-Caveat Lector- an excerpt from: Banking - An Illustrated History Edwin Green©1989 Phaidon Press Limited©1989 Rizzoli International Publications, Inc 300 Park Avenue South New York, NY 10010 ISBN 0-8474-1072-0 ----- CHAPTER THREE BANKING'S NEW FRONTIERS Banking in the 19th century For the major Western economies the nineteenth century was a period of massive expansion and also of frequent excitement. Europe's population, after nearly doubling in the eighteenth century, increased from an estimated 180-90 million in 1800 to over 450 million by 1914. That booming population was increasingly urban rather than landed; in Britain and Germany over half the population was city-based by the early twentieth century. The first industrial revolution transformed the British economy between 1750 and 1850, and by the midnineteenth century it had penetrated Germany, France, the Low Countries and the United States. By the end of the century industrialization was also the keynote of change in Spain, Italy, Sweden, Russia and Japan. Industrial output enlarged at an astonishing rate (world output of iron increased eight times over between 1860 and 1900), while national income and income per head leapt forward in all the industrializing nations. Banking and finance followed, supported and in some instances led economic transformation in the nineteenth century. Unprepared and unrehearsed as banking may have been at the end of the eighteenth century, bankers were recognizable and even well-known figures on the economic stage a hundred years later. Likewise, other service industries — retailing, transport and communications, public utilities - came into more open view. Yet very few industries were involved in so many dimensions of development as banking. In the nineteenth century banking continued and expanded its role in public finance; it was inextricably linked to the rise of industries and professions; it made contact with entirely new categories of customer and community; and it played a large part in extending the geographical boundaries of the world economy. Banks, no less than missionaries, adventurers and settlers, could be found at the frontiers of economic development. In the area of public finance, banking solutions were adopted on a much broader front after 1800. On one hand, warfare and the maintenance costs of their empires placed a huge financial burden on the leading nation-states, thereby extending the need for banking management of state debts. On the other hand, the growing sophistication of trade and industry demanded greater order in national systems of currency and credit; control of the issue of banknotes emerged as a major preoccupation in nineteenth-century banking. The Bank of England remained the most durable and prominent example of a national bank responsible for these aspects of public finance. After a century of sustaining state debts and managing the issue of notes, it was already setting the pattern for other national banking institutions. The Bank of Ireland, for example, was awarded similar privileges of joint-stock status when it was founded in Dublin in 1782. Within the Bank of England itself, the nation's conflict with revolutionary France brought a crisis of confidence in 1797. In the face of panic withdrawal of funds from country banks throughout England and Wales, the Bank was forced to suspend the payment of gold in exchange for its notes. For the duration of the Napoleonic Wars (and until 1819) paper currency was effectively inconvertible, a situation which conditioned the country into a preference for banknote transactions. Thereafter, the Bank diversified its role but its original and continuing responsibilities for government debt, the money market and the management of note-issue remained a telling influence on other banking systems. Parallel institutions were also emerging in the other leading nation-states. In France Napoleon engineered the foundation of the state-regulated Banque de France in 1800. The Banque was a conversion of the Caisse des Comptes Courants, one of a group of note-issuing banks which had been promoted in Paris after the failure of the Caisse d'Escompte in 1796. The bank began life as a shareholders' concern with a capital Of 30 million francs, but Napoleon insisted that his own government agents should take up shares and transfer their accounts. After 1805 the State also took over the appointment of the governor and his two deputies. A monopoly of note-issue, first awarded to the bank in 1803, but not complete until 1848, gave it the dominant role in French banking. However, it was not until later in the nineteenth century that the bank had anywhere near the same freedom as its English counterpart to expand the issue of banknotes. In Germany attitudes to notes and paper currency were even more cautious. Stateauthorized issuing banks were not established in Bavaria until 1835 (the Bayerische Hypotheken- und Wechselbank) and in Saxony until 1838 (the Bank of Leipzig). When the Konigliche Bank was reorganized as the Preussische Bank in 1846, its note-issue was restricted to 21 million thalers, though that limit was removed ten years later. After 1851 the Prussian prime minister was the head of the bank, and its senior officials were essentially state officals. This level of state control was maintained when the Reichsbank was founded as the federal successor to the Preussische Bank in 1875. The other European nations did not adopt identical forms of banking monopoly, although