Röme , Ma hias
A icle — Published Ve sion
Financial c isis o 1931? B i ish banking s abili y and he
ole o open‐ma ke ope a ions
The Economic His o y Re iew
P o ided in Coope a ion wi h:
John Wiley & Sons
Sugges ed Ci a ion: Röme , Ma hias (2024) : Financial c isis o 1931? B i ish banking s abili y and he
ole o open‐ma ke ope a ions, The Economic His o y Re iew, ISSN 1468-0289, Wiley, Hoboken, NJ,
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DOI: 10.1111/eh .13391
ORIGINAL ARTICLE
Financial c isis o 1931? B i ish banking s abili y
and he ole o open-ma ke ope a ions
Ma hias Röme
F eie Uni e si ä Be lin
Co espondence
Ma hias Röme
Email: ma hias. [email p o ec ed]
Abs ac
To wha ex en was he summe o 1931 a inancial c isis
in B i ain? P e ious esea ch has shown how London
me chan banks we e a ec ed, bu i emains unclea o
wha ex en he la ges comme cial banks o London –
he clea ing banks – we e unde h ea . Mon hly balance
shee s epo ed by clea ing banks do no ully e lec he
day- o-day liquidi y in inancial c isis, possibly o e s a ing
a ailable liquidi y. This a icle does no ely on wha
clea ing banks epo ed, bu wha he la ges i e London
clea ing banks ac ually did on a daily basis du ing he
summe o 1931. I ind ha he London clea ing banks we e
no se iously unde h ea . This is because la ge-scale asse
pu chases by he Bank o England s abilized he liquidi y
o he London clea ing banks. This in e en ion is consis-
en wi h p e ious c isis si ua ions du ing he nine een h
cen u y and a he ou se o he Fi s Wo ld Wa .
KEYWORDS
Bank o England, inancial c isis 1931, open ma ke ope a ions,
inancial s abili y
In 1931 Ge many, Aus ia, and Hunga y expe ienced se e e inancial c ises.1Banks ailed, capi al
con ols we e in oduced, and bo owe s de aul ed on hei deb . The con inen al c ises hen
1Fo he o igins o he con inen al c isis, in e wa capi al lows, and hei sudden e e sal, see Accomino i and Eichen-
g een, ‘Mo he o all sudden s ops’. In he Ge man c isis, domes ic isk- aking o banks was linked o such capi al in lows.
Pos el-Vinay and Colle , ‘Ho money and in lows’. Fo he p eceding banking and cu ency c ises in Aus ia, see Mache ,
‘Aus ian banking c isis’. See Mache , ‘Hunga ian win c isis’, on he con agion o Hunga y.
This is an open access a icle unde he e ms o he C ea i e Commons A ibu ion License, which pe mi s use, dis ibu ion and
ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed.
© 2024 The Au ho (s). The Economic His o y Re iew published by John Wiley & Sons L d on behal o Economic His o y Socie y.
1180 wileyonlinelib a y.com/jou nal/eh Econ. His . Re . 2025;78:1180–1201.
FINANCIAL CRISIS OF 1931? 1181
sp ead o he Ci y o London.2To wha ex en was he B i ish banking sys em unde h ea
in 1931? The exposu e o he c ises on he con inen di e ed by ype o banking ins i u ion.
Some me chan banks (o accep ance houses) had gua an eed c edi s o con inen al – p ima ily
Ge man – bo owe s and hus we e di ec ly exposed o he c ises.3The exposu e o he la ges
comme cial banks (o clea ing banks), howe e , was limi ed.4A ailu e o one o he clea ing
banks would ha e mos likely a ec ed he London money ma ke emendously. To wha deg ee
he London clea ing banks we e a isk is subjec o deba e.
The e a e wo opposing iews in he li e a u e. While James a gues ha he London clea ing
banks we e unde h ea due o hea y losses in deposi s, Billings and Capie conclude ha he
London clea ing banks did no ace a un and we e no se iously unde h ea .5I will p esen new
e idence ha he i e la ges London clea ing banks we e no se iously a isk o ailing du ing
he summe o 1931. Howe e , I will a gue ha he liquidi y o he London clea ing banks was
a isk du ing he peak pe iod o gold ou lows, and only la ge-scale pu chases o T easu y bills
s abilized he liquidi y o he London clea ing banks.
The emainde o his a icle is s uc u ed as ollows: sec ion I desc ibes he ole o clea ing
banks in he London money ma ke and hei ela ionships o bo h discoun houses and he Bank
o England. Fu he mo e, his sec ion ou lines he wo opposing iews b ough o wa d in he
li e a u e. Sec ion II p esen s wo new da ase s d awn om Bank o England eco ds. Fi s ly, I
p esen da a on he London clea ing banks’ liquidi y du ing he summe o 1931 on he basis o
he discoun o ice dia y. Secondly, new da a on open-ma ke ope a ions by he Bank o England
du ing he in e wa gold s anda d pe iod a e p esen ed. I de ine open-ma ke ope a ions as he
bila e al ou igh (i.e. no e e se) pu chase o sale o T easu y bills by he Bank o England in
he London money ma ke . Sec ion III p esen s he esul s o he empi ical analysis. I show how
he esponse o he Bank o he moun ing ese e losses was unp eceden ed, a leas du ing he
in e wa gold-s anda d pe iod, bu no unusual gi en pas in e en ions du ing he nine een h
cen u y and a he ou se o he Second Wo ld Wa . Sec ion IV concludes.
ITHE INSTITUTIONAL FRAMEWORK
Clea ing banks we e he main comme cial banks in B i ain. They held he majo i y o deposi s
and we e he main lende o domes ic indus y and ade.6Clea ing banks c ea ed deposi s
agains me e p omise, o as Reginald McKenna, chai man o he Midland Bank, one he i e
la ges clea ing banks, pu i : ‘[...] o a e y la ge ex en , loans make deposi s’.7In o he wo ds,
clea ing banks we e no in e media ies who no only lend deposi s, bu also c ea e hem by
o e ing c edi . The liabili ies o clea ing banks we e mainly deposi s. Thei asse s we e mo e
a ied. Clea ing banks’ in es men s and ad ances made up 68 pe cen o deposi s be ween 1925
and 1931.8The in es men s included ‘bills o exchange and app o ed expo c edi s wi hin 18
2T up il,B i ish banks,p.290;Accomino i, ‘T ansmission’. Fo e idence on he ansmission o he Ge man c isis in 1931,
see also S aumann e al., ‘Ge man c isis’.
