The bourgeoisie … has pitilessly torn asunder the motley feudal ties that bound man to his ‘natural superiors’, and has left remaining no other nexus between man and man than naked self-interest, than callous ‘cash payment’.
No one knew there was an Industrial Revolution under way at the time, but the transition to a society of urban anonymity instead of rural reputation – an economy of cash wages instead of feudal obligations – meant that there had to be a new kind of money for the new kind of economy just as there will have to be a new kind of money for the post-industrial economy.
The settlement
It is hard to tell whether the foundation of the Bank of England was inevitable or accidental. The private banking system was developing nicely and there was no public demand for a public bank (Chown 1994b). No matter how it happened, the creation of the Bank in 1694 announced a revolutionary settlement between the City and the state and, in effect, the creation of capitalism in its modern sense. The government shared its monopoly on money creation with a private institution and in return obtained a debt manager and access to finance.
Both the Tories and the Whigs hated the idea, by the way, as did goldsmiths and pawnbrokers, although luckily their lobby was not strong enough to prevent it (Thornbury 1878). Politicians were concerned that the ‘power of the purse’ would be transferred from the House of Commons to the governor and directors of the Bank (today we think that that is a good thing!) but they needed the cash. What came about as a result of ‘a long-running guerrilla war between sovereigns and the private monetary interest that neither side could win’ (Martin 2013) was the basis of the modern monetary system. Following the Glorious Revolution of 1688, the Dutch revolution in finance and the English revolution in industry collided to recreate money.
When the Bank’s notes began to circulate as a medium of exchange, this was a by-product of the Bank’s activities, not its purpose. Note that the smallest banknotes it issued were more than the average annual wage, so most people went through life without ever seeing one. The Bank did not issue its first £5 note for another century
We had reinvented paper money and it never went away again.
Cheque mate
We also had other kinds of paper payments coming into use at this time, one of which may well vanish in my lifetime: cheques. The earliest surviving European cheques are Tuscan, although the word itself appears to derive from the Arabic ‘sakk’, a written order for payment made through a banker. The oldest extant European cheque was drawn on the Castellani Bank in Florence in November 1368 (it was to pay for black cloth for a funeral). Within a hundred years cheques were in common use (Spufford 2002). Around about the time that paper money, central banks and America were being invented, the cheque in its modern form (that is, a cheque that could be endorsed and circulated) was invented, and we still use those today (some of us, such as the French and the Americans, more than others). But their end is in sight.
Cheques and clearing
The earliest of these modern cheques in the UK dates from 1659: it instructs a London goldsmith to pay £400 to a certain Mr Delboe (Sinclair 2000). Not long after these cheques were invented, cheque clearing was invented. London bank clerks, tired of running round to every bank to clear cheques, began to meet (unofficially) at a coffee house to clear and settle between themselves. Some years later the banks realized that their clerks’ idea was a good one and in 1833 they established a clearing house at 10 Lombard Street in the City of London.
In those days, of course, everything was accounted for with quill pens on paper and the clerks physically walked the cheques around to the clearing house. It therefore took three days for money to move from the payer’s account to the payee’s account: impossible to imagine in our electronic age (unless you live in America of course).
- Cheque signed by Thomas Jefferson during his second term as president of the United States. (Source: National Numismatic Collection, National Museum of American History.)
Three centuries on a great many British retailers no longer accept cheques, and have not done so for a while (Daley 2008). In the United Kingdom, George Osborne, when he was the Chancellor of the Exchequer, set out a firm mandate to energize the British economy by forcing the payments industry to reduce cheque clearing from three days to two – this may well usher in a new economic age, although I frankly doubt it. The cheque’s days are numbered, no matter how efficiently they are processed.
It seems that the cheque may well be the first payment instrument to vanish in my lifetime because the existence of instant payment systems means it no longer has an economic function. I’ll return to this later in the book when we move on to the spread of instant payments and the potential for a ‘push for push’ in retail payments.
