The following are notes from two books I recently read on social and economic conditions in 18th and 19th century England and Wales. The excerpts below focus on the topic of banking and finances, mirroring much of the banking/economic issues facing 19th century America, including the Kirtland Bank and other similar institutions (see Elizabeth A. Kuehn on the Kirtland Bank for excellent resources discussing this event in early LDS history):
Banking and Finance
To cope with the great increase in production and trade, and to provide the capital needed for projects such as canals, Britain’s system of banking and finance needed to be improved and expanded.
The Bank of England was concerned mainly with carrying out financial operations for the Government. It issued only notes of over £20, and these did not circulate outside London. There were numbers of private banks in London to carry out financial business there, but some country districts were lacking in such facilities. Independent banking was limited to private persons, and no combination of more than six persons could engage in banking business.
In 1750, there were fewer than a dozen private banks outside London, but during the next forty years hundreds of banks were opened to finance the early stages of the Industrial Revolution. All kinds of people set up as bankers, and all of them had the right to issue bank-notes. There was no restriction upon the number of notes they could issue, except the legal obligation to exchange them for gold if asked, and frequently through lack of experience or rashness or dishonesty, they failed as soon as times became difficult. These private banks were often able to give valuable help to the development of industry through their knowledge of local men and conditions. Glasgow’s trade doubled in about fifteen years after the founding of the first banks. In normal times only a small percentage of the notes on issue were likely to be presented for cashing at any one time, and the bankers lent out much of their cash to earn interest. Thus the banking system was able to increase the amount of money available for use in developing industry. If, on account of trade depression, or a war scare, large numbers of people wanted to exchange their notes at once the ban might not have enough cash available, and it would fail. Then people who held enough cash available, and it would fail. Then people who held its notes lost their money, and those who had lent their savings to the bank might be ruined.
The outbreak of war with France in 1793 shook the financial system to its foundations. Pitt, the Prime Minister, believed that the war would be short, and to avoid heavy taxation, he began to borrow large sums from the Bank of England. Soon people were less ready to lend their money, and the Bank raised the rate at which it would lend money. Nervous people began to withdraw their money from the banks, there was a ‘run on the banks’, and scores of them failed. After a temporary recovery there was another crisis in 1797. Large sums of gold had been sent to Britain’s allies, and owing to heavy harvests, large sums also had been sent abroad to pay for heavy corn imports. There were rumours of French invasion, and many people again tried to withdraw their money from the private banks, and these therefore drew gold from the Bank of England, where they often kept the money they were not using at the moment. So great was the drain on gold that soon the Bank of England’s reserve of gold was reduced to barely £1,000,000. The Bank of England itself was in great danger of having to refuse payment. An appeal was made to the Government to save the finances of the country from disaster. In 1797, therefore, the Bank Restriction Act was passed, relieving the banks from the obligation to exchange notes for gold. Fortunately people had confidence in the Bank of England, and for the rest of the war and for some time afterwards paper notes were used instead of gold and silver coins for amounts over £1, and the banks were able to print as many as were needed.
For some years the notes were issued in comparatively small numbers, but as the war continued, the number of notes both in London and in the country was increased steadily. The amount of goods that could be bought did not increase as quickly, so prices continued to rise. When the war ended the Bank reduced the issue of notes, and this, together with the sudden stopping of orders or large quantities of war materials, led to a catastrophic fall in prices. These violent price fluctuations caused problems in industry and great distress to the workers.
Another Bank Act, the Gold Standard Act, was passed in 1816. This fixed the standard coin as the sovereign of 20s., instead of the guinea. Henceforward gold bullion (bars of gold) could be coined into gold coins at the rate of £3 17s. 10½d, an ounce.
In 1819 the Government decided to revert to the use of gold coins. This was done in 1821, when notes could once more be exchanged for gold of the same nominal value. Nevertheless, notes continued to be issued in large numbers, and in 1825 people lost confidence, and began to demand gold for their notes. Many banks in London and in the country had issued too many, and they failed.
It was clear that small private banks with very limited resources could not survive these times of trade crisis and the Bank Act of 1826 allowed banks outside the 65-mile radius of London to combine and enlarge themselves, and so to become joint-stock banks. The Acts gave these joint-stock banks the right to issue bank-notes. More and more, however, they developed the use of cheques. Anyone who has deposited any money with a bank can write a cheque for any amount not greater than that of his deposit. Huge business deals can be concluded without the transfer of any cash or notes; the bank simply subtracts the amount from the account of the drawer (the person making the payment) and adds it to that of the payee (the person receiving the payment). It is not surprising that the cheque system began to replace the use of notes, and finally superseded them for most transactions involving large sums. The system had been in use in London for a long time, and in 1775 a clearing house had been established, so that cheques drawn from any bank could be paid into any other, and then periodically the balances of the various banks could be settled with one another.
