The Development of Banking in England
The author considers the history of banking in England, beginning with the goldsmiths who would, for a fee, store the gold of others in their facilities. Depositors held receipts for the gold they deposited, and their gold would be returned to them on presentation of the receipt. The ability of the original owner to give his receipt (and right to redeem the gold) to another person made these receipts function as commercial paper in transactions.
Credit was issued through a completely different system, through personal lending and dealing with individual money-lenders, until the system of banking that had been pioneered by the Dutch was proposed to make lending institutional, legitimized, and regulated by government authorities for the protection of borrower and lender alike.
The Bank of England, itself, was an extension of the royal treasury that was established as a method for the government to borrow money to finance its constant conflicts with the French. This bank, established as an independent corporation, was empowered to loan money to the state and issue notes of credit, also benefitted from favorable legislation, such as being exempted from regulations that restricted the lending and issuing activity of other banks.
While the BE was not intended to serve as a central bank, its monopoly powers slowly made it function as one, and it had the power to regulate the financial well-being of the country. There was no explicit legal authorization for it to do so, but because most smaller private and commercial bankers depended on the BE it gained that position by virtue of its power.
There's also mention of an edict in 1775 that forbade banks to issue notes of less than one pound (and eventually increased this to five), which effectively ended the issuing operations of small banks that loaned small amounts to tradesman and relegated them to conducting their routine business in coin and maintaining their aggregated holdings in notes issued by larger banks.
The users of money also welcomed the centralization of issuance: rather than having notes issued by a plethora of small issuers, it was more convenient and certain to have all notes backed by a large, known, and centralized source. Hence the notes of small banks and goldsmiths' cash notes fell out of favor with the market. In time, the legislation was amended to forbid smaller banks from issuing notes. While it was not expressly forbidden, the web of legislation about conditions under which a bank may or may not issue notes made compliance difficult if not impossible.
There is a rather lengthy consideration of joint-stock banks, which fell through the cracks of banking legislation, but which generally were not in the business of issuing notes. This is largely because these were business partnerships that, by common law, made the partners personally liable for debts incurred by their operations, so the creation of liabilities was rare even before it was forbidden by legislation that regulated the issue of notes.
The author defines five classes of bank:
- Central Bank - Such as the Bank of England, which is a corporation (owned by shareholders) that is often specifically exempted from legislation that restricts the powers of other banks.
- Corporate Banks - Owned by shareholders who are not necessarily depositors, whose liability is limited to the loss of values of their shares of ownership
- Joint Stock Banks - Owned by their depositors, whose partnership makes their liability unrestricted, even beyond their deposits, and not typically engaged in the business of issuing notes.
- Private Banks - Manage the capital assets of one or more wealthy clients, lending to generate income, but not engaged in the business of issuing notes.
- Colonial Banks - Established by a royal charter, such that the liability of shareholders is limited by the terms of their charter (generally twice the nominal amount of their shares)
The author mentions that during the last half of the eighteenth century, there was a great reduction in the number of banks by means of consolidation and amalgamation, decreasing from 317 banks in 1883 to 172 banks in 1901. At the same time, there were a significant growth in the number of offices, as banks opened branches, such that it was not uncommon for a town that was served by one or two banks twenty years ago were served by four or more, competing for the business of the market.
There is also a great growth in the number of banking customers and funds on deposit. Fifty years ago, it was only the wealthy and merchant classes who made use of banking, but by the turn of the century virtually every class has an account in a bank, and even the poorest in society use Post Office banks. Also, more money is held in accounts rather than being maintained in cash boxes and caches within the house. As a result there is a great deal more capital in circulation, and a great deal of credit available that has fueled the growth of industrialization.
And industrialization itself has been a major factor: the large supply of "cheap money" that is available has been created by growth in profitable enterprises that have been capable of servicing their debt. If it were not for this growth and success, there would be little demand to borrow money and little capability to repay it - capital would be wasted rather than generated. There are those who warn that the author's time was a temporary aberration, that there could not be so much money to be had at such low rates for a long period of time. Whether this is pessimism or realism is for the future to decide.
Lastly, there is the concern that the consolidation of banks will eventually lead to a monopoly and that the public will certainly suffer from a narrowing field of competitors. This seems a slippery-slope argument that ignores the fact that pricing in capital markets is not determined solely by the bank. A bank cannot raise interest above the rate that borrowers are willing to pay, or they will simply stop borrowing or seek other sources. Even if the Bank of England became the only bank in all of England, there are other sources of credit (private lenders, foreign banks, etc.) with whom the bank would have to compete. There has been "nothing in recent events to justify this fear" and the consolidation has resulted in greater competition, sounder methods of banking, greater credit to borrowers, and greater security to depositors.