Bank of England: Custodian of the World's Gold
[The Bank of England, which holds the bullion reserves of more than 70 countries, is one of the most secretive institutions in Britain. As the bank's committee meets to set new interest rates, Alex Brummer offers a rare insight into life behind the forbidding walls of Threadneedle Street]
Deep beneath the elegant marbled entrance hall to the Bank of England, where the
waiters in pink frock-coats and silk top hats bustle backwards and forwards escorting
visitors, is the most exclusive warehouse in London. Down the stairs and through a
succession of electronically controlled cell-like doors, one enters a subterranean control
room - straight out of Ian Fleming - where the inventory clerks log movements on their
security screens and the warehouse workers pad around the strengthened concrete in
leather boots, reinforced with steel.
My escort, Nick Jury, manager of the bank's gold department, leads me - the first
journalist to be granted a visit to the vaults in the bank's memory - through a two-foot
deep Chubb door, engineered so that it swings open at the lightest of touches. Beyond,
glistening brightly in the gloom, are pallets of gold ingots stretching as far as the eye can
see. I am invited to cradle a bar: 28lb of gold sitting in my arms, œ70,000 at today's
price. Each tray holds œ5 million in 350-430 ounce ingots; each stack is worth œ20
million.
Here, beneath one of the busiest junctions in the City of London, the Bank of England
stores the official gold reserves for 70 to 80 central banks around the world, but not,
ironically, our own. Most of Britain's gold reserves are held for us by the Federal
Reserve Bank of New York, where they were moved during the second world war.
The Bank of England acts as both the settlement agent for deals made on the London
gold market, the biggest in the world, and stores gold for its clients. Much of the existing
gold never moves - if the government of Uzbekistan (a gold producer) wants to repay a
debt to Germany, then the bank's allocation system simply reassigns the tray of Uzbeki
gold to its new owners, for which it charges a fee. Jury points out a pallet which contains
two bars stamped with the insignia of the Third Reich - the eagle, the ribbon and the
Swastika gleaming in the dark. The date stamp of 1938 from the Bank of Berlin is a
fake, Jury suggests. The bars, captured by the allies after the war and until recently held
by the Tripartite Commission sorting out war claims, were minted during the second
world war, almost certainly from the gold teeth and jewellery of concentration camp
victims.
The role of the bank as custodian of much of the world's gold - a sort of giant
safe-deposit service - is one of the many jobs the UK's central bank performs other
than setting the cost of borrowing. Since May 1997, when the bank won the right to set
interest rates from the Treasury, it has been seen as a narrowly focused monetary
institution, but it is much more than that. It is a banker, like any other, providing services
to the British government, its agencies, foreign governments and overseas central banks.
The bank also runs factories printing the nation's banknotes, embellished with the
signature of the chief-cashier elect, Merlyn Lowther, the first woman to hold the job in
the bank's history. As agent for the government, and on its own account, the bank
manages the nation's foreign exchange reserves. Like any commercial bank it buys and
sells foreign currencies with the aim of making money for the taxpayer. When other rich
nations are in trouble, an alarm sounds in the dealing room and the bank acts in concert
with that nation's central bank to head off the crisis. In the summer, it bought yen
alongside the Bank of Japan to support the currency as it plummeted against the dollar.
Closer to home, the bank also represents the interests of the City. Although detailed
supervision of financial institutions has been moved off to the Financial Services
Authority, based at Canary Wharf, the bank is still ultimately responsible for ensuring
that the nation is not submerged in some great financial catastrophe.
The inside of the bank is a place of strangely mismatched cultures. One moves from
areas with elegant, high-vaulted ceilings, through 1920s neo-gothic arches to oak-walled
offices filled with oil paintings, to areas of shabbily constructed partitions behind which
are narrow, winding corridors and cramped offices. The senior staff sit behind massive
mahogany desks overlooking the bank's fabulous courtyards, the clerks in offices full of
teak furniture, overlooking the security vans arriving day and night with banknotes and
shipments of gold.
John Townend, an earnest LSE graduate who has been at Threadneedle Street for three
decades, is the Bank's Mr Euro. He must ensure that the City, and Britain's banking
system, will be fit to deal with the arrival of Europe's first transnational currency since
Roman times when it arrives in three weeks. Townend's 'Practical Issues Arising from
the Introduction of the Euro' reports have been described by European Commissioner
Mario Monti as 'the bible of the euro'. The reports, now into their ninth edition, have
been distributed to 41,000 people and institutions in the UK and 6,000 in Europe.
Townend feels a 'sense of history' about the movement of events and is confident that
UK institutions will be as fit if not fitter than their Continental counterparts to trade in
euros.