The general feeling was against any Government control of the new joint-stock banks, and failures, crises, and force amalgamations continued to prevent smooth development of the banking system. (L.F. Hobley, Living and Working: A Social and Economic History of England and Wales from 1760 to 1960 [Oxford: Oxford University Press, 1964, 1974], 111-13)
In 1716, a soap and tallow dealer of Bristol, James Wood, started what is believed to have been the first private bank outside London. During the next hundred years many more such banks came into existence, the great majority of them after 1760. By 1815 here were over 600. They were not joint-stock concerns. Many were very small; they had insufficient resources to meet any serious emergency and were thus very liable to go bankrupt; in fact, 240 provincial banks failed between 1814 and 1816. Some of them were started by manufacturers themselves, as a means of helping their own business, and one or two of these were in a later age to become nationwide banking concerns. Ironmasters in particular needed considerable quantities of capital and employed large numbers of men, and so it is not surprising to find that both Lloyds and Barclays Banks had their roots in the iron industry. In the country areas too, as the enclosure movement spread and the scale of farming increased, there was a growing need of banks. There they were often started by corn-merchants. At Aberystwyth there was the pleasantly named Bank of the Black Sheep, whose £1 notes carried a picture of a black sheep and 10s. notes that of a black lamb. (C.P. Hill, British Economic and Social History, 1700-1975 [4th ed.; London: Edward Arnold, 1977], 142)
Banking Since 1815
The fifty years after 1815 saw important changes in the English banking system turning it in directions which it has followed since. The first of these changes was a series of alternations in the laws governing the Bank of England. The growth of trade and industry in the 19th century led naturally to discussion of the place of the Bank in the nation’s economic life. Controversy at first raged round the question of cash payments. The chief champion of a return to gold was David Ricardo (1772-1823), the ablest British economist since Adam Smith, and the author of Principles of Political Economy and Taxation (published in 1817). He had strongly supported the views expressed by the Bullion Committee. Cash payments were eventually resumed in 1821. A serious commercial crisis in 1825, accompanied by many bankruptcies, led to the passing of the Bank Act of 1826. This modified the privileges of the Bank of England by permitting the formation of joint-stock note-issuing banks outside a radius of sixty-five miles from London. A second step in the same direction was taken by another Act of 1833, which allowed the formation of joint-stock banks even in London itself, provided they did not issue notes.
But the most important changes came in 1844, when Sir Robert Peel’s government introduced the Bank Charter Act. This had three main provisions. The Bank of England was divided into two separate departments—one for the issue of notes and the other for ordinary banking business. The Bank was allowed to make a ‘fiduciary’ issue of £14,000,000 worth of notes, that is, an issue backed by securities rather than by bullion; every note issued above this sum was to be backed by an equivalent amount of gold in the vaults. Finally, the issues of all other note-issuing banks were not to be increased in future: and any bank which went bankrupt, or amalgamated with another bank, was to lose its right to issue notes. The object of this last clause was to give the Bank of England a monopoly of issuing notes in England and Wales—a monopoly not achieved until 1921, when the last surviving private note-issuing bank )Fox, Fowler and Co. of Taunton) amalgamated with Lloyds Bank and so lost its right of note-issue. This system on the whole worked well in England—although during the First World War and for some years afterwards the Treasury itself issued £1 and 10s. notes to replace gold sovereigns and half-sovereigns. In Scotland the banking system developed on lines wholly separate from those of England, since the foundation of the Bank of Scotland (1695) and the Royal Bank of Scotland (1727); and the several Scottish banks have each continued to issue their own distinct notes.
A second important development in the 19th century was the great growth of the joint-stock banks. This was much encouraged by the Acts of 1826 and 1833 mentioned above, and by 1842 there were 112 joint-stock banks in operation. Their rise involved the decline of the private banks; these were more limited in their scope, and less stable than the big joint-stock concerns, which were capable of financing the expanding businesses of Victorian England. Gradually during the 19th century the joint-stock concerns absorbed the private banks. This process was accelerated by another banking development of the time—the greatly increased use of the cheque. As a method of paying large sums this was far more convenient than the notes issued by the private banks. The advantages of the cheque were extended in 1854, when the joint-stock banks joined the London Clearing House. This was an institution which had come into being in the late 18th century, arising out of the daily meeting together of clerks from the various banks to collect cheques drawn on each bank, and to settle the balance. Settlement had formerly been made in notes and cash: now, from 1854 onwards, payment was made by cheques drawn on the Bank of England, where the banks henceforward kept their reserves. In 1864, the Bank of England itself joined the Clearing House, in order to simplify the working of the system.
These two major banking development of the 19th century—the several laws affecting the Bank of England and the rise of the joint-stock banks—between them helped to create in England a unified system of banking. At its head is the Bank of England, at once the government’s bank and ‘the bankers’ bank’, with its notes the everyday method of payment throughout the country. The great extension of business since the days of the Bank Charter Act led to a gigantic rise in the ‘fiduciary’ issue of notes: the £14,000,000 of 1844 became £260,000,000 by an Act of Parliament of 1928. The relationship between the Bank of England and the government became much closer in the 20th century, with the government using the Bank in various ways to control the financial policy of the country. Until its nationalisation in 1946, however, the Bank remained in name at least a private company. Below the Bank of England, and working in very close harmony with it, is a small group of very large joint-stock banks, owned by private shareholders and with branches all over the country. They came into being through a long series of amalgamations, first of private banks and then—particularly after the First World War—of groups of joint-stock banks. The largest and most powerful of them—the Westminster, the Midland, the National Provincial, Lloyds, and Barclays—were known as the ‘Big Five’, and they dominated the field of banking in England and Wales. They were not entirely without competitors, on the one hand a number of smaller joint-stock banks, strongest in Lancashire and the West Riding of Yorkshire, and on the other the Co-operate Wholesale Society, which started its own bank in 1872. (Ibid., 144-45)
