the world of private banking

PRIVAtE BANKS AND INtERNAtIONAL FINANcE 147
1860s; these give details of commodity prices, shipping movements, taxes and
regulations, market conditions, etc., for markets around the world.
Other archives worth noting are the private papers of Sir Francis Baring (1740–
1810), the founder of Barings. As one of England’s leading merchants, he acted as
an adviser to British government ministers and others on matters relating to trade
and finance and was influential in East India Company affairs as a director and
chairman. Through these appointments he accumulated many papers of relevance
to international trade.
Finance of International Trade
Agency services provided by merchants came to include the vital work of
collecting and making payments for merchant customers. It was a small but
seemingly inevitable step from this for the merchant, on the one hand, to advance
funds to enable payments to be made and, on the other, to hold deposits as a result
of making collections. The merchant was transformed into a merchant banker.
Thus the merchant banker became a financier of international trade, a core
activity which in Barings’ case endured to the 1920s, after which banking facilities
were increasingly restricted to British-based customers, albeit often to finance their
international sales and purchases. But as the merchant banker was not a significant
deposit taker until well after 1945 so, generally speaking, the advances he made
were limited. Far more important was his provision of credits represented by bills
of exchange; the so called ‘bill on London’, accepted by and payable at London’s
merchant banks, was of vital importance in international trade finance before 1914.
Bills of exchange were guaranteed – more commonly referred to as accepted
– by merchant banks in return for a commission. In other words, by guaranteeing
bills, merchant banks lent their good name – the product of a widespread
acknowledgement of their reputation based on expertise and integrity – rather than
their money. In its simplest form, bill finance ran something like this. A merchant
customer of Barings located, say, in Shanghai, paid for commodities with a bill
of exchange drawn on Barings and payable at Barings in London at a future date,
say three or perhaps even six months ahead. If the holder of the bill required funds
immediately he could sell the bill to a third party – perhaps another merchant
needing to remit funds to London – for slightly less than its face value. In due
course the holder of the bill would present it to Barings for payment and payment
would be made from funds in the merchant’s account. By now, of course, the
merchant would have had time to sell the commodities and to forward the proceeds
to his Barings’ account so that sufficient funds were available for payment of the
bill. In the event of the merchant encountering difficulties and not having funds,
Barings would nevertheless stand by its guarantee and honour the bill.
This simple and effective mechanism had other uses. It was, for example,
a vital means of making international payments. Also, it financed more than
international trade. While ‘commercial credits’ were granted to merchants,