the centralization of noteissuing was always a prime concern. In Belgium the Banque Nationale de Belgique opened in 1851; it became the de facto monopoly when the other Belgian banks gave up their own note-issue in return for shareholdings in the new Banque Nationale. The French example had also been the inspiration behind the Nederlandsche Bank, which was formed as an issuing bank in 1814 and led to the demise of the Wisselbank in 1819. These European models were significant influences on state banks in the industrializing nations of the later nineteenth century. In Japan early legislation to regulate banking was a variation of the American banking acts; however, the Bank of Japan, created by Matsukata, the Finance Minister, in 1882, then adapted the French and German pattern. A more distinctive feature was the creation of the Yokohama Specie Bank in 1880, a vehicle for financing Japan's foreign trade with state participation. In Russia the French influence on the banking scene was especially strong. The Russian State Bank, which had been founded as a deposit-taking bank in 1860, was eventually given a monopoly of note-issue, similar to that of the Banque de France, in 1897. Although private accounts could be lodged with the bank, it was mainly an instrument of the state: by 1914 the Treasury's accounts comprised 70 per cent of the bank's total liabilities. In contrast, the United States of America developed its own distinctive pattern of state banking. The charter of the first Bank of the United States was not renewed when it expired in 1811, apparently as a result of pressure from the Bank's enemies in Congress. Nevertheless, when government debt mounted rapidly after the war with Britain in 1812-14, the search for a banking solution was renewed. The second Bank of the United States, launched in 1816, attempted to combine note-issuing, discounting and the management of government debt in the same style as its predecessor of 1791. Andrew Jackson, President between 1829 and 1837, doubted whether the US government had the constitutional powers to sustain a national bank and withdrew the bank's privileges in 1836. The concessions - and the government's business - were transferred to banks authorized by individual States of the Union, leaving the Bank of the United States more or less stranded as a private bank until it became bankrupt in 1841. Thereafter, the issue of banknotes was left in the hands of private banks and by 1860 there were no less than 1,562 banks issuing notes. In this climate there was little regulation, let alone management, of the government's own debts. The National Banking Act of 1863 at least clarified the duties of the Union and State governments. The Act distinguished between 'National' banks (jointstock companies chartered and regulated by the Federal government) and 'State' banks (joint-stock banks, trust companies and property companies authorized by their own State governments). Under the new structure the number of note-issuing national banks multiplied rapidly from 500 in 1864 to over 2,000 in 1880. Meanwhile, State banks either gave up their note-issues or converted into National banks but they in turn multipled[sic] to nearly 4,500 in 1900. Not until 1913, however, was this huge banking population given its own central issuing bank. The Federal Reserve System created in that year introduced a central note-issue (operating through twelve Federal Reserve Districts) and required all National banks to place deposits with the Federal Reserve System. The appointment of the Board of Governors was in the hands of the President of the United States, matching the State's authority in the Banque de France and the Reichsbank. Many of the leading nation-states had been slow or half-hearted in centralizing their banking needs. It was only in the later years of the nineteenth century and the early twentieth century that 'central' banks were a standard feature of the banking landscape. In the interim, the large financial needs of the major powers had revived or created new banking opportunities. Nation-states had not lost their appetite for privately raised loans and international borrowing. Finance of this type was in a long tradition, stretching back to the Italian banking firms of the thirteenth and fourteenth centuries. That tradition had been extinguished neither by its attendant vicissitudes nor by the spread of broader-based banking institutions in the seventeenth and eighteenth centuries, and by the early nineteenth century a remarkable breed of privately owned international banks was showing that the trading of state debt was a viable - and survivable -business. These bankers, notable among whom were the Barings, Hopes and Rothschilds, were able to develop a multi-purpose, entrepreneurial role which was to be vital to financial markets over the next two centuries. The term 'merchant bank' was not used to describe these firms until the mid-nineteenth century (before then they preferred to describe themselves as 'merchants' or 'foreign bankers') but the description is used here to outline the origins of these banks. The pre-eminent merchant bankers owed much to the economic power of Amsterdam and London. By the eighteenth century these centres had acquired the structures, attitudes and habits of international financial markets, and they were fertile ground for innovation and enterprise. In the Low Countries the firm of Hope and Co - Scots in origin - had been active in the commodity and