Buttons and bank acts
Industrializing Britain saw more changes in the way that money worked as it strove to reinvent money for its new economy. As the nature of that economy had changed, so the nature of money had needed to change too, but it lags. At the time, it was not clear exactly what needed doing. People could see that there were problems but not what do to about them.
Naturally I refer to this time because the Internet, mobile phones and online commerce are creating a vortex that is sucking in monetary innovation at an accelerating rate, my point being that we have been here before. Consider the relationship between private and public provision of small change (coins, essentially), which has been brought back into focus by discussions about micropayments in an online world (Selgin 2008).
When the Industrial Revolution caused an explosion in population and commerce in Georgian England, the lack of small change shifted from being an annoyance to being a major national problem, holding back growth and development. Factories had no coins to pay their workers, workers had no coins to buy their essentials and the economy was suffering. Furthermore, by the end of the eighteenth century most of the coins in circulation in Britain were counterfeits. Gresham’s Law meant that there was widespread acceptance of counterfeits because there were few legal coins in circulation. A shopkeeper might have four copper trays in his till: pennies, ha’pennies, good counterfeits of same, and ‘raps’ (counterfeits that could not easily be passed on).
Transaction costs were climbing and commercial exchange was often accompanied by disputes over the money used in payment. Merchants began to stipulate the weight of coin needed to settle a transaction and workers’ pay days were often the basis of disputes about the value of wages. Rarely was any transaction made without an argument. Quarrels over money values were continuous; market days and fares were regularly scenes of brawls. Wages paid by employers to their workers were the cause of many Saturday-night disputes regarding the value of their money: ‘such was the result of the apathy and ignorance of the government in so neglecting the currency’ (Josset 1962).
While government did nothing, the private sector took action. The people involved were those at the centre of the industrialization storm, largely from Birmingham. The nascent metal-bashing industry there, the emergence of organized production (Matthew Boulton’s factory) and the expanding skill base meant that the supply chain for medals and buttons and the machines to make them could be readily adapted to coins. The industrialists used the latest technology of steam presses, whereas the government did not. At the same time, the supply of copper (the world’s largest copper mine was in Anglesey at the time) meant that the right raw material was in the right place at the right time.
What was the result of this technological change? It was that coins changed from commodity money (i.e. gold and silver to the face value) to token money (i.e. base metals and alloys worth a fraction of the face value). And it was, crucially, the private sector that caused the shift, with the public happy to accept the token money that, presumably, no one in government thought worth providing. There was money for the wealthy (banknotes and gold and silver coins) but there was no money for the masses. You couldn’t buy a loaf of bread or a pint of beer with a banknote or a silver coin so private industry stepped in to mint copper token money, and this token money circulated particularly in industrial centres to (very successfully) facilitate wage payments and retail spending. A remote example? Not at all, and not only on the web. It’s exactly the situation in, for example, Zimbabwe today, and it looks as if private industry is going to have a go! There are several mobile money schemes there, with many banks connecting to the ‘ZimSwitch’ mobile banking platform.
(As an aside, in his splendid book Good Money George Selgin asks why the private mints put so much effort and invention into creating such high-quality tokens and suggests that marketing was one of the key reasons: because high-quality tokens were good publicity – adverts for the skills of the companies involved. I wonder if mobile money services will similarly serve to advertise the competencies of mobile operators?)
These tokens gained rapid acceptance and by 1795 the problem of small change was almost solved with the official (or ‘Tower’) coins trading at a discount against the private alternatives. What happened then? Well, around two decades later the official government mint adopted token currency and began issuing modern coins. Could we see a similar trajectory in the post-industrial economy? This would suggest that private operators might step into the market to fill the void and then, when the competition had run its course and the ‘best’ coinage had been established, the government would step in and provide it as a public good. Perhaps, as we will discuss later when we talk about digital currency, the Bank of England should run its own version of PayPal and the government should insist that everyone has an account if they want to receive state payments of any kind: welfare, pensions, wages and so on? Once all money is digital, as opposed to the current 96.3 per cent of it (in the United Kingdom), who knows where that will take us? At some point in the future the government might adopt a digital payment technology that is in widespread use in the private sector (let us set aside exactly which technology for the time being) and make the final shift of cash from atoms to bits – a subject we will return to in Part III.