3Accomino i, ‘Me chan banks’.
4Ibid.
5James,End o globaliza ion,p.72;Billings and Capie, ‘Financial c isis’.
6Saye s,Mode n banking, (7 h edn.), pp. 18‒9.
7T up il,B i ish banks,p.208.
8T up il,B i ish banks.Seeapp. II on annual a e ages o weekly posi ions. A e age weekly balances a e compiled om
mon hly s a emen s.
1182 RÖMER
mon hs o ma u i y’.9The mo e liquid asse s a e cash ( his includes any balances – banke s’
deposi s – a he Bank o England), loans a call (i.e. ‘money a call’ o ‘call money’), and loans
a sho no ice (up o a week), as well as bills discoun ed. Such liquid asse s made up 32 pe cen
o deposi s.10 Banke s’ deposi s we e he i s line o de ence gi en a liquidi y shock.11 Following
a loss in deposi s, clea ing banks could imp o e hei liquidi y by allowing some o hei bill
holdings o ma u e wi hou aking up any eplacemen s.
Howe e , i his did no su ice, he second line o de ence was ‘call money’. Clea ing banks
could ecall hei unds om he discoun houses. ‘Call money’ linked he clea ing banks o o he
asse s in he London money ma ke : ‘[I]n a sense, money a call in he balance—shee s o he
clea ing banks ep esen s bills o exchange and sho go e nmen pape held indi ec ly by he
banks’.12 Hence, ‘call money’ linked he clea ing banks no only o o he asse s, bu also o o he
inancial ins i u ions, mos no ably, he discoun houses. Discoun houses, in u n, we e linked
o me chan banks who gua an eed paymen o bills a ma u i y. Such bills we e sold o discoun
houses, which we e unded by sho - e m, o en o e nigh , deposi s om clea ing banks. Discoun
houses we e agile ins i u ions in he sense ha hey elied almos exclusi ely on bo owed unds
and did no hold any conside able ese es.13
The Bank o England closely moni o ed he s a e o he London clea ing banks: ‘[ ]he mos
impo an ins i u ions o which he Bank accep s esponsibili y o his kind a e he London clea -
ing banks, o on hei abili y o mee ins an ly he demands o hei deposi o s he business o
he na ion depends’.14 A key indica o was he cash–deposi a io. I was no legally ixed, bu he
clea ing banks ‘ olun a ily’ imposed a ce ain a io o liquid asse s o deposi s.15 Since a la ge
ac ion o liquid asse s we e banke s’ deposi s a he Bank o England, any changes in banke s’
deposi s would change he a io. This ga e he Bank o England an oppo uni y o con ol as
clea ing banks ied o a oid any excess ese es:
As he banks, s i ing o keep hei cash- a io ixed a eigh pe cen , sense he changes
in ese es, hey y o adjus hei posi ion by buying less o mo e bills and by calling
mo e o less money om he discoun houses. These, ha ing and wan ing no ma gin,
look o he Bank o England o enable hem o mee he si ua ion, and his gi es he
Bank impo an oppo uni ies.16
In imes o s ingency, he Bank o England could suppo he banking sys em by lending o he
discoun houses o pu chasing T easu y bills.17 The ansmission mechanism o a T easu y bill
pu chase was he ollowing: The Bank o England pu chased a T easu y bill om a discoun
9Saye s,Mode n banking,(7 hedn.),p.39.
10 T up il,B i ish banks.Seeapp. II.
11 Ibid., pp. 220‒1.
12 Saye s,Mode n banking,(7 hedn.),p.39.
13 King,Discoun ma ke ,p.183.
14 Saye s,Bank o England: 1891‒1944,p.528.
15 T up il,B i ish banks,pp.209‒10.
16 Saye s, ‘Open-ma ke ope a ions’, p. 390.
17 T easu y bills a e ‘a sho - e m go e nmen p omisso y no e inancing sho - e m de ici s be ween go e nmen eceip s
and expendi u e’. (Capie and Webbe ,Mone a y his o y, p. 307) Du ing he in e wa yea s, T easu y bills, he mos impo -
an ins umen o inancing go e nmen de ici , we e issued ei he by ende each F iday o by ap, ha is, any ime a
a ixed discoun a e se by he T easu y (ibid., p. 308). The bulk o T easu y bills a he ime had a ma u i y o 3 mon hs
(Saye s, ‘Open-ma ke ope a ions’).
FINANCIAL CRISIS OF 1931? 1183
house.18 I paid o he bill wi h a cheque on i sel . The discoun house ook he cheque o one
o he clea ing banks and he discoun house’s deposi ose by he amoun o he cheque. In
u n, he clea ing bank ook he cheque o he clea ing house. As a esul , he Bank o England
owed he clea ing bank he amoun o he cheque. The Bank o England would se le he claim
by adding he amoun o he cheque o he clea ing bank’s balances wi h i sel . Consequen ly,
banke s’ deposi s ose and he clea ing bank’s a io o cash o deposi s inc eased as well, since
cash included banke s’ deposi s. The e e se occu ed i he Bank o England sold a T easu y bill
o a discoun house. The la e paid he Bank o England wi h a cheque d awn on hei deposi a
a clea ing bank. The amoun was deduc ed om he clea ing bank’s deposi a he Bank o Eng-
land. Hence, banke s’ deposi s dec eased a e a sale o a T easu y bill and he a io o cash o
deposi s dec eased.19 I he cash a io declined, clea ing banks could always ecall hei loans o
he discoun houses on sho no ice. This was adi ionally a c ucial ‘bu e ’ be ween he banking
sys em and he Bank o England.20 On his ma e , he Depu y Go e no es i ied in on o he
Commi ee on Finance and Indus y in 1929:
‘[Clea ing banks ha e] he means o o cing he Bank o England o c ea e addi ional
c edi , as hey do now. [...] By calling in hei sho money unds om hose who
employ hem hey compel hose pe sons o ha e a ecou se o he Bank o England,
and hus o c ea e c edi which has been called in.’ Reginald McKenna – a membe
o he commi ee – u he inqui es: ‘I would be a e y limi ed powe ha hey could
exe cise? – I is no e y limi ed a imes’ esponded Ha ey [own emphasis].21
The discoun houses would u n o he Bank o England o discoun bills o ob ain an ad ance
o epay he bo owed unds o he clea ing banks. By noon each day he money posi ion o each
discoun house was es ablished, esul ing in de ici o su plus. Usually, a de ici was es ablished
as clea ing banks would ecall unds al eady in he mo ning, bu would gi e back only la e in
he day be ween 12 p.m. and 1 p.m. Then Seccombe, Ma shall, and Campion, he special agen s
o he Bank o England, who would pu chase and sell bills on behal o he Bank o England,
‘would elephone o es ablish he money posi ion in he ma ke as a whole’.22 The Discoun o ice
closed a 2:30 p.m. and discoun houses would ha e o decide whe he o bo ow om he Bank o
England. Funds om banks could a i e un il 3 p.m. ‘Indica ions gi en by he special buye o he
a i ude o he Bank and knowledge o p i ilege money a ailable would in luence he decision’.23
Howe e , his came a a p ice. Bank a e was he a e se by he Bank o England o lending o he
discoun houses, and changes in he Bank Ra e would be ansmi ed o he wide money ma ke
h ough he a es a which discoun houses would discoun bills p esen ed o hem.24
18 Saye s,Mode n banking (1s edn), pp. 104‒8. F om 1938 on, he Bank o England would pu chase bills di ec ly om
clea ing banks as well.