bullion trades since the late seventeenth century. Even after Amsterdam's economic strength waned following the French invasion Of 1795, Hope and Co was able to sustain its business by transferring to London for the duration of the French wars. There it consolidated its links with the firm of Baring Brothers, the dominant merchant bank in London at the beginning of the nineteenth century. Barings had been founded in London in 1763, in tandem with the family's cloth trading business in Exeter. It became increasingly involved in banking operations from the 1770s, and in the 1780s it acted as the government's agent in buying supplies for the British army and in contracting for public loan subscriptions. By the turn of the century the firm was also arranging loans for the American government and for American trading partners. In 1803, in conjunction with Hopes, Barings found buyers for the $11 million loan which the United States government issued to pay for its purchase of Louisiana from the French. The Napoleonic wars gave Barings many more opportunities for financing foreign governments, and in the years that followed their clients included the State of Buenos Aires (from 1823), Upper Canada (1835), Chile (1844) and, in conjunction with Hopes, the Imperial Russian Government (from the 1840s). Barings' leadership in merchant banking did not go unchallenged. In international finance their strongest rivals were the Rothschild interests in Germany, France and England. The founder of this remarkable dynasty, Meyer Amschel Rothschild, had begun business in Frankfurt in the mideighteenth century. Originally a general trader in textiles, antiques, medals and coins, he moved into bill dealing and (from 1764) became a factor or agent to the court of Hesse-Kassel. By the turn of the century he was the court's sole financial agent and the proceeds of this success enabled him to convert the business into the banking partnership of M. A. Rothschild & Sohne in 1810. The business spawned an international network of Rothschild banks headed by Meyer's sons - Amschel and Karl in Frankfurt, James and Salomon in Paris, and Nathan in London. Subsidiary firms were added in Vienna (1816) and Naples (1820), together with agencies in Europe and the Americas. Of these interlocking interests, Nathan's business in England was the senior in age and in the size of its business. He had settled in England in 1798, subsequently building up a large textile export trade in Manchester. When the London firm of N. M. Rothschild was established in 1804, however, the emphasis was on banking business, especially bullion dealing and contracting for government loans. In this merchant-banking role Rothschild captured British and international business, including a loan issue for Prussia in 1818 and the Rothschilds' first loan contract for the British government in 1819. The Frankfurt house was by then handling loans and debt negotiations for Austria and Prussia, while the Paris firm held a commanding position in the entangled finances of Spain and its American colonies; by 1904 the Rothschilds had been responsible for the staggering total Of £1,300 million in loans to European nations. Their initiative had been especially decisive in enabling France to pay the indemnity 'fine' to Prussia after the war of 1871, and Rothschild intervention was also a turning point in Britain's purchase of a majority share in the Suez canal in 1875. Although the Barings and Rothschilds could not be matched in the breadth and size of their dealings in state loans, this market became increasingly competitive as the nineteenth century progressed. In France banque protestante firms such as Perregaux Laffitte & Cie and Hottinguer & Cie - both established by Swiss immigrants in Paris in the 1780s - were prominent in the negotiation of French reparation debts after 1815. In Germany the firm of Bethmann Brothers of Frankfurt had been lending to the Austrian court since 1754, and their neighbours and rivals Metzler Sohn & Co were bankers to both Bavaria and Prussia. Like the Rothschilds and other Jewish business dynasties in Germany, the Oppenheims, Seligmanns and Kaullas had been factors or financial agents to German courts in the late eighteenth century and in each case their banking firms developed state loan business in the early nineteenth century. In London, Hambro's, founded by a firm of Danish merchants in 1839, specialized in loans to the Scandinavian countries and also acted for the Italian states; Kleinwort and Sons, who moved to London in 1830, cultivated strong links in eastern Europe. Schroders, coming from Hamburg to London in 1804, had long-standing connections with Cuba, Chile and Peru, and they were to be the first international house to issue a loan for Japan in 1874. From the 1860s American private banks were also in the market for government loans and their successes included the US loan of 1874 (shared by the Rothschilds and others) and the French loan of -1870 (the first major issue managed by J. S. Morgan). National and international government finance was a vital ingredient in the rise of these enterprises. The merchant banks of Europe and America were none the less active in a wide range of business. Some, like Barings, and Brown Shipley of Baltimore and Liverpool, sustained their original merchant role until late in the nineteenth century. Most houses relied heavily upon income from accepting bills from international traders; this business grew especially fast