 325; Kynaston, City of London (Vol. III), 60; Green, The World of Gold, 103. Although an earlier memo between the Bank of England and the South African producers had been ‘evidently misunderstood’ on 9 July 1919, ‘at this end [Bank of England] we are all in general agreement that the existing contract be cancelled’. The details were agreed on 25 July although concerns had to be met in September 1919 that the arrangements were more favourable to South African producers than to their Australian counterparts; Bank of England Archives, ADM 34/9, Montagu Norman diaries 1919.
16. Blagg, “1897–1939”, 19. See also Kynaston, City of London (Vol. III), 389; Sayers, Bank of England (Vol. 2), 482; Green, The World of Gold, 43–44 and Precious Heritage, 26, 37–38.
17. The lead participant began the process by proposing a price close to the existing price. Those involved then simulated the result of trading at that price and identified the net amount (in ounces) of gold they wished to buy or sell and whether they were able to complete all transactions at that price. If not, the chair changed the proposed price, raising it if the amount of gold the brokers proposed to buy was higher than the amount proposed for sale, or vice versa. The process then iterated until a fix was found; Bank of England, “Gold Markets,” 17.
18. See López-Morell and O'Kean, “Rothschilds’ Strategies,” 720–722; Ferguson, The House of Rothschild, xxiv. A schematic representation of the complex inter-relationships between the different parts of the Rothschild business network is given in López-Morell and O'Kean, “A Stable Network,” 169–170, 180. In Spain, they were mainly involved in three sectors: public finance, mining and railways, where the state was either a client or the regulatory agent. In each area, the Rothschilds ‘sought to gain sufficient power over the market to guarantee large profits’ and, to achieve this in an economy as heavily regulated as the Spanish one at that time, they constructed a ‘meticulous social network’; López-Morell and O'Kean, “A stable network,” 174.
19. Green and Kinsey, “The Archives”, 94. Accepting houses accept, or authenticate, bills of exchange and other financial instruments. The main accepting houses formed a committee to represent their views jointly to the Bank of England and other financial institutions. Membership of the committee was, therefore, prestigious.
20. Blagg, “The Royal Mint,” 3 and “Gold Refining,” 91, and “1897–1939,” 18.
21. Blagg, “1897–1939,” 19.
22. Balachandran, “Power and markets”, 325; Bank of England Archives, C40/360/90, Sir Brien Cokayne’s notes on a meeting with Anthony Gustav de Rothschild, 6 August, 1919. The London gold pricing arrangements would not, in fact, be consistent with open market ideals until 2015. In private correspondence the Governor was far more emphatic; ‘the only solution he was prepared to accept was an arrangement that would still retain London as the main distribution centre for South Africa's gold, while at the same time guaranteeing the producers the best price for their product’; Ally, “War and Gold,” 233.
23. Green, The World of Gold, 105; Bank of England, “Gold Markets,” 18. The various bidders had a small Union Jack flag they could raise when they needed to phone their head office. The head offices in turn would be in ‘direct communication with perhaps a dozen clients scattered across Europe. Once he has reached a decision with them, he lowers the flag and fixing proceeds’; Green, The World of Gold, 104.
24. Johnson Matthey, a metallurgical firm of international repute with considerable expertise in refining and processing gold joined the ‘fix’ in 1926; Bank of England, “Gold Markets,” 16. They had been involved in bullion dealing, banking and ‘the refining and preparation of precious metals’ from 1817. They conducted many of the early assays for gold prospectors in South Africa in the 1880s and several major mining finance houses, including Gold Fields, were floated on the strength of their reports. They were also ‘official melters, refiners and assayers to the Bank of England’; Green, The World of Gold, 100–102.
25. Abken, “The Economics,” 3. There were limits to the ability of South African mining interests to ‘game’ changes in the price of gold; see Green, The World of Gold, 46–49.
26. Abken, “The Economics,” 6.
27. There was also strong Chinese buying of silver for coinage; Kynaston, City of London (Vol. III), 48–49, 100; Cain and Hopkins, British Imperialism, 55; Sayers, Bank of England (Vol. 3), 55–56; Eichengreen, Golden Fetters, 102, 116–18; Green, Precious Heritage, 36.
28. Keynes, Essays in Persuasion, 106. In London, the price of gold rose to £6 7s 4d in February 1920; Bank of England Archives C40/137 The London Gold Market, August 1937.
29. During this period the British government was seemingly preoccupied with the prospect that America would dominate the foreign exchange markets; Eichengreen, Golden Fetters, 163, 190–191; Skidelsky, John Maynard Keynes, 352. See also Eichengreen and Temin, “The Gold Standard,” 184–185, 192–194; Cain and Hopkins, British Imperialism, 47, 72; Galbraith, The Great Crash, 38; Lekachman, The Age, 55–56; Collins, Banks, 80–81. Note Keynes comment that gold simply became ‘part of the apparatus of conservatism’; Keynes, Essays in Persuasion, 183.
