The Money Market

F. Straker

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781138057470
• eBook ISBN: 9781351675383
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, first published in 1904, is an early examination of England's monetary system: what it is, how it was founded, grew and developed. It analyses the role of trade in this development, and works from the assumption that the material well-being of the country and all its inhabitants is largely dependent upon the money market.

CHAPTER I

The Beginning of Banking in England

The present position of the Money Market in this country so enters into the life of the people as a thing that is, that few trouble themselves to inquire how our monetary system came to be what it is, how it was founded, grew, and developed into its present state. Whether people are aware of it or not, the stability and condition of the Money Market of a country influences the lives of all—rich and poor alike—and the materiel well-being of all is largely dependent upon it. Before proceeding to any examination of the methods in which present-day business in the London Money Market is conducted, we will look back into the past, and trace the rise of our financial system from its early beginnings.

Trade is, of course, the foundation of, and reason for, the need of money; and trade commenced with the first division of labour. With the earliest men one was more fitted for one thing and one for another; one was a hunter and one a husbandman. When the hunter handed over to the husbandman so many skins for so much corn, trade was established; but this trade was, of course, only a system of barter. As men grew more civilised and trade developed, the inconveniences of this system became apparent and pressing, and gradually more suitable modes of settling transactions were evolved; although in certain remote and uncivilised parts of the world trading by barter exists to the present day. As a reminder of bygone times there is, in the Royal Exchange, a picture of the Phœnicians trading with the men of Cornwall fine cloth for tin and skins.

We know that the early inhabitants of this country had coinage of a kind, but the earliest record of any definite business in monetary transactions was in the reign of William the Conqueror, who first introduced Jewish traders to this country. From that time on, for hundreds of years, the Jews were more or less intimately connected with our finances; but they led a very chequered career in England, being frequently treated with great cruelty and barbarity. They were required for the help which could be obtained from them, but hated by the people for their usurious practices. The exactions which the kings and nobles of the time put upon them were largely conducive to these practices, how-ever, as unless the Jews could make large profits out of the people they would not have been able to meet these exactions.

The financial importance of the Jews appears to have declined in this country towards the end of the thirteenth century; but about the same time their place was taken by the Lombards, the early Italian merchants, who came over and settled here in the street which still bears their name. These Lombards were men of some attainment, being skilled in arts and trade, and they possessed the only knowledge of banking then in existence. They combined the art of the goldsmith with the business of the banker, and gradually obtained a firm and sound footing in the country.

The reign of Elizabeth was notable, among many other things, for a great and important increase in the trade and commerce of the country. Many causes contributed to this, among others being the capture of Antwerp by the Duke of Parma, when it is said a third of the merchants of that flourishing city found a refuge on the banks of the Thames. The newly awakened national energies found fresh outlets and markets, and London gradually became the general mart of Europe and of the then known world. That the knowledge of banking and the foreign exchanges had by this time considerably developed we can gather from many sources; but the knowledge and wisdom exhibited by Sir Thomas Gresham during the reigns of Edward VI., Mary, and Elizabeth is remarkable, and his influence had a far-reaching effect on the public and private finances of the time.

In spite of this increase of the knowledge of monetary matters, however, no settled banking business developed for some time. As our merchants gradually accumulated riches they fell into the custom of sending their surplus funds to the Tower of London for safe custody. This custom was brought to an abrupt end in 1640 by Charles I. taking possession of £200,000 which had thus been lodged at the Tower ; but this sum was shortly after repaid. For a time the merchants kept their moneys in their own possession, but owing to the unsettled condition of affairs ruling through the whole period of the civil war, they adopted a system of depositing their cash with the goldsmiths, who were by this time a wealthy and responsible body.

In addition to the presumed safety of funds so deposited, the goldsmiths offered an extra inducement for further funds to be placed in their hands by allowing interest on such moneys. With this additional borrowed cash at their disposal, the goldsmiths commenced the business of discounting bills and lending money; and they also lent money to the king on the security of the taxes. The receipts they issued for the money lodged with them circulated from hand to hand, and were known as Goldsmiths’ Notes, and these may be considered the first kind of notes issued in England. Scott, in the Fortunes of Nigel, makes Heriot to say, “I am a goldsmith, and live by lending money as well as by selling plate.”

In 1672, however, this gradually developing banking business received a rude shock. As we have already seen, the goldsmiths, or bankers, of the time lent their money to the king; that is, they deposited their moneys with the Treasury on the security of the revenue, from which they were afterwards reimbursed, obtaining a good rate of interest on their money in the meanwhile. A king or a government, however, can no more live beyond their income with-out getting into difficulties, than can an individual. The necessities and extravagances of Charles II. led him to a memorable step when, in the year 1672, he suddenly ordered the Exchequer to be closed, and refused to pay out any of the sums deposited. The amount thus annexed was about £1,300,000, and this drastic measure had the effect of bringing ruin on nearly half of the goldsmiths, and consequently on their clients who had money deposited with them. The injustice of this seizure raised such universal protest that the king agreed to pay interest at the rate of 6 per cent. per annum on the principal sum out of the hereditary excise. This interest was paid until the last year of his reign, and subsequently an arrangement was made by which about one-half the sum owing was allotted to the claimants in the form of stock. This was the real commencement of our National Debt in its present form.

