Forrest Capie

Industrial Lending by English Commercial Banks, 1860s–1914: Why Did Banks Refuse Loans?

English commercial banks have suffered severe criticism for their alleged failure to support industrial activity, to provide ‘industrial finance’. They are said to compare unfavourably with their European counterparts. In this article we explore this issue by examining how in the years before 1914 these banks treated loan applications from industrialists, specifically analysing the extent of refusals and the reasons given for refusals. The results confirm that the banks operated their lending business within general constraints imposed by the principles of prudent banking. However, it is also clear that the banks gave very careful consideration to all applicants, applied a set of reasonable criteria, and approved the great bulk of all applications for industrial lending.

Profitability in English banking in the twentieth century

It is well-known that clearing banks in Britain did not publish their true profits until 1969. This article sets out to establish from sources in the banks’ archives reliable and consistent estimates of the true profits and profitability of the major English clearing banks during the period 1920–68. The methods used and problems encountered are explained, and the results discussed, together with possible sources of data outside the banks. The impact of inflation on rates of return is considered. The question of ‘smoothing’ of published profits by the banks is addressed. The results are discussed in the context of economic theory and the perceived cartel nature of banking and some comparisons made to estimates of profitability in the wider UK economy. Finally, some interesting questions raised by the results, and which require further study, are identified.

Tariff Protection and Economic Performance in the Nineteenth Century

The role of the tariff in economic development in the nineteenth century has long been a subject of debate, even if much of the literature has centred on the political objectives and avoids assessing the economic effects. No less an economist than Taussig, in his 1880’s study, conceded that he, “… does not touch directly on the more important but less easy questions as to the economic effects of (tariff) legislation” (Taussig, 1885, preface), and in his Principles almost forty years later said: “The economic effects of this system (tariffs) it is impossible to follow empirically…more baffling is the task of following or measuring its effects on general prosperity” (1921, p. 539). Some historians too have been content to pass on in a casual way observations that owed as much to ideology as they did to empirical investigation: some noted that Free Trade Britain grew more rapidly than other countries and more rapidly than at any other time, while other writers pointed to the coincidence of protection and prosperity in certain countries. And yet the dominance of some variables together with the comparative data scarcity combine to make the task of identifying the role of the tariff in the nineteenth century much more difficult than is commonly allowed for.

Financial crisis, contagion, and the British banking system between the world wars

In a globalised world, when financial crisis strikes, can countries which are well-integrated into the world financial system escape? Recent experience suggests not. In the early 1930s, Britains openness at the centre of the world financial system left it vulnerable, particularly to the central European financial crisis. Yet there was no financial crisis in Britain in 1931, rather an exchange-rate crisis, and sterling left the exchange-rate regime of the gold exchange standard. The most important financial institutions, the joint-stock commercial banks, the central part of the payments system, remained robust and contributed to the stability of the British economy.

The Evolution of Central Banking

Institutions known as central banks emerged or were established as commercial banks or government banks. Their evolution into central banks came with their monopoly issuing notes and their role as lender of last resort, among other functions. Carrying out commercial business on a large scale created a conflict of interest, so this practice was abandoned. Establishing the right degree of dependence was difficult, and changed in times of crisis. Independence is important: it helps to establish reputation, which is everything in banking. The Great Depression, widely attributed to inept Central Bank behavior, interrupted central bank independence, but poor price behavior brought about its return. In the 19th century, laissez faire and the gold standard encouraged and sometimes allowed for considerable independence. Greater changes came in the new dirigiste environment following the Great Depression and the rise of the managed economy. Economies in transition confront high inflation and the problem of maintaining monetary stability just as newly independent developing countries did in the 1960s. How can inflation be controlled? Under fiat regimes, the money supply is controlled by the domestic monetary authority. But can they control monetary growth? Prior and current records are not encouraging. Will authorities have the credibility they need? Options include maintaining a fixed exchange rate or reviving currency boards. Currency boards function like an independent central bank, holding reserves and tying domestic currency to strong foreign currency. There are drawbacks to currency boards, especially for countries in transition. They require a considerable sacrifice of sovereignty, and are unlikely to appeal to countries that are only beginning to recover lost sovereignty.

Transparency and financial reporting in mid-20th century British banking

Abstract Until 1970, British banks were firm believers in the merits of ‘non-disclosure’, which obscured their ‘true’ profits and capital through profits smoothing and the use of hidden reserves. Many other companies adopted the same view for as long as legislation permitted, but there were special reasons why non-disclosure endured for longer in banking. This paper examines the persistence and demise of non-disclosure in banking, placing it in the context of the wider development of financial reporting in Britain, and highlights similarities and differences in financial reporting between banks and other types of company.

Banks, Industry and Finance, 1880-1914

This article uses contemporary business records to provide the first authoritative empirical breakdown of the general characteristics of English commercial bank lending to industrial firms in the three and a half decades before the First World War. The results confirm that the bulk of commercial bank support for industry was in the form of short-term credit. In particular, the overdraft system was operated in such a way as to provide industrial concerns with an readily accessible and flexible means of meeting cash flow and working capital requirements. A sizeable proportion of such loans required the deposit of no tangible security although over time this proportion declined. There were important differences in terms of collateral requirements demanded of private partnerships and limited companies, with the latter having to provide additional security to cover their limited liability status. In terms of the degree of bank involvement in the finance of industry a significant finding is that the commercial banks did lend to finance industrial fixed capital investment and, though most loans were short-term, about one-fifth were lent for two or more years through the rolling-over of short period loans.

The development of management accounting in UK clearing banks, 1920–70

There is a perception that, in the British banks which dominated the industry for much of the twentieth century, management accounting was limited in scope and contributed to a general inefficiency in these institutions. Various official reports published from the 1960s until very recently have reinforced this view. However, some authors have argued that the banks were more sophisticated in their management than such criticisms would imply. This paper investigates the role, development and limitations of management accounting in the sector, drawing on archival evidence and relating this to the more general development of management accounting. In advancing our understanding, evidence is found to support both views.

How Important Historically Were Financial Systems for Growth in the U.K., U.S., Germany, and Japan?

The case studies for each country survey the literature on the role of their financial systems in their development. The sources of finance for industrial development include (i) banks, (ii) securities markets, (iii) internal finance, (iv) alternative sources of finance such as angel finance, trade credit, families, and friends, and (v) governments. All four countries had sophisticated financial systems and all four grew successfully. The fact that they had different financial systems suggests that if there is an optimal financial structure for a country it does not lead to a significantly greater level of growth than other possible structures. The experiences of the four countries considered suggest that a variety of financial structures can lead to high rates of growth in real per capita GDP.

Asset prices and the real economy

Notes on the Contributors - Opening Remarks G.Pepper - Introduction F.Capie & G.E.Wood - The Great Regime Shift: Asset Markets and Economic Activity in Sweden, 1985-1993 L.Jonung & J.Stymne - Debt Deflation and Financial Instability: Two Historical Explorations B.Eichengreen & R.Grossman - Credit Crunch: A British Perspective D.Llewellyn & L.Drake - Leverage as a State Variable for Employment, Inventory Accumulation, and Fixed Investment C.Calomiris , A.Orphanides & S.Sharpe - Debt Deflation: Theory and Evidence M.King - Debt-Deflation in Japan K.Kaku - Index