Breaking into the City's shadowy vaults

Stephen Fay talks to a historian of the Square Mile about an autocratic Bank of England chief

David Kynaston, the City of London's self-appointed chronicler, was in the Bank of England archives poring over Montagu Norman's diaries when he read an entry that pulled him up short. It was, he said, "absolutely thrilling".

In 1942 Norman had been governor of the bank for 22 years, and he had got used to behaving like the City's puppet-master. The diary records that he had an idea for the future of London's three internationally celebrated merchant banks - Baring Brothers, NM Rothschild and Son and JH Schroder & Co. The entries, written in Norman's idiosyncratic shorthand, reveal what Kynaston calls "a supremely tantalising moment in City history".

"8 September. Pam [Albert Pam of Schroders]. Why should not Schroders, Rs and Barings amalgamate? Or why should not Barings take over the other two? ... 2 October. ERP. BB & Co not willing, after consideration, to join with JHS & Co, whose methods are impossible & unpopularity great - nor with NMR & S who are entirely a Jewish family concern."

Kynaston does not register his shock after this insight into the prejudiced mind of this most autocratic of Bank of England governors. Readers of the third volume of Kynaston's monumental history of the City are left to make up their own minds about this piece of anti-Semitism at the height of the Second World War. Instead, he quietly records: "Imagine that reason - at the time of the concentration camps."

Kynaston first became aware of the City in 1964, when he was 13: "It was one sterling crisis after another," he says. An Oxford historian, he served an apprenticeship writing histories of City institutions such as the Financial Times, Cazenove and Liffe; in the late 1980s, he hit upon the idea of putting it all into one work.

His City of London history was planned as a single volume, but the material got out of hand. Volume three, published this month, covers the years 1914 to 1945. The final volume (1946-2000) will take the number of words he will have written to "a cool million". This is a readable narrative history of a secretive place in British life which had guarded its privacy for centuries. "My approach is to do it as social and political as well as financial history. I'm almost like an anthropologist let loose among natives," he says.

Norman, the central character in the new volume, is one of the most remarkable figures in City history, feared inside it and widely hated outside. Kynaston tells the story of Norman's determination to create an international alliance of central bankers operating fixed currencies based on the gold standard. His allegiance to gold forced up interest rates and that drove British industry deeper into the Depression. His obduracy isolated him and the City.

But Norman retained his power within the Square Mile. Kynaston says that he has tried to be unemotive, to let the record speak for itself, but his description of Norman exploiting his authority does not help his posthumous reputation.

In 1938, for example, Norman - who was a close friend of Hitler's financial guru Hjalmar Schacht - was a committed appeaser. Upset by the anti-Hitler tone of articles by Paul Einzig in the Financial News, Norman summoned one of the paper's directors. The diary records: "Complaints from abroad about one of Einzig's articles: he will see what can be done."

The role of the Bank governor is a prominent theme in volume three and the yet-to-be-published volume four. Kynaston charts the ups and downs of the governor's reputation during the past 50 years. It was down in 1967 when Leslie O'Brien was not tipped off by the Midland Bank before it took over Samuel Montagu. The governor was furious that the consent of the Bank no longer seemed necessary. The governor's reputation went up 30 years later, however, when Eddie George revived the aura of power and influenced economic policy much as Norman had done in the 1920s.

Volume four will talk about the New City, aspects of which Kynaston admires: "People who did well in the City were people who concealed their intelligence. Now it's more meritocratic, more international, more intelligent - that's because of the money."

n The City of London: Illusions of Gold, 1914-1945, is published by Chatto & Windus at pounds 30.