the world of private banking

LONDON’S FIRSt ‘BIG BANG’? 73
with greater equity capital, potentially available by turning to shareholders, further
arose from the impulsive reaction of Bank of England directors to the 1857 crisis.
Led by Governor Neave, the Bank’s directors quickly maintained that the
1857 panic had erupted due to the private discount houses’ inadequate reserves.
However, this was a faulty diagnosis, arising from miscomprehensions about the
differences between bill broking and bill dealing. Indeed, the Bank’s directors did
not understand the workings of the unique, three-layered English banking system,
especially during a crisis. When subject to panic-induced monetary stringency, the
commercial banks both reduced their call deposits placed with the discount houses
and bought fewer bills from Lombard Street. This was in order to augment their
reserves, especially their balances with the Bank of England. As a consequence, the
discount houses (collectively, the middle-layer ‘buffer’ in the system) were forced
to rediscount bills with the Bank, the only lender of last resort, in order to replenish
their own liquidity. The regular holding of higher reserves by the discount houses
would have been of little avail since, essentially, they acted to provide liquid assets
to the banking system – call deposits (the banks’ third line of reserves) – and bills
as the banks’ short-term investments. The houses substantially generated their own
earnings from their respective partners’ expertise regarding the quality of bills
acquired and the differences between the rate paid on bankers’ call deposits on the
one hand and their bill buying and selling discount rates on the other. With its 1858
‘shutting rule’ the Bank broke the vital links in the three-layered banking system
between itself, the discount houses and the banks. The rule closed the discount
houses’ running accounts at the Bank, thereby restricting their general access to
the Bank’s facilities solely to the quarterly ‘shuttings’ periods, when illiquidity
was caused primarily and artificially by money flows shaped by government tax
receipts and the closure of the National Debt transfer books. 16
The 1858 rule, maintained formally until 1890, provoked two decades of
hostility between the Bank and the discount houses, of which the first major episode
was Overend, Gurney’s attempted run on the ‘Old Lady’ in 1860. Furthermore, the
rule may have further encouraged the establishment of corporate discount houses,
such as Albert Gottheimer’s seamy Mercantile Discount Company, formed in
April 1859. 17 It failed during the ‘leather crisis’ of 1860/1, as did the General
and the London. Furthermore, the London & Provincial Discount appeared and
disappeared within three months during 1861, leaving only the National of the
recent corporate creations. 18
16
Evidence of S. Neave, Governor of the Bank of England, to Select Committee on the
Bank Acts [B.P.P., 1858, XIII ], qq. 396, 398–406, 605–18, 627–35, 640–44 and 715–19.
17
On his questionable business mores at even this early stage of his career, see
S. Xenos, Depredations; or Overend, Gurney & Co., and the Greek & Oriental Steam
Navigation Company (London, 1869), p. 56.
18
On the ‘leather crisis’, see The Economist (7 July 1860), pp. 726, 739. For general
developments, see Bankers’ Magazine (1860), pp. 150–52; and consult W.T.C. King,
History of the London Discount Market (London, 1936), pp. 215–33.