the world of private banking
the world of private banking
the world of private banking
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THE ANGLO-AmERIcAN HOUSES IN tHE NINEtEENtH CENtURy 113<br />
reputations for financial strength had sufficient prestige to attract customers for <strong>the</strong>ir<br />
letter-<strong>of</strong>-credit operations. An enhanced reputation in international financial circles<br />
<strong>of</strong>ten took years, if not decades, to develop. As a consequence, <strong>the</strong> leading merchant<strong>banking</strong><br />
houses typically had very few serious competitors as issuers <strong>of</strong> letters <strong>of</strong><br />
credit. This specialized market had oligopolistic characteristics from <strong>the</strong> outset, and<br />
it remained a highly concentrated field throughout <strong>the</strong> nineteenth century. <br />
In <strong>the</strong> period from 1790 to 1820, <strong>the</strong> Anglo-American merchant <strong>banking</strong><br />
houses were only sporadically involved in promoting British portfolio investments<br />
in American securities. The opportunities to do so were few and far between. In<br />
<strong>the</strong> 1790s <strong>the</strong> new US federal government funded its outstanding non-performing<br />
debt, plus <strong>the</strong> debts <strong>of</strong> <strong>the</strong> several States, without <strong>the</strong> aid <strong>of</strong> <strong>private</strong> bankers. Once<br />
President Thomas Jefferson took <strong>of</strong>fice in 1801, <strong>the</strong> federal debt was steadily retired.<br />
American banks and insurance companies, which in some cases were capitalized at<br />
several million dollars, drew largely on <strong>the</strong> savings <strong>of</strong> local investors. A number <strong>of</strong><br />
American securities subsequently traded on secondary markets in London, but <strong>the</strong><br />
original placements were overwhelmingly transactions negotiated in <strong>the</strong> US market.<br />
The third phase in <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> Anglo-American financial market<br />
was characterized by a mixture <strong>of</strong> <strong>the</strong> existing trade-related services and <strong>the</strong><br />
emergence <strong>of</strong> new underwriting services linked to <strong>the</strong> expanding capital markets.<br />
The instantaneous success <strong>of</strong> <strong>the</strong> Erie Canal, an ambitious venture launched in<br />
1817, triggered a host <strong>of</strong> expensive transportation projects. The funds to finance<br />
<strong>the</strong> construction came from diverse sources, some governmental and some <strong>private</strong>.<br />
Anglo-American merchant <strong>banking</strong> became involved in <strong>the</strong>se transactions in<br />
varying degrees. In many instances, <strong>the</strong> promoters <strong>of</strong> American canal and railroad<br />
projects engaged <strong>private</strong> bankers with overseas connections to solicit investors in<br />
London and o<strong>the</strong>r parts <strong>of</strong> Europe. But <strong>the</strong> participation <strong>of</strong> <strong>the</strong> <strong>private</strong> bankers was<br />
erratic and irregular. Many firms that had agreed to help promoters raise funds in<br />
London for American projects on an ad hoc basis later withdrew <strong>the</strong>ir services in<br />
<strong>the</strong> aftermath <strong>of</strong> <strong>the</strong> economic dislocations associated with <strong>the</strong> Panic <strong>of</strong> 1837. In<br />
<strong>the</strong> light <strong>of</strong> <strong>the</strong> vicissitudes <strong>of</strong> <strong>the</strong> US economy in this period, none <strong>of</strong> <strong>the</strong> leading<br />
Anglo-American merchant <strong>banking</strong> houses made <strong>the</strong> strategic decision to provide<br />
investment services on anything approaching a permanent basis during <strong>the</strong> first<br />
half <strong>of</strong> <strong>the</strong> nineteenth century. These merchant bankers were already engaged in<br />
handling thousands <strong>of</strong> transactions <strong>of</strong> all varieties linked to <strong>the</strong> trade sector, and<br />
<strong>the</strong>y considered securities transactions a sideline business ra<strong>the</strong>r than a mainstream<br />
activity. None<strong>the</strong>less, given <strong>the</strong> wide scope <strong>of</strong> <strong>the</strong>ir business activities, which<br />
included a mixture <strong>of</strong> trade financing and occasional investment <strong>banking</strong> ventures,<br />
this era represented <strong>the</strong> height <strong>of</strong> <strong>the</strong> power and influence <strong>of</strong> those Anglo-American<br />
houses engaged in multi-functional merchant <strong>banking</strong>.<br />
The fourth and final stage in <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> Anglo-American financial<br />
markets coincided with <strong>the</strong> outbreak <strong>of</strong> <strong>the</strong> American Civil War. Suddenly, <strong>the</strong><br />
<br />
Some issuers later added travellers’ letters <strong>of</strong> credit and travellers’ cheques to <strong>the</strong>ir<br />
range <strong>of</strong> services.