30. The Indian government sales in 1926–27 were a ‘highly confidential operation through Mocatta and Goldsmid, approved personally by the Viceroy’; Bernstein, The Power of Gold, 299–300. By the time countries returned to the gold standard, the real value of gold reserves had been reduced by inflation and the uneven distribution of the reserves (half of which were in the US), uncertainties over exchange rates and German reparations (which were fixed in gold) increased the demand for reserves. In such a situation it was almost inevitable that the ‘increased demand for gold brought about by a return to the gold standard’ would lead to deflation. The failure, in the spring of 1931, of the Viennese Creditanstalt, the biggest bank in Central Europe, also caused considerable difficulties that led to Australia, Brazil, Chile, New Zealand, Paraguay, Peru, Uruguay, and Venezuela going off gold; Mundell, “A Reconsideration,” 328–329.
31. Dow, Major Recessions, 144–145; Michie, The London Stock Exchange, 254–255; Eichengreen, Golden Fetters, 258; Ferguson, The House of Rothschild, 464; see also Feinstein, Temin, and Toniolo, The European Economy, 84–87, 187–190. Sayers thought there was very little faith from 1928 that ‘London could by a high Bank rate draw sufficient gold from other people’s hoards’ particularly the French; Sayers, Bank of England (Vol.1), 223–227. Bank rate would stay at 2% from June 1932 to August 1939. See also Richardson , “The Role of Consumption,” 165; Sayers, Bank of England (Vol.2), 416, and (Vol. 3), 3–30, 80–84, 264–265.
32. From 1932 until 1939 ‘the British authorities sought to influence rates of exchange by themselves trading in the market as buyers of foreign exchange and gold’; Sayers, Bank of England (Vol. 2), 567.
33. Green, Precious Heritage, 36; Sayers, Bank of England (Vol. 2), 481–483. The Gold Reserve Act effectively nationalised the major American gold holdings by ordering Federal Reserve banks to turn over their supply to the US Treasury. Private European hoardings were valued at around £2billion, ‘of which two thirds was held in the vaults of the London market’; at times, ‘Mocatta’s weighing room and vault … was crammed with trans-shipments and the allocated gold holdings of clients’. For a time the US was the only buyer at the London silver fixing, so the participants played bridge until the Federal Treasury officials started work; Kynaston, City of London (Vol. III), 389; Sayers, Bank of England (Vol.2), 482; Green, The World of Gold, 43–44 and Precious Heritage, 26, 37–38.
34. Green, The New World of Gold, 114 and Precious Heritage, 38; Clarke, The City, 80–81; Sayers, Bank of England (Vol.2), 571–572.
35. Abraham Mocatta had retired in 1750 and, having no son, was succeeded by his son-in-law, Moses de Mattos Mocatta. Moses son, Abraham de Mattos Mocatta, became a partner in the firm in 1754, when he became 21. When Moses died four years later, Abraham became senior partner in the firm, a position he held until 1800; Cope, “The Goldsmids,” 181–185; Green, Precious Heritage, 5–6, 11, 27; see also Kynaston, City of London (Vol. I), 11–13, 19, 24–25.
36. The Mocattas were awarded gratuities by both the East India Company and the Bank of England as appreciation for their silver dealings. In the period 1713–25, two-thirds of all the Bank’s loans against silver were made to the Mocattas. Mocatta and Goldsmid’s exclusive position with the Bank lasted until 1840. After F. D. Goldsmid’s resignation from the firm in 1864, to pursue a political career, no Goldsmid would be a partner of the firm for 70 years, although the traditional name was retained; Green, Precious Heritage, 7–11, 17, 28, 34–35; Clarke, The City, 49–50; Clapham, The Bank of England, 93, 137; Eichengreen, Golden Fetters, 97; Walton, “Broker to the Bank,” 12.
37. Such businesses were often involved in personalised and confidential transactions and the financial diplomacy that was ‘for so long typical of the English markets … only came under great strain when new approaches to financial business undermined traditional methods in the City of London in the later 1950s’; Lisle-Williams, “Beyond the Market,” 241, 245; Olegario and McKenna, “Introduction,” 650.
38. Any enthusiasm for limited liability as a business form for English banks was undermined by the failure of Overend Gurney and Co in 1866. Most of the major banks retained their uncalled capital until the 1950s; Turner, Banking in Crisis, 123–132.
39. Edgar Lionel de Mattos Mocatta (1879–1957), Owen Elkin Mocatta (1882–1957), John Russell Villiers (1866–1858), Arthur Henry Villiers (1894–1975). The main partnership agreements were those of December 1911, February 1920, January 1922, December 1926 and 28 July 1930. The profits were not shared equally amongst the partners but in a specified manner that varied quite considerably over time. Owen Mocatta, for example earned 10% of the profits for his first three years as a partner (1911–14), yet by 1927 was earning 45% of the profits. The Villiers share of profits ranged from 10% to 25%; Rubinstein, Jolles and Rubinstein, Palgrave Dictionary, 674; Green, Precious Heritage, 38; Walton, “Broker to the Bank,” 16; London Metropolitan Archives, Mocatta Goldsmid files; CLC/B/161/MS18637 deeds of partnership, 1909–44.