The last major money innovation of that age was the conclusion of the relationship between banks and the state through the monopolization of currency by the central bank. In short, the government took control of monetary policy and the central bank became the sole backer of currency, and in return the commercial banks became responsible for money creation. At this point the commercial banks, the money system and the modern state became fused together: all, in effect, aspects of one another (Lanchester 2016).
It was quite a big step. If you look at the United Kingdom as an example, the Bank of England has not always been the sole issuer of banknotes in England and Wales, as it is now. Acts of 1708 and 1709 had given it a partial monopoly by making it unlawful for companies or partnerships of more than six people to set up banks and issue notes. The ban did not extend to the many provincial bankers – the so-called country bankers – who were all either individuals or small family concerns. The Country Bankers’ Act of 1826 allowed the establishment of note-issuing joint-stock banks with more than six partners, but not within sixty-five miles of London. The Act also allowed the Bank of England to open branches in major provincial cities, which gave it more outlets for its notes.
In 1833 the Bank’s notes were made legal tender for all sums above £5 in England and Wales so that, in the event of a crisis, the public would still be willing to accept the Bank’s notes and its bullion reserves would be safeguarded. Later, the 1844 Bank Charter Act was the key to the Bank achieving its gradual monopoly over note issue in England and Wales. Under the Act no new banks of issue could be established and existing note-issuing banks were barred from expanding their issue. Those whose issues lapsed – because, for example, they merged with a non-issuing bank – forfeited their right of issue. The last private banknotes in England and Wales were issued by Fox, Fowler and Company, a Somerset bank, in 1921.
- Barings circular letter of credit from 1892.
While the central bank was reorganizing the currency, the commercial banks were reorganizing deposit taking. The first joint-stock bank in Britain, the London & Westminster, opened in 1834 (Ellinger 1940). Note that the Bank of England refused to open an account for it or extend private banking facilities!
From joint-stock banks the next step was limited liability banks. Limited liability banking was made legal in 1858 but it was only after 1878 that it began to take off. You can probably guess why. When the City of Glasgow bank failed in 1878, the shareholders had to pay £2,750 for every £100 in stock they owned (Ellinger 1940) as there were no taxpayer bailouts for bankers in those days. The calls for limited liability from the share-owning middle classes were answered and banks assumed their modern form.
Scotland the Brave
Foreign readers may be unaware that, as the foregoing discussion of the extension of the Bank of England’s monopoly implied, banks in Scotland and Northern Ireland issue their own banknotes. There are nearly £3 billion worth of Scottish banknotes in circulation (as well as half that much in Northern Irish banknotes). For odd historical reasons the issuing banks had to back their note issue with a deposit of 95 per cent of the value of notes outstanding, but only at weekends! Seriously. So during the week they can lend the money out and earn seigniorage. The Scottish banks currently earn good money this way so any change would lose Scottish banks some of the £65 million they now earn in interest and ‘seigniorage’ (income from selling their notes to other banks).
I have a particular interest in the history of Scottish banks because of the lessons from their period of ‘free banking’. This does not, as you might think, mean that Scottish banks were once operated as charities but that they were free to compete in note issue. And the result, as most historians would confirm, was a period of incredible innovation when the more tightly regulated London and country banks failed more often than the less tightly regulated Scottish banks did (I know this is a flimsy précis of a complicated and interesting period, but I’m trying to make a bigger point). In fact, the famous writer Sir Walter Scott is commemorated on banknotes in Scotland precisely because he fought off the Bank of England’s 1826 attempt to stop Scottish banks from issuing their own notes (Economist 2008).
- Scottish innovations in finance.
When?
What?