CHAPTER II

Foundation and Growth of the Bank of England

In tracing the history of our financial system we now come to the important event of the establishment of the Bank of England.

About the year 1691 the Government of William and Mary experienced considerable difficulty in raising the necessary funds to prosecute the war with France ; but “the hour brings the man.” The man on this occasion was William Paterson, a merchant of Scotland, who had been educated for the Church, but had led a varied and adventurous life. The scheme he presented for the consideration of the Government for the relief of the situation was the foundation of a public joint-stock bank; which, in return for certain powers and privileges to be conferred, should advance money to the Government. His scheme, though well received in official circles, produced very great opposition from many classes of the public, who thought they would be prejudiced by such an institution.

The goldsmiths thought they saw in it the destruction of their business, the money-lenders a reduction in the rates of interest obtainable, certain merchants a reduction of their profits on Government contracts, while the political opponents of the Government and the king saw that the scheme, if efficiently carried out, would naturally strengthen the former and give the latter a firmer position than he occupied at that time; and all these interested parties with one accord joined forces and condemned the scheme.

But in spite of all opposition the Bill establishing the Bank of England was successfully carried through Parliament, and obtained the royal assent on the 25th April, 1694.

The basis of the Bill was that £1,200,000 should be voluntarily subscribed by the public, and that the subscribers should be incorporated into a body, to be known as “The Governor and Company of the Bank of England.”

The whole of the sum forming the capital of the Bank was to be lent to the Government, for which the Bank was to receive interest at the rate of 8 per cent. per annum, together with an allowance of £4,000 per annum for management and expenses; making in all £100,000 per annum. It was also provided that the sum of £300,000 was to be raised by public subscription, for which the contributors were to receive certain terminable annuities.

By its first Charter, which was for ten years only, the Bank of England was not allowed to borrow or owe more than the amount of its capital; which meant that it could issue notes to the extent of its capital and no more. If this amount were exceeded the members were liable for such excess, in their private capacities, in proportion to their holding of stock.

The capital of the Bank was subscribed in a few days, and when duly paid up, the agreed sum of £1,200,000 was handed in to the Exchequer.

Such in brief was the foundation of the Bank of England, and though its establishment quickly had a beneficial effect on the community at large, in curtailing the ruling rates of interest, yet its early years were marked by great trouble and many vicissitudes. Certain persons who had opposed its establishment from personal motives saw some of their worst fears being realised in the reduction of their profits, and they were not slow to take advantage of every opportunity which presented itself to throw obstacles in the path of their young though powerful rival, and to unite in efforts to thwart its progress.

With a Government always wanting more financial help, in season and out of season, with debased currency, and with enemies on every side, the position of the directors of the Bank was no enviable one; and it was only by great energy, united effort, and perseverance that they were able to keep their heads above water, and struggle on until at last they found themselves on safer and firmer ground.

The Charter originally granted to the Bank was for ten years only, as we have already seen ; but this Charter has from time to time been renewed, and also varied—sometimes in favour of the Bank and sometimes curtailing its privileges. The monopoly of joint-stock banking was not granted to the Bank by its first Charter, but this monopoly was practically conferred on it in 1708. The Act passed in that year provides :—

“That during the continuance of the said corporation of the Governor and Company of the Bank of England, it shall not be lawful for any body politic or corporate whatsoever, created or to be created (other than the said Governor and Company of the Bank of England), or for any other persons whatsoever, united or to be united in covenants or partner-ship, exceeding the number of six persons, in that part of Great Britain called England, to borrow, owe, or take up any sum or sums of money on their bills or notes, payable at demand, or at a less time than six months from the borrowing thereof.”

In spite of its many embarrassments, the following extract from the London Magazine of 1737 shows how well the Bank of England had come to be thought of by that time :—

“There certainly never was a body of men that contributed more to the public safety than the Bank of England. This flourishing and opulent company have, upon every emergency, always cheerfully and readily supplied the necessities of the nation, so that there never have been any difficulties—any embarrassments—any delays in raising the money which has been granted by Parliament for the service of the public; and it may very truly be said that they have, in very many important conjunctures, relieved the nation out of the greatest difficulties, if not absolutely saved it from ruin.”