40. Salomon v A. Salomon and Co. Ltd [1897] AC 22.
41. Morrison and Wilhelm, “The Demise,” 312–313. The partnership agreements from February 1920 specified the minimum level of capital that each of the main partners should retain in the business.
42. London Metropolitan Archives, Mocatta Goldsmid files; CLC/B/161/MS18647: printed Balance Sheets and Profit and Loss accounts, with schedules, 1917–39, 1941–42; CLC/B/161/MS18648/008 private ledger, 1904–12; CLC/B/161/MS18648/009 private ledger, 1912–18; CLC/B/161/MS18648/012 private ledger, 1935-44; CLC/B/161/MS18651 data on EPD taxes, 1917–19.
43. In line with normal accounting practice, stocks were valued at the lower of cost or market value and gains were not included in the trading profits until the sale of the asset concerned.
44. In the 1930s, in the City, new clerks might start on £75 and expect increments of £5 or £10 a year; those who were paid £175 a year were sufficiently senior to marry and a ‘well-paid’ employee of a firm of stock-brokers received £225 a year, where the partners each received £1500 a year; Kynaston, City of London (Vol. III), 282–283, 305. Weekly wage rates were relatively static across the interwar period; Hatton, “Unemployment,” 382. Mocatta and Goldsmid generally employed three partners and £1500 a year has been taken as a reasonable approximation of the value of their time inputs, apart from particularly specialised risk evaluation abilities that would form part of the profit returns. This estimate has, in any case, only a modest impact on the rate of return figures.
45. The averages as quoted are for 1919–39, unless otherwise indicated.
46. More than 95% of the loans were secured on the business assets, mostly on its investments but, in years in which bullion dealing was important, also on the latter. In the event of default, the lenders would also have been able to look to the entire personal estates of the partners.
47. London Metropolitan Archives, Mocatta and Goldsmid files; CLC/B/161/MS18647: printed Balance Sheets and Profit and Loss accounts, with schedules, 1917–39.
48. In 1919, with the ending of wartime controls, the price of silver revived. Mocatta and Goldsmid also traded extensively in silver in 1919–20 on behalf of the India Office; Green, New World of Gold, 113–114; Precious Heritage, 36. In 1934 the US passed the Silver Purchase Act, which greatly increased American purchases of silver from India and Europe.
49. Capie and Billings, “Evidence on Competition,” 86. Such instances may well have been more common in the City before the 1980s, where ‘relatively high standards of corporate governance can be explained not by the strict enforcement of regulations but by concerns about reputation’. Banking was once almost totally built on reputation and informal controls as, with ‘virtually no trademarks or patents, bankers had to peddle reputation’. Until then London’s financial sector was not highly regulated as ‘bankers relied on direct personal contact with a relatively small cadre of private bankers and leaders of joint-stock companies connected by education, family, religion, or just social strata’. Thus, when ‘accurate information was hard to acquire and most firms’ financial status and operations were opaque, shrewd business people learned to pay attention not just to economic signals but also to social ones’; Olegario and McKenna, “Introduction,” 644–646, 651; Kobrak, “The Concept of Reputation,” 778, 781; Hannah, “Pioneering Modern,” 680.
50. Eichengreen, Golden Fetters, 97–99.
51. Kynaston, City of London (Vol. III), 462.
52. Matthews, Feinstein, and Odling-Smee British Economic Growth, 22, 208; Feinstein, National Income, T4; Mitchell, British Historical Statistics, 829; Billings and Capie, “Financial Crisis,” 196; Parkinson, “British Industrial,” 599.
53. Schoders were badly affected by their exposures to German Standstill debt in the 1930s and took a more cautious approach to issuing and underwriting in the 1930s, given the ‘great scarcity of good borrowers; Roberts, Schroders, 264–273. Montagu’s results in the 1930s were almost entirely dependent on a much higher level of trading in gold and silver; whereas their profits from this averaged less than £20,000 across the period 1919–32, from 1933–39 the average was £140,000 p.a., with 76% of this coming from gold transactions; HSBC Archives, Samuel Montagu papers; UK 0329/0078 Private ledger 1919–22, UK 0329/0080 Balance sheet book 1920-37, UK 0329/0081 Private ledger 1922–32, UK 0329/0082 Private ledger 1933–39, UK 0864/0006/0001 Balance sheet 1926, UK 0864/0006/0003 Balance Sheet 1937, UK 0864/0006/0004 List of and notes on annual profits 1919–29.
54. The main sources for this information were Roberts, Schroders; Burk, Morgan Grenfell; HSBC archives; Capie and Billings, “Evidence on competition”. Further detail is shown at the foot of Table . The Wall Street Crash, the abandonment of gold and ‘especially the German banking crisis all damaged the prosperity of the merchant banks’. ‘Kleinworts made a profit for most of the period between 1932 and the outbreak of the war, although there were losses in 1935 and 1938’; Diaper, “Merchant Banking,” 55, 72.