1695
Britain’s first joint stock clearing bank, the Bank of Scotland, created by the Scottish parliament
1728
The first overdraft is granted by the Royal Bank of Scotland
1750
The British Linen Bank (Scottish, despite the name) starts to build the world’s first branch network
1777
World’s first multicoloured banknotes printed by the Royal Bank
1810
First savings bank established in Ruthwell
1826
Royal Bank of Scotland launches banknotes printed on both sides
1845
Westminster, despite Scottish protests, legislates against private note issue; since this date no major commercial banks have been formed in Scotland
In the era of independent free banking it was Scotland that had an enviable track record of innovation in the finance and banking sector. When the previous wave of innovation (paper money) swept through the economy, Scotland was far more successful than England in exploiting technological change to make the economy more efficient (and more stable). By 1850, in fact, when 90 per cent of all commercial transactions in France were still being settled in gold or silver (as were a third of those in England), 90 per cent of all commercial transactions in Scotland were being settled with paper (Ferguson 2001).
(Therefore, one cannot help but wonder if a future independent Scotland might once again become a hotbed of innovation when freed from the dead hand of the Old Lady of Threadneedle Street.)
Accounting for taste
In A Christmas Carol Charles Dickens wrote of something becoming as worthless as ‘a US security’: presumably a phrase that was recognizable to his readers when the novella was published in 1843.
To understand where the phrase originates you have to remember the state of the American economy in the 1830s: a time when – as Jason Goodwin puts it in his splendid Greenback: The Almighty Dollar and the Invention of America – ‘America’s money just grew and grew’ because the volume of silver in circulation was climbing, land values were soaring and the Second Bank of the United States was printing dollars. Rising land prices and easy credit (heard this anywhere before?) led to the ‘Panic of 1837’ when Andrew Jackson shut down the Second Bank and commercial banks began demanding specie and refusing debased paper. This panic was followed by a five-year depression, with the failure of banks and then-record-high unemployment levels. Hence Dickens’s disparaging phrase.
We Brits were not, of course, immune to boom and bust at the time. Here, as Hard Times Dickens was chewing his pencil, the railway boom was underway (see Christian Wolmar’s fabulous Fire and Steam for a beautifully written history of this), leading to a colossal crash in 1866. It was caused (and here’s a surprise) by the banking sector, but in that case it was because they had been lending money to railway companies who couldn’t pay it back rather than to American homeowners who couldn’t pay it back.
The British government then, as in 2008, had to respond. It suspended the Bank Act of 1844 to allow banks to pay out in paper money rather than gold, which kept them going, but they were not too big to fail and the famous Overend & Gurney went down. When it suspended payments after a run on 10 May 1866 (the last run on a British bank until the Northern Rock debacle) it not only ruined its own shareholders but caused the collapse of about 200 other companies (including other banks). The directors were, incidentally, charged with fraud, but they got off as the judge said that they were merely idiots, not criminals.
The railway companies at the time held the same commanding position in the world’s largest economy as companies such as Apple and Exxon do in the United States today, so the impact on UK plc was substantial. Bear in mind that the first railway service in the world started in 1830, running between Liverpool and Manchester, and less than two decades later (by 1849) the London and North Western Railway was already the biggest company in the world. When the directors of these gigantic enterprises went to see the prime minister in 1867 to ask for the nationalization of the railway companies to stop them from collapsing (with dread consequences for the whole of the British economy) because they couldn’t pay back their loans or attract new capital, they didn’t get the Gordon Brown approach of 2008: investment bank advisers, the suspension of competition law and much tea and sympathy. Benjamin Disraeli told them to get stuffed: he didn’t see why the public should bail out badly run businesses, no matter how big they might be.
Needless to say, the economy didn’t collapse. As you may have noticed, we still have trains and tracks. A new railway industry was born from the ruins, the services kept running and the economy kept growing. But there was another impact of great relevance to the story of money. The introduction of basic corporate accounting standards following the collapse of the railway companies was a significant benefit to Britain and aided the development of Victorian capitalism (Odlyzko 2011). You can’t make an omelette, as the saying goes, without letting the bad eggs go to the wall. Just as the tulip crisis had led to regulated futures and options contracts, the railway crisis led to the creation of accounting standards. These standards determined what transactions were recorded in ledgers, how those ledgers were audited and what the state of the world represented in the ledgers meant. The standardization of profit and loss, assets and liabilities, credits and debits meant that the people could invest their money in far-flung enterprises of which they knew little.