We pass on now to the end of the eighteenth century, when the country was plunged in the throes of war and financial difficulty. Up to this time the Bank, since its foundation, had succeeded in meeting its notes when presented; but in the year 1796 a steady drain on the reserve of the Bank commenced, owing to the fear of invasion. This drain began to assume a very serious aspect in the early part of 1797, and it appeared probable that the Bank would be subjected to the danger and humiliation of a temporary stoppage. The directors, fully aware of this danger ahead of them, laid the position before the Government, and left the solution of the difficulty in its hands. After due consideration, an Order in Council was issued on the 26th February, 1797, requiring the Bank not to pay its notes in gold. On the following day this Order was made public, and the Bank issued the following notice :—

“BANK OF ENGLAND, February 27th, 1797.

“In consequence of an order of His Majesty’s Privy Council, notified to the Bank last night, a copy of which is hereunto annexed, the governor, deputy-governor, and directors of the Bank of England think it their duty to inform the proprietors of the bank stock, as well as the public at large, that the general concerns of the Bank are in the most affluent and prosperous situation, and such as to preclude every doubt as to the security of its notes. The directors mean to continue their usual discounts for the accommodation of the commercial interest, paying the amount in bank-notes, and the dividend warrants will be paid in the same manner.”

This suspension of cash payments was a very drastic measure to take; but the public, recognising the difficulties of the situation, and appreciating the means which were being taken for the general safety, at once fell in with the spirit of the Order, and a meeting of merchants and bankers was held and passed the following resolution, which received very general support :—

“That we, the undersigned, being highly sensible how necessary the preservation of public credit is at this time, do most readily declare that we will not refuse to receive bank-notes in payment of any sum of money to be paid to us, and we will use our utmost endeavours to make all our payments in the same manner.”

An Act was passed in the following May, confirming the action of the Privy Council, but authorising the Bank to pay out sums under twenty shillings in cash, and also allowing certain bankers to have a stated amount of cash. This Act restricted the payment of cash for a period of fifty-two days only, but before it expired a further Act was passed extending the period of restriction, and subsequently other Acts were passed greatly prolonging the period; and it was not until 1823 that the restriction was entirely withdrawn, although as a matter of fact the Bank really resumed paying in cash on demand on May 1st, 1821, deeming it then safe to do so.

Although a period of safety and prosperity then appeared to have dawned, the Bank was not quite clear of its troubles. The very prosperity of the times led imperceptibly to another period of distress and danger, culminating in the panic of 1825.

The year 1824 was notable for a very great increase in the number of joint-stock companies which were promoted or suggested, and also of loans to foreign countries ; and a period of intense excitement and speculation ensued. This was followed by the inevitable crisis, which developed into a panic at the end of 1825, when a large number of London and country bankers had to stop payment. The reserve of the Bank was reduced to a merely nominal figure, and the Bank authorities themselves suggested that they should again be “restricted” as to payments; but the suggestion was firmly resisted by the Government. Fortunately, at the lucky moment, an old box which had been stored away was remembered. It contained a large quantity of £1 notes, and these the Bank at once commenced to issue. This issue had very quick and beneficial results. The notes were readily received by the public in exchange for the notes of private bankers, the demand for bullion ceased ; and Mr. Harman, giving his evidence before a parliamentary committee inquiring into the causes of the panic, stated it was his opinion that this issue of small notes “saved the credit of the country.”

In 1826 the Bank of England, by arrangement with the Government, agreed to establish branches in various parts of the country, and gave up their monopoly of joint-stock banking, except within a radius of sixty-five miles of London.

The year 1833, however, saw a further restriction in the powers of the Bank, when, after protracted negotiations, and in return for a further renewal of its Charter, the Bank surrendered its monopoly of joint-stock banking entirely, provided that no bank having more than six partners might issue notes within the sixty-five-mile limit of London.

It is a curious point that the Charter of the Bank never did restrict joint-stock banking in its present accepted form, but only the issue of notes by joint-stock bankers or banks having more than six partners. Up to this time the issue of notes by a bank had been thought to be its main business; so much so, that it was believed to be useless to attempt to conduct a bank without power of issue, and consequently no joint-stock bank had been founded. But about this time the need of such institutions began to be felt, and the presumed monopoly of the Bank of England was called in question—largely by Mr. Gilbart, the founder of the London and Westminster Bank. The Bank tried to assert their monopoly, but without success, and in order to settle the matter effectually, the following clause was inserted in the Act passed in 1833 dealing with the Bank Charter :—

“Be it the...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Chapter I The Beginning of Banking in England
• Chapter II Foundation and Growth of the Bank of England
• Chapter III The Early Private Bankers
• Chapter IV The Bank Charter Act of 1844, and Its Suspensions
• Chapter V The Development of London as the Financial Centre of the World
• Chapter VI Factors of the Money Market
• Chapter VII The Bank Return
• Chapter VIII The Growth of Joint-Stock Banks
• Chapter IX Joint-Stock Bank Balance Sheets
• Chapter X The Bill-Brokers
• Chapter XI The Clearing House
• Chapter XII Foreign Exchanges
• Chapter XIII The Money Article of the Press
• Chapter XIV Conclusion
• Appendix The Gold Reserve
• Index