Saye s, ‘Open-ma ke ope a ions’.
19 Saye s,Mode n banking (1s edn.), p. 108.
20 Capie,Fu u e o cen al banking, p. 66.
21 Commi ee on Finance and Indus y,Minu es,Qn55–57.
22 Fle che ,Discoun houses, pp. 88‒90. While Fle che ’s accoun e e s o 1951, i seems o esemble ea lie pe iods. See
Haase,Lomba dpoli ik, p. 96, who desc ibes an only sligh ly di e en schedule. I he discoun houses we e unable o
bo ow su icien ly o co e hei needs un il 1:25 p.m., hey would ha e o u n o he Bank o England o e ie e o e nigh
money om he Bank by 2 p.m.
23 Fle che ,Discoun houses,p.90.
24 Saye s,Mode n banking (1s edn.), p. 116.
1184 RÖMER
The pu chase (and sale) o T easu y bills by he Bank o England became a ool o con ol sho -
e m ma ke a es du ing he in e wa pe iod.25 Al hough open-ma ke ope a ions we e jus one
ool among a a ie y o ools o con ol sho - e m ma ke a es, by he la e 1920s open-ma ke
ope a ions in he o m o pu chases and sales o T easu y bills we e he p ima y ool.26 Al hough
he o igins o open-ma ke ope a ions by he Bank o England go back as a as 1834,27 only he
in e wa pe iod saw he inc easing use and sophis ica ion as he ‘ echnical condi ions we e mo e
a ou able o open-ma ke ope a ions’ due o he much la ge a ailabili y o T easu y bills a e
he Fi s Wo ld Wa .28 The esponse o he Depu y Go e no o he Bank o England Si E nes
Ha ey du ing he Commi ee on Finance and Indus y on ha ma e :
Do you gene ally, when you ope a e in he open ma ke , ope a e h ough bills o
h ough Go e nmen secu i ies?’ – (Si E nes Ha ey)’ Gene ally h ough bills.
When I say ‘gene ally’ I do no wish i o be hough ha we do no ope a e in Go e n-
men secu i ies. We may ope a e h ough Go e nmen secu i ies, bu , o cou se, a a
ime like his when he olume o bills is so much la ge han in, le us say, p e-wa
imes, owing la gely o he g ea olume o T easu y bills, he p opo ion o ope a ions
in bills is la ge in compa ison wi h secu i ies han used o be he case.29
The in e wa ma ke o T easu y bills was qui e ac i e du ing he in e wa gold s anda d pe iod.
Each week on a e age £37 million we e issued and ‘ o al ma u i ies each day we e o he o de
£10 million’.30 The di e ence be ween he amoun o newly issued bills and ma u ing bills was
subjec o seasonal a ia ions. Du ing he ax seasons (Janua y–Ap il) o ins ance, he amoun
o bills ma u ing exceeded he newly issued amoun o bills, ha is, adding liquidi y o he ma -
ke . The o al amoun o bills allo ed o he London money ma ke was on a e age £500 million
on he basis o he weekly ende . This amoun was less han he o al amoun o T easu y bills
ou s anding. The di e ence be ween he wo numbe s is held by he Bank o England and o he
public ins i u ions. The Bank o England held on a e age £160 million T easu y bills in he Issue
depa men (s a ing in No embe 1928 o Sep embe 1931) and £13 million T easu y bills in he
Banking depa men (Ap il 1925 o Sep embe 1931).31 The es o he T easu y bills we e held by
London clea ing banks, discoun houses, and o he banks. The London clea ing banks held 17 pe
cen o o al esou ces in bills and T easu y bills.32 In Ma ch 1931 he London clea ing banks held
25 The main pu pose o open-ma ke ope a ions was he con ol o sho - e m ma ke a es, no some mone a y quan i y.
26 See ch. 13 in Saye s,Bank o England 1891‒1944. O he ools include ‘no ma ching ende s o ma u i ies’. By no ma ching
ende s in T easu y bills o ma u i ies, he Bank o England could aim a i me a es. No ma ching ende s was la gely
seasonal. Du ing he ax season (Janua y h ough Ap il) when liquidi y was d ained om he ma ke due o ax paymen s
o he T easu y, he amoun o ma u ing T easu y bills would exceed he amoun o newly issued T easu y bills, ha is,
addi ional liquidi y o se ing he d ain o liquidi y caused by ax paymen s. Ye ano he ool was bo owing di ec ly om
banks (ibid. p. 303).
27 Fo an o e iew see Bindseil,Implemen a ion,pp.145‒6.SeealsoUgolini, ‘Liquidi y managemen ’, o empi ical e idence
on epu chase ag eemen s by he Bank o England be o e he Fi s Wo ld Wa .