Beginning money again
This chapter has naturally focused on England as it was the crucible of the Industrial Revolution. However, there are some other lessons to be learned from this period. While England was experimenting with banknotes and cheques, with capitalism and a gold standard, France was experimenting with revolution. England exported its revolution to the colonies and began a series of unplanned steps towards a new money. France, however, tried to reinvent money along with everything else and as a result delivered a fascinating case study in the relationship between money and trust, between the monarchy and the citizens, between the state and industry.
Rebecca Spang cautions against using the story of the attempted reinvention of money following the French Revolution as part of the ‘transition to capitalism’ (Spang 2015a), but as a non-historian, and with only the most limited knowledge of revolutionary France, it does seem to me that there is something for today in comparing the evolution of money in industrializing Britain with the evolution of money in revolutionary France. To me, it is a contrast between British mercantile pragmatism and flexibility in response to changing circumstances (you might want to label this ‘muddling through’ for short) to exploit bottom-up innovation, on the one hand, and French idealism and top-down change on the other.
Money in France was very different from money in England. In pre-revolutionary France it was the monarch’s prerogative to set the exchange rate between the money of account (livre) and the money of reckoning (the coins, such as the ecus). In the last twenty-six years of Louis XIV’s reign, this changed forty-three times (Spang 2015b). There was very little of this money out there in the real economy because pre-revolutionary France was, as pre-industrial England had been, a reputation economy. That is, there was virtually no cash in circulation. The great majority of the population engaged in commercial activities with well-known and trusted counterparties. For the great majority of the French population, buying and selling was done ‘on tick’. That is, people would maintain a web of credit relationships for periodic reckoning. This is an economy based on trust, and once that trust is disturbed the substitute of money is required to oil the wheels of commerce. This is precisely what happened in France.
After the French Revolution, a lack of trust in the state quickly led to a shortage of credit in the marketplace and, therefore, to an immediate demand for a circulating medium of exchange. But from where? France did not have a central bank along the lines of the Bank of England. The failure of John Law’s note-issuing Banque Royale in 1720 had turned the French away from banking, and the nearest thing to a central bank was the Caisse d’Escompte, which had been formed in 1776 but granted too many loans to the profligate state and over-issued its notes.
One of the first acts of France’s new revolutionary government was to take over church lands and, on the basis of this security, to issue interest-bearing bonds with the redemption being a portion of the land itself. The interest and redemption were soon abandoned and the notes, the assignats, simply became state-issued inconvertible fiduciary notes. There followed what Glyn Davies calls ‘the usual consequences’: inflation, dual pricing (with note payers forced to give more than coin payers), hoarding and (Gresham’s Law again) the practical disappearance of coins and capital flight across international borders (Davies 1995c).
This was the first time that the French state had attempted to control the money supply (Spang 2015c). To be honest, it didn’t end well. By October 1795, 100 Franc assignats could be traded for only 15 sous in coin and the Paris riots of the time opened the door for Napoleon. It wasn’t until the Bank of France was founded in 1800 that the nation at last enjoyed the same kind of public institution that England, Holland and Sweden had had for more than a century.
There seems to me a useful comparison to be made between those revolutionary times and ours. If we expect the state to come up with some grand plan to reinvent a money de nos jours, we run the risk of it going hopelessly wrong. If we leave a regulatory space for the button makers to play in, they may well come up with a better idea.
A final point. Spang notes that when the assignats were put into circulation, people treated the new paper currency as the bills of exchange that they were familiar with. They did not value the anonymity of the currency, since they signed them and passed them on. Who had used a note attested to its validity, and the identity of the previous holders gave the notes value: an idea we will see reinterpreted from an artistic perspective in the chapter called Reimagining Money. Identity was the new money, so to speak. Fungibility is not all that.