as Europe's trade with North America quickened between 1815 and 1835. Dealing in foreign exchange (and, in some cases, bullion) was a feature of many firms, especially when the telegraph came into use in the mid-nineteenth century. After the laying of the transatlantic cable in the 1870s the merchant banks in London and New York were able to generate useful income from 'arbitrage' - trading on differences between share prices in different markets. In all of these activities the merchant banks developed distinct specializations in different overseas markets, often reflecting their origins as trading houses or agencies. Alongside their role in raising capital for governments, the merchant banks were also the springboard for new capital for the great railway and utilities projects of the nineteenth century. The most spectacular example was the Rothschilds' involvement in French, German and Austrian railway construction. The European Rothschild houses issued and subscribed for new railway stocks, to the extent that 10 per cent of all French railway capital was in Rothschild hands by 1848. Specialist firms also flourished during the boom period of railway building - notably Oppenheim & Cie of Cologne and, in Philadelphia, Drexel & Co (founded in 1838) and Jay Cooke & Co (established in 1861 but suspended in 1873). Perhaps the most remarkable European example of a railway specialist was the Brussels banker Baron Maurice de Hirsch, popularly known as 'Turkenhirsch', who on his own account acquired the concession for Turkish railways in 1869. The success of the deal brought Hirsch a huge fortune - thought to have been worth over E20 million at his death - and it also left the rich heritage of the Orient Express line from Paris to Constantinople, completed in 1888. Although the British merchant banks were relatively less involved in railway finance, the London houses issued over $120 million in American and Canadian railway stocks between 1865 and 1890. Barings, who took nearly 30 per cent of this business, also participated in Russian railway stocks later in the century. Barings were, in addition, one of the few merchant banks to raise capital for industrial customers; they floated the massive £6 million issue for the brewers Arthur Guinness & Co in 1888. The merchant banks of Europe and the United States were clearly opening up new financial territory by competing for business in a worldwide market. Their ambitions and connections contributed to the increasing internationalism of the financial community, but in other ways they were dealing with a relatively narrow section of economic life. The customers of merchant banks included governments and trading firms, railways and utilities - not forgetting the substantial business of dealing back and forth with other banks - but they did not cater for many private customers or for the smaller operators in industry, trade and the professions. It was the achievement of the nineteenth century to produce a pattern of banking which reached beyond these boundaries towards a wider spread of business and ownership, and towards a more visible role in the community. At the centre of that pattern was the development of joint-stock banking and branch banking. Joint-stock banking, in which many shareholders could participate in a company with agreed rules of operation, was not the invention of the nineteenth century. The creditors of Italian city-states in the Middle Ages were in a sense 'shareholders' in public debt. In the seventeenth and eighteenth centuries the joint-stock form had also been adopted by the Amsterdam Wisselbank, the Bank of England and the three Scottish chartered banks. Yet it was only in the nineteenth century that shareholders' banks became a common feature of the financial scene and, eventually, dominated the banking market. The joint-stock form of banking was already in place in the United States by 1800. The Bank of New York and the Bank of Boston (known as the First National Bank of Boston from 1864) had both been launched in 1784, while the Manhattan Company Of 1799 was to emerge from its original business of water supply to become a banking corporation (now part of Chase Manhattan). In the first half of the nineteenth century a further 1,000 jointstock banks were promoted in the United States (excluding a significant number of savings banks which had appeared on the American scene since 1817). Across the Atlantic at the beginning of the nineteenth century Scotland remained the stronghold of joint-stock banking in the shape of the three Edinburgh chartered companies. Joint-stock status was also chosen for the Commercial Bank of Scotland (1810), the National Bank of Scotland (1825) and the Aberdeen Town & County Bank (1825). In England and Wales, by contrast, the Bank of England had enjoyed exclusive status as a joint-stock bank since the early eighteenth century, forcing other banking enterprises to operate as small private partnerships. This in no way inhibited the proliferation of hundreds of private banks in London and the country, but the monopoly was increasingly inappropriate and the frailty of English private banking firms during the financial crises of 1815-16 and 1825 gave ammunition to its opponents. The opposition campaign succeeded. The 1826 Banking Copartnerships Act brought the Bank of England's exclusive privileges to an end. The Act permitted the formation of joint-stock banks with any number of shareholders and with the right to issue their own