28 Saye s, ‘Open-ma ke ope a ions’, p. 391.
29 Ci ed om ibid, p. 392.
30 Saye s,Bank o England 1891‒1944,p.308.
31 The size o T easu y bill po olio luc ua ed widely. Fo he Banking depa men he minimum alue was £25 000 and
he maximum alue £59 million. Fo Issue depa men he minimum alue was £65 million and he maximum alue was
£212 million. Bank o England A chi e (he ea e BoE A chi e), Re e ence 9A155 6/7 and ADM17/ 56.
32 T up il,B i ish banks, p. 85. Da a e e o Decembe 1930.
FINANCIAL CRISIS OF 1931? 1185
£129 million wo h o T easu y bills.33 O e all his poin s o a la ge a ailabili y o di e ing ma u-
i ies, which helped he Bank o England o choose sui able ma u i ies. This ma e ed since he
ma u i y chosen would de e mine o how long liquidi y was d ained o added o he ma ke .34
Why should he inancial s abili y o London clea ing banks ha e been unde h ea a e all
in he summe o 1931? The Economis , in i s banking supplemen , es ima ed ha be ween he
end o June 1931 and he abandonmen o he gold s anda d, £200 million o unds le he coun-
y.35 The ‘abno mal’ decline in banking deposi s is explained by he wi hd awals o o eign unds,
gold losses, and ‘ he consequen con ac ion o c edi ’.36 Howe e , i is no clea wha cons i u ed
he wi hd awals and who ook i .37 The ou low was p obably mainly he e-call o deposi s, con-
e sion o sho - e m c edi s, and sales o secu i ies.38 Howe e , i espec i e o he sou ce o he
unds wi hd awn: ‘[a]ll mo emen s in he gold holding o he Bank o England (unless hese a e
o accoun o he T easu y) will ha e an immedia e e ec upon he ‘banke s deposi s’ and h ough
hem, in he o al o bank c edi ’.39 As ou lined be o e, banke s’ deposi s we e a c ucial sou ce o
he liquidi y o London clea ing banks.
James a gues ha he s abili y o he London clea ing banks was se iously unde h ea in
1931 and ci es he decline in he agg ega e mon hly a e age o deposi s o nine clea ing banks.40
Acco ding o James, i ell om £1.836 billion in Janua y 1931 o £1.688 billion in Oc obe 1931.
The losses in deposi s a ied ac oss clea ing banks: ‘Ba clays los 3.9 pe cen o deposi s and cu -
en accoun s, he Wes mins e 6.6 pe cen , Lloyds 8.5 pe cen , he Na ional P o incial 10.4 pe
cen , and he Midland ( he la ges English bank) 9.8 pe cen ’.41 La ge, sudden losses o deposi s
h ea en he s abili y o banks when hey ha e o liquida e asse s o inance he loss o deposi s.
This could be pa icula ly p oblema ic when he p ice o asse s is cu en ly low. James a gues ha
he inancial s abili y o he banking sys ems was in ac unde h ea and only de alua ion could
elie e he la ges banks om such p essu e. A de alua ion and subsequen s abiliza ion o he
exchange a e would hal u he deposi losses as i would hal u he de alua ion expec a ions.
Howe e , he e is an opposing iew. Billings and Capie ag ee wi h James ha indeed agg ega e
deposi s a he London clea ing banks ell in 1931 by abou £125 million, bu he au ho s add ha
agg ega e deposi s ell only by 4 pe cen om June o Sep embe 1931.42 Billings and Capie com-
pa e he yea s 1926‒36 and s a e ha he a ia ion in 1931 was ‘wide ’ and deposi le els in Augus
and Sep embe a li le lowe , bu no d ama ically so. In addi ion, Billings and Capie a gue ha
bo h Ba clays Bank and Lloyds Bank con inued o make ad ances be o e and a e he Ge man
33 Commi ee on Finance and Indus y,Repo . Appendices, ab. 1, p. 289.
34 Saye s, ‘Open-ma ke ope a ions’, p. 395.
35 The Economis , 14 May 1932, Banking supplemen , p. 6.
36 ‘The ou low o unds was me by £30 million o gold shipmen s, £50 million by he Bank o England’s Pa is and New
Yo k c edi s. Ano he £80 million we e me by he T easu y’s Pa is and New Yo k c edi s. The emaining £40 million we e
me by ‘ he disposal o de isen held in o icial o p i a e hands’ (ibid., pp. 5‒6).
37 Hu s , ‘Gold c isis’. I hank one o he e iewe s o b inging Hu s o my a en ion and he unclea sou ces o
wi hd awals.
38 Ibid. Hu s ci es he la ge amoun o o eign deposi s held on o eign accoun . See also Commi ee on Finance and
Indus y,Repo , Appendices, ab. 9, p. 299.
39 T up il,B i ish banks,p.211.
40 James,End o globaliza ion,p.72.
41 Ibid.
42 Billing and Capie, ‘Financial c isis’. Sligh ly di e en han James’ es ima e as hey ocus on he en i e calenda yea , no
jus Janua y h ough Oc obe 1931.
1186 RÖMER
s ands ill/de alua ion.43 Fu he mo e, p o isions o bad deb s did no ma kedly inc ease in he
1930s.44 O e all, Billings and Capie conclude ha ‘e idence o a un on B i ish banks is lacking,
hesys ememe gedin ac ,andwea guewasno unde se ious h ea [...]’.45 The au ho s a gue
ha he Bank o England did no suppo any pa icula inancial ins i u ions ‘a he expense o
abandoning he gold s anda d’.46
How o econcile hese wo accoun s? This pape p esen s new e idence on he daily liquidi y o
he i e la ges London clea ing banks h oughou he c isis o 1931. The da a show ha he la ges
clea ing banks did no come unde se e e h ea du ing he inancial c isis in 1931, bu du ing he
peak pe iod o ese e ou lows he London clea ing banks e-called unds and did no e u n
hem. A e a la ge-scale in e en ion by he Bank o England, which s abilized a key liquidi y
sou ce (banke s’ deposi s) o he London clea ing banks, he London money ma ke esumed i s
no mal ope a ions.
