I explore this area by looking first at the origins of British banking. I then look at the merchant banks and the bankers. Banking for manufacturers was in a sense a second tier activity in the UK and I explore the example of the Midland Bank ; not so in the USA with the mighty J.P. Morgan. The approach taken by Germany was different again with their large SME sector being almost entirely financed by banks or internal funds. A final strand is a look at the British stock exchanges which created a market for shares in public companies. Again, what it interesting is that manufacturing companies are yet again second order.
The Origins of British banking
In How Britain Shaped the Manufacturing World, I traced the Industrial Revolution back to our trading past, most particularly trading overseas buying cotton and bringing it to England to be spun and woven into cloth. Payment could, of course, be made in cash, at that time gold and silver coin or barter, but from early times the idea of a promise to pay had become common currency and took the more formal shape of a bill of exchange.
A bill of exchange may be defined as a signed, unconditional, written order binding one party to pay a fixed sum of money to another party at a predetermined date. The advantage of a bill is that the person holding it may discount it with a bank rather than waiting for it to mature. It is then the bank that receives the payment from the buyer and the seller has his discounted payment up front. It is a form of borrowing.
Banks, originally also trading as goldsmiths, enter the scene as places where money could be kept safely and where payments could be made without the physical transfer of gold. Banks would issue paper notes as promises to pay. They would also advance credit on the strength of the promise to pay at the heart of the bill of exchange.
Banking activity often took place alongside trading activity, so, looking at some of the revered names of banking, Coutts traded in corn, wine, lead and fish, Barings were importers of woollen and dyed fabrics, Twinings dealt in tea, their banking activity later became part of Lloyds, and the British Linen Bank’s name betrays its origins. They were businesses owned by small numbers of business people usually in a local area.
Alongside these ‘private’ banks, in the reign of William and Mary in 1694, business people in city of London came together to form the Bank of England at first to raise money for the Crown to finance defence against France. From the start, the Bank (with a capital B) operated alongside the private banks issuing notes, discounting bills of exchange and taking deposits. The London Stock Exchange and Lloyds Insurance market appeared around the same time providing the infrastructure for expansion.
With the changes to the economy and society that the Industrial Revolution brought about, financiers, like everyone else, were learning how to operate in a new world, and, as is the way with learning, mistakes were made, banks crashed and money was lost. Elsewhere, of course, fortunes were being made.
In 1825 a wave of speculation led to a large number of bank failures and, in response, in 1826 legislation was introduced to allow wider ownership of banks in the form that became known as the joint-stock bank. This move was necessitated by the growth of the enterprises they were there to serve. These new banks were initially not allowed to have branches in London or to be established within sixty five miles of the capital. They were viewed with disdain by the London private banks and by the Bank which had branches in Birmingham, Bristol, Hull, Leeds, Liverpool, Manchester, Newcastle and Plymouth. One of the first joint-stock banks, the National Provincial, opened in 1833 and, with a change in law, the London and Westminster was formed in 1834. The Midland Bank was formed in 1836.
British Manufacturing History 