notes, on condition that they were not based within sixty-five miles of London. Supplementary legislation in -1833 made away with the sixty-five-mile rule, although London-based joint-stock banks were prevented from issuing their own notes. The response to the new legislation was rapid. Joint-stock banks were launched throughout England and Wales -usually as first-time companies but in some cases as conversions of old private banks - and within ten years over 100 of the new banks had been promoted, including the Midland (1836) and the main forerunners of the National Westminster Bank (1833-6). This sudden acceleration of banking enterprise and investment ran parallel to initiatives in Scotland, where Glasgow's promotions of the 1830s included the Union Bank of Scotland (1830), the Western Bank (1832), the Clydesdale (1838), and the City of Glasgow Bank (1839). Domestic banking was a highly competitive business in the second and third quarters of the century, with the Bank of England joining the fray through new provincial branches, and the old private banks in London and the country refusing to give way to the new joint-stock concerns. Even in specialist areas of banking such as bill broking, the pace of competition sharply increased. >From the 1820s discount houses emerged on the London scene, channelling bills of exchange to bankers and other institutions. After the largest discount house, Overend Gurney, failed in 1866, many of these intermediaries adopted joint-stock status. Thereafter they played a vital role as a buffer between the Bank of England and the banks, mainly by dealing in short-term funds. None the less, it was primarily the jointstock banks which took the lead in developing networks of branch banks throughout the country. The number of bank offices in the United Kingdom multiplied from about 1,700 in 1850 to 3,300 in 1875 and double that total by the end of the century. This commitment pushed banking into new territory: rural towns and villages, central and suburban areas of the industrial cities were given better access to basic banking services. Fierce competition between the banks also ensured that many communities enjoyed a choice of banks. For instance, a small country town such as Camelford in Cornwall could boast three banks in the 1880s; at the same time Haddington in Lothian, with a population of barely 4,000 people, had five Scottish banks competing for the town's business. Private customers could also turn to the growing numbers of savings banks. The pioneers of this movement included the Reverend Joseph Smith, whose Sunday Penny Bank opened at Wendover in 1799; Mrs Priscilla Wakefield, founder of the Tottenham Benefit Bank in 1804; and Dr Henry Duncan of Ruthwell, Dumfries, 'the father of savings banks'. By 19o4 approximately 400 savings banks were in existence, excluding many hundreds of offices of the Post Office Savings Bank (authorized by the government in 1861). The British banks, private or joint-stock, continued to provide relatively restricted services to their home markets. They received deposits, settled payments, accepted and discounted bills, provided loans and overdrafts, and in some cases issued their own notes. Because in England and Wales their note- issues were restricted, from the mid-nineteenth century cheques became much more significant in the settlement of debts and payments. Annual turnover of cheques at the London Clearing House multiplied by more than five times to nearly £6 billion between 1840 and 1884. Thus, British banks attempted to supply basic services to a variety of customers in their home town or district. Those customers might include large manufacturing enterprises but they would also include small shopkeepers and purely personal accounts. The adoption of joint-stock banking in Europe, in contrast, was often linked to specific tasks in industrial development. The honour of the first joint- stock investment bank belongs to the Societe Generale de Belgique, chartered in 1822 to 'contribute to the progress, development and prosperity of agriculture, manufacturers, and commerce'. The Banque de Belgique, formed on the model of the Societe Generale in 1835, entered the same field of industrial finance with the result that by 1840 no less than fifty-five joint- stock companies had been promoted by the two banks. In the main their support for industrial customers was based on mortgages, longer-term loans and direct shareholdings, and by 1860 the Societe Generale could even claim that it held one fifth of the total capital of one billion francs in Belgian joint-stock companies. Across the border in France the most successful of the Parisian private bankers ( la haute banque) were already involved in funding canal construction in the 1820s. One of them, Jacques Laffitte, had also been canvassing plans for an industrial finance bank since 1825. When he inaugurated the Caisse Generale de Commerce et de l'Industrie in 1837 he promised his associates: 'my first step is to establish an ordinary bank, but I have in mind to convert it ... into a real commercial and industrial bank'. Although this partnership venture perished in the financial upheavals of the 1848 revolution, Laffitte's ideas influenced jointstock banking experiments after the midcentury. Of these the largest and most distinctive was the Societe Generale de Credit Mobilier, promoted in 1852 by the brothers Isaac and Emile Pereire. joint-stock in form, its task was no less than the long-term financing of