II DATA AND SOURCES
How o measu e he liquidi y o London clea ing banks? Mon hly balance shee s published by he
clea ing banks a e one possible sou ce. Such balance shee s showed ha he mos liquid i ems
– ‘call money’, ‘cash’, and ‘deposi s a he Bank o England’ – made up abou 20 pe cen o all
asse s.47 Howe e , he clea ing banks ‘[i]n ac ual ac hey do no keep qui e as much’.48 This is
due o a well-known p ac ice called ‘window-d essing’. The Commi ee on Finance and Indus y
on window-d essing:
The mon hly igu es published by he clea ing banks a e no ue daily a e ages bu
a e a e ages o one selec ed day in each week o he mon h. I seems ha , in o de o
p esen a be e appea ance, mos o he banks conce ned a e a pains o manipula e
hei balances wi h he Bank o England on he selec ed day o he week so ha hey
s and a a highe igu e han usual.49
Hence, ‘ he cash- a io by he mon hly s a emen s is he e o e a ic ious a io’.50 An al e na i e
measu e o London clea ing banks’ liquidi y a e he deposi s held by London clea ing banks a
he Bank o England. Da a on such deposi s a e a ailable on a daily basis. Howe e , such deposi s
we e subjec o ‘window-d essing’ as well. Bo h he published mon hly balance shee s and he
daily banke s’ deposi s o e a possibly misleading o incomple e pic u e o he liquidi y o London
clea ing banks. A mo e eliable indica o o liquidi y is necessa y o judge he inancial s a e o
he London clea ing banks du ing he c isis o 1931. A mo e comple e pic u e includes a c ucial
second sou ce o liquidi y – ‘money a call’ o ‘call money’. Hence, he ollowing analysis does
43 Billings and Capie, ‘Financial c isis’, p. 203.
44 Ibid., p. 208.
45 Ibid., p. 211.
46 Billings and Capie go on o a gue ha ‘ci cums ances mean ha he exchange a e was no longe sus ainable’ (ibid.,
p. 211).
47 T up il,B i ish banks,p.85.
48 Ibid., p. 93.
49 Ci ed om Saye s,Mode n banking (1s edn.), p. 38.
50 Ibid, p. 39.
FINANCIAL CRISIS OF 1931? 1187
no ely on he published mon hly s a emen s o banke s’ deposi s only, bu analyses new da a on
daily ac ions o he i e la ges London clea ing banks in he London money ma ke .
The pape uses he daily en ies in he discoun o ice dia y a he Bank o England.51 They a e
a es amen o he close a en ion he Bank o England paid o he daily s a e o London clea ing
banks. The dia ies con ain de ails on wha he la ges i e clea ing banks (Ba clays Bank, Lloyds
Bank, Midland Bank, Wes mins e Bank, and Na ional P o incial Bank) we e doing each day
acco ding o he ollowing ca ego ies:52
(1) Who e-calls sho - e m lending (‘call-money’)
(2) Who gi es back call money
(3) Who buys bills
The p o ision o ‘call money’, o he pu chase o bills, indica es he a ailabili y o liquidi y,
whe eas he ecall o ‘call money’ is indica i e o a de ici in liquidi y. These obse a ions a e used
o cons uc a daily liquidi y indica o on he basis o he daily ac ions o he i e clea ing banks.
A se e e lack o liquidi y would be, o ins ance, i all i e clea ing banks ecalled ‘call money’
on he same day. I employ he ollowing coding scheme: I a pa icula clea ing bank ecalled
unds, i was coded minus one. Gi ing back o pu chasing bills was coded plus one. Doing no hing
is coded ze o. Such coding is admi edly a he simplis ic and does no ell any hing abou he
magni ude o sums in ol ed, bu such in o ma ion is un o una ely no consis en ly a ailable in
he discoun dia y. The ecu ing ecall o unds o balance shee pu poses a e le ou . These
we e known in ad ance and each clea ing bank had a pa icula day when o call and do no
necessa ily indica e a lack o liquidi y. Ba clays Bank egula ly called on Mondays, Lloyds Bank
on Tuesdays, Midland Bank on Wednesdays, and Na ional P o incial Bank and Wes mins e Bank
on Thu sdays.53 The only excep ion o his schedule was he p epa a ion o he hal -yea balance
shee , when all clea ing banks could call on he same day.
Figu e 1shows he daily use o sho - e m unds by he la ges i e London clea ing banks
be ween 15 June 1931 and 19 Sep embe 1931. The le axis shows he daily liquidi y indica o on he
basis o he dia y o he discoun o ice. A nega i e alue indica es a ecall o unds. A posi i e alue
signals a e u n o unds o he London money ma ke . The igh axis he shows he di e ence
be ween he Bank Ra e and he sho - e m ma ke a e. The shaded a ea ep esen s he pe iod
be ween 6 July and 16 July 1931. O e all, Figu e 1shows he ollowing: he London clea ing banks
e-called unds (and/o wi hheld unds) as news o con inen al ouble s a ed o eme ge in ea ly
July 1931, and as a esul , he di e ence be ween bank a e and ma ke a e declined, indica ing a
lack o liquidi y in he London money ma ke .54
Howe e , he o e all liquidi y o he ‘Big Fi e’ London clea ing banks does no seem o ha e
been se e ely h ea ened.55 Funds we e e u ned and bills we e pu chased om 16 July onwa ds.
51 Discoun o ice dia y, BoE A chi e C55, see app. o en ies in he dia y om 1 July o 19 Sep embe 1931.
52 In addi ion, an o e all assessmen o he si ua ion in he London money ma ke is p o ided, o example, money sho ,
pa chy, usable, com o able, easy. Howe e , his in o ma ion was no used in he ime se ies shown.
53 T up il,B i ish banks, p. 93. The desc ip ion by T up il is con i med by he en ies in he Discoun Dia y. The only
excep ion is he Na ional P o incial Bank. A leas in 1931, he la e called egula ly on Wednesdays, no Thu sdays.
54 An excep ion is Wes mins e Bank. On 10 July 1931, Wes mins e Bank was a ‘small’ buye o bills, acco ding o he dia y
o he Discoun O ice. Howe e , simila o all o he clea ing banks, Wes mins e Bank ecalled unds on 6 July, 7 July,
and on 15 July.
55 See app. o da a used in ig. 1in abula o m.
1194 RÖMER
FIGURE 5 Liquidi y in he London money ma ke and daily open-ma ke ope a ions (1 Ap il–19 Sep embe
1931). Sou ces: Bank Ra e and 3 Mon hs Banke s’ d a om The Economis ( a ious issues). Fo sou ces o
open-ma ke ope a ions, see sec ion II.
