the world of private banking

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