Across Threadneedle Street from Townend's office lie the Bank Buildings, and in them,
Merlyn Lowther, the new public face of the Bank. The 44-year-old has taken on the
oldest position in the institution, that of chief cashier, which dates back to 1694. Her job
will be wide-ranging, among other things managing the government's accounts with the
bank, through which tens of billions of pounds of income tax revenue pour each year.
Her signature will soon become the most common in Britain, passed across every till in
the nation.
Lowther, one of the few women in high places in the bank, takes over from Graham
Kentfield, the courtly holder of the office for the past seven years. His time in the chief
cashier's department saw the great inflation in the 1970s, and the rapid shift from 10
shilling and œ1 notes to œ5, œ10 and œ20 denominations. He is currently fighting a dour
battle to save the œ5 note, which is enormously popular with the public, but not with the
commercial bankers. Loading fivers into automatic teller machines is considered
inconvenient by the banks.
They are in no hurry to recirculate the notes that come in, leading to a shortage of fivers
and pockets of œ1 coins. Unlike the Americans, who love big denomination notes,
Kentfield detects no enthusiasm for launching a œ100 note in Britain, although he recalls
that before the second world war there were œ1,000 Bank of England notes in
circulation, which were popularly used for house purchases.
The boiler room of the bank is the foreign exchange dealing floor, headed by Cliff
Snout, whose inner-sanctum of an office is decorated with yellowing newspaper
cartoons depicting the campaigns that the bank has conducted.
They date from Harold Wilson taking on the 'gnomes of Zurich' in the 1967 sterling
crisis, to John Major, Norman Lamont and Eddie George taking on - and being
defeated by - George Soros on 'black Wednesday' in September 1992. The bank's
dealing room looks like that of any commercial bank, with young dealers in braces and
bright-coloured shirts sprawled over banks of screens and handling upwards of 30,000
trades a year.
But there are differences: on the desk of the senior dealer is a bank of direct telephone
connections to the City's 16 money brokers. And at the end of the trading desk are
phones that connect Snout and his traders directly with other G7 central banks.
Because trading in Britain carries on after the Pacific closes and before the New York
has opened, it is here that great support operations for currencies often begin. The bank
will act on behalf of other central banks in buying up a weak currency, in an effort to
strengthen a flailing currency or even the pound.
"When those phones ring, a buzz goes around the room," the chief dealer notes. The
Old Lady's dealers are not simply passive. They also are responsible for managing the
UK's foreign exchange reserves, dollars, yen and Deutsche Marks held by the bank
directly as well as on behalf of the Treasury. This means shifting in and out of yen or
dollar instruments in an effort to maximise value.
The bank needs strict limits. As lender of the last resort, if anything goes wrong with the
financial system, in the end it is the Bank of England which has the statutory duty to
ensure that everyone's deposits are safe.
The current deputy-director is John Footman. He worries about stresses and strains in
the entire financial system, the FSA about individual institutions within the system.
He has been occupied for much of this autumn by a succession of problems in the Far
East, Russia, Brazil and at the hedge fund long-term Capital Management in America,
which cost Barclays Bank $250 million and contributed to its chief executive's
resignation. Footman argues that the City got through this period better than New York:
"There were no signs of heavy constraints - banks refusing to make new or renew
loans," Footman observed. His greatest worry at present is over 'payments systems'.
Because each financial centre has different payment systems, instant settlement is
impossible. This means that should one financial centre collapse, all the payments that
had left it but had not arrived at their destination would not be honoured, causing
shock-waves around the world. It would be as if one's wage-cheque were caught in an
electronic nowhereland.
The day-to-day management of the bank, from IT to the balance sheet, falls under the
direction of Gordon Midgley, an unconventional figure with long hair and a penchant for
extremely bright ties. Aside from producing the bank's balance sheets, he is now
planning for one of the biggest transformation's in the bank's history: the shifting of staff
from outlying buildings into Threadneedle Street following the removal of the regulators
to Canary Wharf.
The project has been described as a grandiose œ40 million refurbishment. Maybe. But if
any building needed a facelift and modernisation it is the bank, where apart from the
glamorous public areas occupied by the governor and his deputies, conditions are
extraordinarily Victorian.
The bank claims it will be fully self-financing, with disposed buildings paying for the
changes, including new staff canteens and dining rooms high above the bank's public
areas. The cost might seem like bitter gruel for industrialists suffering from the effect of
high interest rates and a strong pound. But then the prestige of the Bank of England -
which brings so much of the world's gold and foreign exchange trade to London - has to
be upheld.
Fair use, etc...
MY COMMENTARY:
And Ms Fukado tells the WGC's luncheon guests in Denver, Monday 10/18/99, [ALEX furnished that snipet in his originating post] that there is a liquidity problem at the Bank of England and GOLD is being brought in by armored car??? hmmmmm
O/49r
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