On 23 July, he bank a e was aised om 2.5 pe cen o 3.5 pe cen and again on 30 July o 4.5
pe cen . I emained a 4.5 pe cen un il he suspension o he gold s anda d. A u he ise was
discou aged by he Commi ee o he T easu y a he Bank o England. F om he minu es o he
Commi ee o T easu y on 6 Augus 1931:
A e discussion he Commi ee ag eed: [...] Tha he inc eased loss o con idence
ab oad which migh ollow an immedia e ise in he Bank Ra e ou weighed all o he
conside a ions and ha i would he e o e be ad isable o ecommend o he Cou
ha no al e a ions be made oday in he Bank Ra e.79
This in e nal eluc ance o aise he bank a e u he was sha ed ab oad: ‘Equally ad ice om
Pa is, New Yo k and Zu ich had pu an end o he use o he Bank Ra e: a e he nega i e decision
aken in[sic] Commi ee o T easu y on he 6 h, he ques ion was no aised again ha mon h’.80
Bo h he Bank o F ance and he Fede al Rese e Bank o New Yo k hough ha a u he ise in
he bank a e would igh en holde s o s e ling e en u he .81
I is wo h no ing ha he Bank o England no only pu chased T easu y bills on a la ge scale
du ing he c isis in he London money ma ke , bu comme cial bills as well. Howe e , hese
pu chases a e dis inc om he T easu y bill pu chases. The Bank o England ob ained loans
om he Bank o F ance and he Fede al Rese e Bank o New Yo k. Mo e speci ically, he Bank
o England ob ained wo e-discoun c edi s o pu chase s e ling in he o eign exchange ma ke
79 BoE A chi e, C8/60.
80 Saye s,Bank o England 1891‒1944,p.396.
81 ibid., pp. 405‒9.
FINANCIAL CRISIS OF 1931? 1195
and he eby de end he exchange a e. The Bank o England would ob ain dolla s and ancs. Fo
each d aw, he Bank o England had o deposi p ime s e ling comme cial bills o no mo e han
90 days’ ma u i y.82
The pu chases o comme cial bills in he London money ma ke s a ed on 10 Augus and 12
Augus 1931 on behal o he Fede al Rese e C edi and Bank o F ance C edi , espec i ely.83 The
Bank o England bough 18 million o comme cial bills be ween 10 Augus and 3 Sep embe in he
London money ma ke on behal o he Fede al Rese e c edi and 10 million o comme cial bills
on behal o he F ench C edi be ween 12 Augus and 16 Sep embe 1931.84 Hence, hese pu chases
ell ou side he peak weeks o ese e losses be ween 15 July and 5 Augus 1931 when he liquidi y
o he London clea ing banks migh ha e been mos a isk. Fu he mo e, he p ima y objec i e
o hese comme cial bill pu chases could no ha e been liquidi y p o ision. In e nal eco ds show
ha a leas o he Bank o F ance c edi , Midland Bank ecei ed T easu y bills in exchange o
he comme cial bills.85 Hence, hese ansac ions did no any ha e addi ional liquidi y e ec .86
In sum, he pu chase o comme cial bills a e dis inc om he T easu y Bill pu chases made in
July and ea ly Augus 1931, when he liquidi y o he Big Fi e London clea ing banks, as I a gue,
was in ques ion.87 On 5 Augus 1931 he iducia y issue was aised by £15 million o £275 million
o acili a e la ge asse pu chases. Unlike o he coun ies, B i ain did no ha e an ‘escape clause’
which allowed ese es o all below a ce ain minimum in imes o c isis, bu aising he iducia y
issues amoun ed o he same hing. Doing so elaxed he cons ain imposed by he gold s anda d
and inc eased he oom o open-ma ke ope a ions.
We e clea ing banks a isk du ing he peak mon h o ese e wi hd awal? I a gue hey
we e p obably no a isk o ailing, bu hei wo sou ces o liquidi y – banke s’ deposi s and
‘call-money’ – showed s ains and impe illed he no mal wo king o he London money ma ke
as he ecall o unds and he subsequen lack o e u n o unds showed. The esul was a
na owing di e ence be ween bank a e and sho - e m ma ke a es. The h ea o he London
clea ing banks was h ee old: deposi losses, unds in es ed in accep ances and sho - e m unds
len o highly le e aged discoun houses, which we e hea ily in es ed in accep ances and could
no e u n bo owed unds, as hey we e ied up in accep ances. Funds in es ed in accep ances
we e ozen, bu he Bank o England allowed o a e-discoun . In addi ion, he pu chase o
T easu y bills by he Bank o England om he discoun houses would s abilize Banke s’ deposi s
as ou lined abo e. Such pu chases would o se he losses caused by he gold ou lows. The sum o
£25 million wo h o T easu y bills pu chased be ween 16 July and 4 Augus seems small ela i e
o he combined balance shee s o he London clea ing bank, bu less small o he immedia e
sou ce o London clea ing banks liquidi y – banke s’ deposi s and money a call. O e all, i
p o ed su icien o s abilize and inc ease he sp ead be ween bank a e and sho - e m ma ke
a es. This is an indica ion ha a lack o liquidi y was alle ia ed. A e he in e en ion, no mal
business in he call-money ma ke esumed.
82 Cla ke,Coope a ion,p.206.
83 BoE A chi e C25/7
84 ibid.
85 See BoE A chi e 9A155/ 6&7. No simila en ies we e ound o he Fede al Rese e c edi .
86 The exchange o T easu y bills o comme cial bills would no ha e a led o addi ional T easu y bill pu chases as he
holdings o he Banking and Issue depa men seem la ge enough o acili a e he exchange. On 10 Augus 1931 he Banking
depa men held 26 million o T easu y bills and 110 million in he Issue depa men , o ins ance. I a gue his would su ice
o any exchange o comme cial bills. (BoE A chi e 9A155/ 6&7 and ADM17/ 5&6)