the French transport system and the principal heavy industries. By 1860 the Pereires' bank had financed over 10,000 kilometres of railway outside France and the brothers were threatening the supremacy in this field of the Rothschilds, their one- time employers. To many in the world of finance the Pereires' initiative seemed to point the way forward. Even Joshua Bates, then the senior man at Barings, admitted that 'these sorts of Banks will get all the public loans', and gave support to certain Credit Mobilier projects. Imitators of the French bank soon appeared throughout Europe. In Switzerland the creation of the Swiss Credit Bank by the energetic promoter Alfred Escher in 1856 laid the foundations of a strong banking tradition in Zurich. The mobilier example was followed in other Swiss cantons and in Italy and Spain. German bankers also saw a role for mobilier institutions. The Darmstadter Bank was founded on that basis in 1854, while the Disconto-Gesellschaft (opened originally as a deposit bank in Berlin in 1851) switched its business to the same pattern in 1865. These new banks were the target of a remarkable counter-attack by the Rothschilds and their allies, coming together in 1856 as the Reunion Financiere syndicate. The alliance used various devices to forestall or compete with the new banks, notably the promotion of the Osterreichische Creditanstalt bank of Vienna in 1856. After a long political and business struggle, in 1864 the Rothschild syndicate was also permitted to create their own mobilier-type bank in France, the Societe Generale pour Favoriser le Developpement du Commerce et de l'Industrie en France. This tough response contributed to severe strain on the Credit Mobilier in the financial crisis of 1857 and the eventual fall of the Pereire brothers in 1866. Although the remnants of the bank were then reconstructed, the Credit Mobilier was only a shadow of its early promise and it was liquidated in 1902. The Pereires had been preoccupied with long-term and almost immobile investment in industrial enterprise, to the neglect of traditional methods of payments and short-term credit. Their specialization had left no room for the private customer or for small business. To restore the balance, from the late 1850s the European financial community sought a middle way between the mobiler objectives and the joint-stock deposit banks of the United Kingdom. The Credit Lyonnais, founded in Lyons by Henri Germain in 1863 and converted into a jointstock company in 1872, was primarily a deposit bank with a network of country branches and agencies. The Paris-based Societe Generale, after its initial launch as a mobilier bank in 1864, followed a similar path to the Lyons bank from the late 1860s. By the turn of the century the Credit Lyonnais had over 200 branches in France and another 20 overseas, while the Societe Generale operated nearly 350 branches in France. Likewise, in Germany there was a shift towards deposit banking on the British pattern. The Deutsche Bank and Commerz- und Disconto Bank were formed when company legislation was liberalized in 1870, and both were deposit banks with the emphasis on commercial rather than industrial finance. Thereafter, the German and Austrian banks emerged as the leading examples of 'universal' or 'mixed' banking combining short-term deposits with longterm investment banking and securities business. Elsewhere in Europe, and beyond, the proliferation of banking owed much to the use of joint-stock form and branch networks. The pattern proved to be well adapted to industrializing nations such as Italy, Russia and Japan. In Italy a consortium of the largest German joint-stock banks was syndicating government loans in 1890, and the Germans subsequently played a strong hand in setting up Italy's largest joint-stock banks. In 1894 German, Swiss and Austrian banks combined in the formation of the Banca Commerciale Italiana in Milan in 1894. The new bank's nearest rival, the Credito Italiano of 1895, was essentially a relaunch of the Banca di Genova with the backing of the National-bank fur Deutschland. The earliest of the Russian joint-stock banks, the St Petersburg Private Commercial Bank, had been founded in 1864, and it was St Petersburg rather than Moscow which remained the centre of Russian finance throughout the century. By 1900 there were forty-three joint-stock banks in Russia, including many with German or Austrian connections. When, in 1887, Bismarck forced the German banks to curtail their Russian bank investments, the French banks were able to capture as much as half the foreign ownership of Russian banks by the early years of the twentieth century. In contrast, banking development in Japan was firmly in the hands of the major zaibatsu - ancient family business empires such as the Mitsui, Mitsubishi and Sumitomo. The Mitsui, for instance, helped to promote the Dai-Ichi Bank of Tokyo, formed in 1873 as the first 'National' bank, and then created their own Mitsui Bank in 1876. The controlling influence of the zaibatsu in banks such as the Mitsui and Sumitomo (1895) was far removed from the shareholding structure of European jointstock banks. Neither is there evidence of any Western investment in these banks. On the other hand, the Japanese banks adopted Western traditions in the development of their banking structure and operations. The Industrial Bank of Japan, launched in 1900, was in the mobilier mould of industrial finance. The singular figure of Alexander Allan