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