87 I hank one o he e iewe s o poin ing ou he exchange o T easu y bills o comme cial bills.
1196 RÖMER
Figu e 4shows ha he Bank o England pu chased a la ge amoun o T easu y bills when gold
s a ed o low ab oad. Howe e , he Bank o England had o se gold lows p e iously. I will a gue
ha he esponse o he ese e losses was in ac unp eceden ed, a leas du ing he in e wa gold
s anda d pe iod. The model p oposed by Cai nc oss and Eicheng een allows o es ima e wha
o se o ese e lows a ec ing he domes ic c edi we e o be expec ed in 1931, gi en pas o se s
du ing he in e wa gold s anda d.88 The model s a s ou by equa ing eal balances o ou pu and
he sho - e m ma ke a e:
𝑀
𝑃=𝑦
𝑎1𝑒𝑎2𝐼(1)
The money supply is de e mined by he p oduc o he money mul iplie (V) imes he
mone a y base
𝑀=𝑉𝐻=𝑉(𝑅+𝐶
)(2)
The mone a y base (H) is made up o ese es (R) (bo h gold and o eign exchange) and
domes ic c edi (C), ha is, he sha e o he mone a y base no backed by ese es is unde s ood
as domes ic c edi .89 The mone a y base (H) is measu ed as he sum o banke s’ deposi s and
o he p i a e deposi s a he Bank o England and cu ency held ou side o banks. Rese es
a e bo h gold and o eign exchange held by he Bank o England. The equilib ium condi ion o
moneysupplyequalmoneydemandcanbe ew i enas:
𝑉(𝑅+𝐶
)
𝑃=𝑦
𝑎1𝑒𝑎2𝐼(3)
As ou lined in Cai nc oss and Eicheng een by aking he loga i hm o he equilib ium
condi ion, di e en ia ing wi h espec o ime and sol ing o he pe cen age change in ese es,
he equilib ium condi ion can be ew i en as:
𝑅𝑅
𝐻=
𝑃+𝑎
1
𝑌+𝑎
2Δ𝐼 −
𝑉−𝐶
𝐻
𝐶 + 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 (4)
whe e
𝑅and ˆ
𝐶a e de ined as he pe cen age change in ese es and domes ic c edi weigh ed
by he a io o ese e o domes ic c edi o mone a y base. In o he wo ds, he change in ese es
weigh ed by he ese e o mone a y base a io is a unc ion o he change in p ices, ou pu ,
he i s di e ence in in e es a es, he money mul iplie , and he change in domes ic c edi
weigh ed by he a io o domes ic c edi o mone a y base. The money mul iplie is V=M/H.
Taking he loga i hm yields:
𝑣=𝑚−ℎ=𝑎
3(𝐼−𝐽
)(5)
88 Cai nc oss and Eicheng een,S e ling in decline,pp.77‒9.
89 The de ini ion o he a iables ollows Cai nc oss and Eicheng een,S e ling in decline,pp.77‒9.
FINANCIAL CRISIS OF 1931? 1197
Iis he sho - e m ma ke a e and Jis he bank a e o he Bank o England. Di e en ia ing
wi h espec o ime:
𝑉=𝑎
3(Δ𝐼 − Δ𝐽)(6)
The Bank o England can in e ene in he London money ma ke ia open-ma ke ope a ions
by mi iga ing he e ec o ese e lows on domes ic c edi :
Δ𝐶 = 𝑎4Δ𝑅 (7)
I he Bank o England had played by he ‘ ules o he game’, any changes in ese es would
a ec domes ic c edi as well, ha is, a4>0. In con as , pa ly o se ing he e ec o changes
in ese es would imply a4<0. Simila ly o he p e ious equa ion on he pe cen age change in
ese es, he eac ion unc ion can be w i en as:
𝐶
𝐻
𝐶=𝑎
4
𝑅
𝐻
𝑅 + 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 (8)
In o he wo ds, he dependen a iable is he pe cen age change in domes ic c edi weigh ed by
he domes ic c edi o mone a y base a io. The independen a iable o in e es is he pe cen age
change in ese es weigh ed by ese es o mone a y base a io 𝑅
𝐻
𝑅. Seasonal con ols include
he ecu ing ax season in he i s qua e o each yea , window-d essing in June and Decembe
o each yea , and a dummy o he mine ’s s ike in he i s qua e o 1926. The ese e low
equa ion (4) and he eac ion unc ion (8) o m a simul aneous equa ion sys em wi h 𝑅
𝐻
𝑅no being
exogenous. Hence, ollowing Cai nc oss and Eicheng een, I use wo-s age leas squa es (2SLS) o
es ima e he eac ion unc ion.90
Table 3p esen s he esul s o he es ima ion o he eac ion unc ion (8). The nega i e and sig-
ni ican coe icien o 𝑅
𝐻
𝑅shows ha he Bank o England did in ac o se he e ec o ese e
lows on domes ic c edi , ha is, ese e changes did no ully a ec domes ic c edi . The e ec o
ese es on domes ic c edi was pa ly o se by open-ma ke ope a ions. On he basis o he 2SLS
es ima ion, igu e 6shows ha he es ima ed eac ion unc ion acks he ac ual alues o he
change in domes ic c edi qui e well un il he second qua e o 1931. Howe e , he ou -o -sample
simula ion based on he es ima ed coe icien s and he ac ual ese e losses does no simula e he
change in domes ic c edi well. The ac ual change in domes ic c edi by a exceeds he simula ed
alue in he hi d qua e o 1931. This implies ha he Bank o England’s eac ion o ese e losses
was ma kedly di e en in he hi d qua e be o e lea ing he gold s anda d. While some neu-
aliza ion o ese e losses was expec ed gi en he his o y o o se ing ese e lows, he ac ual
expansion o domes ic c edi be o e lea ing he gold s anda d was in ac unusually la ge.
Howe e , he esponse du ing he summe o 1931 does no seem unp eceden ed when com-
pa ed wi h o he c ises. The Bank o England len du ing he c ises o 1847, 1857, and 1866 by
g an ing discoun s and ad ances.91 Fu he mo e, he esponse in 1931 is simila o he c isis in
1914 in he sense ha he Bank o England pu chased la ge amoun s o bills om bo h accep-
ances houses and banks.92 Howe e , he amoun s pu chased om discoun houses we e smalle
90 The money mul iplie equa ion is no pa o he simul aneous equa ion sys em and can be es ima ed by OLS.
91 Anson e al., ‘Lende o las eso ’.
92 Robe s,Sa ing he ci y.
1198 RÖMER
TABLE 3 Resul s dependen a iable: 𝐶
𝐻
𝐶.