Shand, who had learnt his banking in Scotland and England, was also a major influence on the Japanese system during his sojourn in Yokohama in the 1870s and afterwards as a manager of Parr's Bank in London, one of the principal banking agents of the government and railways of Japan. The Western influence on newly developing countries was even more direct, principally in the dominions and colonies of the European empires. Britain, France, Germany and the other major powers exported not only capital for banking but also the organization, expertise and even the personnel of their banks at home. The British were especially prominent, both in their own territories and in non- aligned countries. Joint-stock banking in the Scottish tradition gained a foothold in Australia as early as 1817, when the Bank of New South Wales opened in Sydney, and in the same year the Bank of Montreal began business in Canada. In the case of the Bank of Montreal, British influence was also maintained by a large input of Scottish capital: ninety of the Bank's original subscribers were Scots. Colonial banking then moved into a phase of intensive development in the second and third quarters of the century. Many of the leading banks promoted in British territories were London-based in their management and financed primarily by British shareholders. Front-rank examples were the Bank of Australasia in 1835 and the Bank of South Australia in 1837, the Bank of British North America in 1836, and the Colonial Bank, formed to operate in the key commercial region of the West Indies, in 1836. In the Indian sub- continent, where banking operations had been dominated by the East India Company and the commercial 'agency houses' until a series of failures between 1829 and 1832, a group of Londonbased joint-stock concerns now took up the pace of banking expansion. They included the Oriental Banking Corporation (1842), the Chartered Bank of India, Australia and China (1853) and the Mercantile Bank of India (1853), each with a network of branches in the sub- continent and in the major trading centres of the Far East. The British influence on these overseas banks was further reinforced when, in 1846, all colonial joint-stock banks - whether based in London or in their home territories - became subject to supervision by the British government. Under this regime there was a huge investment in Anglo colonial banks, of which sixty-eight were launched between 1853 and 1913. This generation of overseas banks included ambitious and successful ventures such as the Standard Bank of South Africa (1858) and the Hongkong and Shanghai Banking Corporation (1864). Under the leadership of the remarkable Thomas Jackson, chief manager for most of the period from 1876 to 1902, the Hongkong and Shanghai Bank took on a multiple role as agent to Imperial China, as banker to the colonial government and to other Eastern states, and as the principal commercial bank in the East. The boom in overseas banking projects was not confined to British territories. Ventures such as the London and River Plate Bank (1862) were tied in with strong trading links in Argentina and Uruguay. Others, for example the Imperial Bank of Persia (founded in 1889 and now the British Bank of the Middle East), participated in public and railway finance for foreign states as well as in deposit banking. The European banks were similarly active overseas, though not on the same scale as the imperial and international banks based in London. The Banque de l'Indo-Chine, established at Paris in 1875, played a dual role as an issuing bank and commercial bank in French colonies in the Indian Ocean and South-East Asia. Yet French overseas banking was in the main outside the country's own empire. Russia was an important channel for investment (see P. 76) and French- owned banks were also active in Latin America, Spain and the Near East. For example the Banque Imperiale Ottomane was primarily a French initiative when in 1863 it began business at Constantinople and at branches throughout the Ottoman Empire. Towards the end of the century, German banks also made a determined entry into overseas business. Fingers were burned by the failure in 1885 of the Deutsch- Belgische La Plata Bank, formed in 1872 to support German and Belgian trade with Uruguay and Argentina, but the Deutsche Uberseeische Bank of 1886 was altogether more successful in South America. The venture was sponsored by the Deutsche Bank and based in Berlin, and by 1905 all the major German banks were sharing in South American subsidiaries. Inter-bank co-operation was also important in the creation of the Deutsch-Asiatische Bank at Berlin and Shanghai in 1889, allowing the new bank to play an expansive role in German development of the Shantung province of China. The overseas projects of European bankers and investors relied heavily upon capital and political support from their home markets. Even so, their progress would have been impossible without the frontier spirit in which overseas bankers tackled their work. Thousands of young European bankers - the Scots were one of the largest groups - travelled in the steps of the first settlers and traders, attempting to provide a service in the most primitive conditions. To run a branch network in the relative comfort of a European community was not at all the same challenge as operating branches and agencies in uncharted areas of South-East Asia or Africa. The challenge confronting home-grown banks was equally strong. The