Va iable 2SLS
In e cep 0.014*
(0.007)
𝑅
𝐻
𝑅 −0.776***
(0.152)
𝑅
𝐻
𝑅𝑡−1 −0.410**
(0.186)
𝐶
𝐻
𝐶𝑡−1 −0.575***
(0.180)
S ike −0.007
(0.009)
Seasonal – Tax −0.050***
(0.009)
Seasonal – Window d essing −0.013
(0.009)
Obse a ions 21
𝑅20.872
No e: 1926 i s qua e o 1931 i s qua e .
Sou ces: The da a on gold bullion held in he Issue Depa men , o eign exchange, banke s’ deposi s, and ‘O he Deposi s and
Accoun s’ a Bank o England a e om he Bank o England A chi e (C1/79). Money supply and cu ency in he hands o he
non-bank public is om Mogg idge, ‘B i ish mone a y policy’, pp. 148 . Business ac i i y is om Mi chell e al., ‘In e wa GDP’
p. 551. P ice da a a e om Albe s, ‘G ea Dep ession’. The day- o-day a e is om Tinbe gen, ‘Economic S a is ics’, p. 106.
***p<0.01, **p<0.05, *p<0.1.
in 1931, and he in e en ion seems less a ma e o sol ency bu a he o liquidi y when i comes
o he London clea ing banks. Sensing illiquidi y du ing he peak pe iod o ese e losses he Bank
o England injec ed liquidi y ia he pu chase o T easu y bills. O e all, he day- o-day esponse
shown du ing he summe o 1931 is consis en wi h p e ious in e en ion by he Bank o England
acing (po en ial) c ises in he London money ma ke .
IV CONCLUSION
Recen ly i has been shown how he con inen al c isis in 1931 a ec ed he London me chan
banks. Did such ouble ex end o he la ges comme cial banks in London – he clea ing banks?
The e a e wo opposing iews. While James a gued ha he London clea ing banks we e unde
h ea due o hea y losses in deposi s, Billings and Capie concluded ha he London clea ing
banks we e no se iously h ea ened du ing he summe o 1931.93 This a icle aims o b idge he
wo opposing iews. Fi s , new a chi al da a on he day- o-day liquidi y o London clea ing banks
we e p esen ed. Liquidi y was measu ed by he daily lending o ecall o sho - e m unds by he
i e la ges London clea ing banks (Midland Bank, Ba clays Bank, Lloyds Bank, Wes mins e
Bank, and Na ional P o incial Bank). These p e iously unpublished daily da a a e no subjec
o po en ial window-d essing, unlike he mon hly balance shee da a p e iously used. The ecall
93 Billings and Capie, ‘Financial c isis’; James,End o globaliza ion,p.72.
FINANCIAL CRISIS OF 1931? 1199
FIGURE 6 Pe cen age change in domes ic c edi 1926–31. No e: The do ed line is he es ima ed pe cen age
change in domes ic c edi weigh ed by he domes ic mone a y base. The black line is he ac ual alue. Sou ces:
See able 3.
o unds om he London money ma ke is he second line o de ence a e banke s’ deposi s.
I p oposed ha he ecall (o e u n) o sho - e m unds desc ibes he o e all liquidi y posi ion
o he London clea ing banks du ing he 1931 c isis. The da a show ha he London clea ing
banks we e able o e u n unds o he London money ma ke h oughou he c isis be ween July
and Sep embe 1931. This e idence sugges s ha he London clea ing banks we e no se iously
h ea ened. Howe e , a he same ime, newly collec ed a chi al da a show ha he Bank o Eng-
land pu chased la ge amoun s o T easu y bills du ing he same pe iod, ansac ions which we e
dis inc om he pu chase o comme cial bills s a ing in Augus 1931 in suppo o he c edi s by
he Fede al Rese e and he Bank o F ance. The pu chase o T easu y bills aises he ques ion o
whe he he Bank’s la ge scale liquidi y injec ion did in ac sa e he London clea ing banks om
se e e ha m. Al hough no a he isk o ailu e, I a gue ha he e idence p esen ed shows ha
open-ma ke ope a ions s abilized he liquidi y o London clea ing banks du ing he pe iod o
la ge-scale ese e losses. In sum, in his pape I a gue ha , yes, London clea ing banks we e no
pa icula ly ha d hi du ing he c isis o 1931, bu his was also possibly due o he suppo by he
Bank o England ia open-ma ke ope a ions. The esponse is consis en wi h p e ious esponses
by he Bank o England du ing he nine een h cen u y and a he ou se o he Fi s Wo ld Wa
in 1914.
In 1931, he Bank o England was con on ed wi h a dilemma be ween main aining he
exchange a e and ensu ing banking s abili y. Pu suing bo h objec i es may ha e been mu ually
exclusi e.94 The e idence p esen ed he e indica es ha he Bank o England selec ed banking
94 K ugman, ‘Balance o paymen c ises’.
1200 RÖMER
s abili y o e a ixed exchange a e by aising he iducia y issue and unde aking la ge-scale
pu chases, which we e con a y o he o hodoxy o he gold s anda d.
ACKNOWLEDGEMENTS
I am g a e ul o he edi o , Ca he ine Schenk, and wo anonymous e e ees whose commen s
and sugges ions g ea ly imp o ed he pape . I also would like o hank Nikolaus Wol , Oli ie
Accomino i, and F iede ike Röme o hei commen s on an ea lie e sion o his pape . All
emaining e o s a e mine.
Open access unding enabled and o ganized by P ojek DEAL.
ORCID
Ma hiasRöme h ps://o cid.o g/0009-0002-6312-0846
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OFFICIAL PAPERS
Bank o England S a is ical Summa y (1931).
Commi ee on Finance and Indus y (Macmillan Commi ee), Minu es o e idence (1931).
Commi ee on Finance and Indus y (Macmillan Commi ee), Repo o he commi ee on inance and indus y
(1931).
SUPPORTING INFORMATION
Addi ional suppo ing in o ma ion can be ound online in he Suppo ing In o ma ion sec ion a
he end o his a icle.
How o ci e his a icle: Röme , M. ‘Financial c isis o 1931? B i ish banking s abili y
and he ole o open-ma ke ope a ions.’ Economic His o y Re iew, 78 (2025), 1180–1201.
h ps://doi.o g/10.1111/eh .13391