Australian branch banks of the nineteenth century, for example, were a triumph over the obstacles of communication and transport. Similarly the North American banks were exposed to all the difficulties of long-distance business, including the skirmishes and lawlessness which placed banks and bank robberies in the literature and culture of the American West. Wells Fargo of San Francisco, originally the 'Express Company' of carriers rather than bankers, made the transition into banking by overcoming these only too real hurdles to financial development. The risks were lampooned in a notice issued by a Wyoming bank after a series of shooting incidents in 1906: Patrons thinking an error has been made are requested not to shoot the cashier before making investigation. Strangers must enter the bank holding their hands above their heads or they will be fired on by staff. Deposits of persons killed on the premises remain the property of the bank. The bank will not be responsible for lost guns or bowie knives. Persons desirous of transacting business quickly will please remember that shooting out the light tends to delay rather than to expedite the work of the staff. This bank will not be responsible for the funeral charges of persons killed on the premises of the bank. But increasingly during the nineteenth century the main danger had come from commercial and financial crisis. Periods of severe stress, such as the mid-1820S in Britain and South America, and the late 1830s and late 1850s throughout Europe and the United States had decimated the population of private and joint-stock banks. In some cases, that stress was exacerbated by fundamental weaknesses in banks themselves - the reckless over-extension which led to the failure of the Agricultural & Commercial Bank of Ireland and the Northern and Central Bank in 1836-7, the wild investments which ruined the London discount house of Overend Gurney in 1866, the crookedness which led to the collapse of the City of Glasgow Bank in 1878, or the wilful fraud that overwhelmed a number of savings banks late in the century. In other cases, the crises affecting banks were part of more generalized economic difficulty. A severe squeeze in the American bond market brought an end to the Boston house of Jay Cooke and Co in 1873, and a stockmarket collapse also led to the downfall of the Union Generale of Paris in 1882. One of the most serious upheavals of this kind was the Australian banking crisis of 1893, when a long period of heavy investment in Australia culminated in a speculative boom in land prices. The boom collapsed in April and May 1893, driving three Australian banks into liquidation. Another thirteen banks, with total liabilities of over £100 million, were forced to suspend payments for the duration of the crisis. These examples are only part of the long roll-call of failures and crises which affected the banking community in the nineteenth century. Yet the century also saw serious progress in coping with banking disasters or reducing their impact. This was partly the result of an upgrading of techniques, professional standards and education; institutes of bankers were launched in Scotland (1874), England (1879), the United States, and Australia. Legislation governing the composition and conduct of banks was also a factor. Banking was an increasingly rule-bound business in the nineteenth century, particularly in the United States with its National Banking Act of 1863. In the United Kingdom, after the City of Glasgow Bank failure of 1878 had exposed damaging weaknesses in jointstock bank regulations, the reform of limited liability in 1880 was designed to give greater security to shareholders and customers of British banks, while the Bills of Exchange Act of 1882 was a landmark in standardizing the practice of banking. By the end of the century the banking scene had also acquired experience and expertise in dealing with moments of crisis. Warfare and political turmoil were more easily absorbed - and even indeed discounted - by the international banking network than had been possible in the previous two centuries. When crisis was unavoidable, the banking structure was also better equipped to respond. The role of national or 'central' banks was crucial at such moments. As early as 1837 the Bank of England agreed to support the Liverpool house of William and James Brown (later Brown Shipley) at a moment of panic and confusion in Anglo-American trade. Again, in 1890, the Bank of England headed a subscription list of British bankers in guaranteeing the debts of Baring Brothers, which was in danger of succumbing to a huge financial exposure in Argentina. In these cases the notion of a 'lender of last resort' was emerging, fashioned by the lessons of coping with crises and panics. The value of formal and informal co-operation between banks was also better understood, whether through associations of banks or through inter-bank agreements on competition and working conditions. The result was a greater cohesion and community of interests in national and international banking. With bankers continually entering new territories of business, this stability helped to sustain public confidence at home and abroad. It was also an essential background for the very large banking institutions which were already emerging to dominate the financial scene in the early twentieth century. pps. 55-85 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! 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