In the 20th century, various new financial organizations were launched, from the Bank for International Settlements to the International Monetary Fund, in order to grapple with global monetary challenges. To some extent, these were products of 20th century problems, from facilitating war reparations to strained efforts to keep the ailing international gold standard alive. While there was generally less financial cooperation across countries in the 19th century, central banks were not wholly constrained to acting within their home economies. At times, challenges arose that required international action, even a century before the advent of bodies like the BIS or IMF.
Central Banks
Prior to their mid-20th century nationalizations, the Bank of England and the Banque de France were private entities. The Bank of England’s profit-motivated shareholders were represented by a Court of Directors and the Banque de France was overseen by its Conseil Général. Starting with the Bank of England, while it was formed in the late 17th century to raise money for the English state, the Bank was primarily engaged in ‘discounting’, namely advancing funds on receivables or ‘bills’ held by London-based bankers and merchants. This discounting was the principal activity of the Bank of England for much, though not all, of the 19th century.
The same was true of the Banque de France, which was established much later, in 1800. However, there were differences between the two institutions. For one, the Banque de France’s notes were backed by both gold and silver in a ‘bimetallist’ monetary standard rather than gold alone, as was the case with the Bank of England’s notes after 1821. This created the opportunity for useful partnership at times because silver was often in the possession of the Bank of England in some quantities but was more useful in the hands of the Banque de France.
Besides discounting bills, the Bank of England also made loans, though these loans were often to bill brokering firms, so the bank was regularly providing short-term trade financing. That said, Bank of England loans in the 19th century were also being made to trading companies, like the Hudson’s Bay Company, as well as the City of London and even canal and railway developers. The Bank of England even made mortgage loans such as a large £300,000 one to the 5th Duke of Rutland in 1823, among many others. The Bank of England could even discount foreign bills, something the Banque de France could not do. In another point of difference, the Banque de France also had to abide by an interest rate ceiling of 6%, until this was lifted in 1857, whereas no such limit bound the Bank of England.
Panic of 1825
Deflation was underway in Britain as the Bank of England prepared to resume redeeming banknotes for gold in 1821. This ended a suspension of the gold standard that had begun in 1797 as a consequence of the Wars of the French Revolution. Prices dropped as money was withdrawn from circulation in an attempt to adequately back the outstanding Bank of England notes with gold in the Bank’s possession. The deflation slowed after 1821 but was still ongoing. During these years, the Bank of England was lending little, both in loans or by advancing money against bills. Instead, it was busy accumulating precious metal reserves which reached £13.8 million in February 1824.
This accumulation continued despite a loosening in the Bank’s credit terms as it prepared to begin lending more meaningfully once more. In December 1821, the Bank of England began to discount bills up to 95 days in term rather than imposing a limit of 65 days, as was the old policy. It also lowered the discount rate it charged on such financing from 5% per annum to 4% in June 1822; the first adjustment in the Bank’s discount rate in many decades. Industrial activity was picking up and trade as well, particularly with markets in North and South America.
However, perhaps the most notable financial development in the mid-1820s was a boom in new foreign loan issuances in London. These were mostly for European issuers in 1822-23 and then Latin American ones in 1824-25. There was also money being raised in London for various private projects, many of them mining ventures in South America. The foreign investments led to exports of bullion summing to £7 million in 1825 as funds borrowed in Britain were sent abroad.
This boom gave way to a financial crisis in late-1825. Bankers’ capital was tied up in longer-dated and illiquid assets and money became tight in autumn of that year. Share prices in new companies and the market values of foreign bonds were falling. Bankruptcies rose quickly late in the year and then bank failures took place starting from late-November. These problems cascaded to threaten the Bank of England.
On December 1, 1825, there was a rush of demand for discounts from the Bank; £900,000 in bills were discounted in a single day. Later in the month, the bank had to raise its discount rate back to 5%. Still, the rush for liquid funds meant that nearly £6 million in bills were discounted across six days in mid-December 1825. There was also a rush for gold, including via the conversion of banknotes for gold, which together with the flood of discounting in the month caused the Bank of England’s reserves to reach just £1 million; compare this to the mountain of reserves, standing at £13.8 million, not even a couple of years earlier.
Across the English Channel, there was a solution to the gold shortage available to the Bank of England. The Bank was in need of gold but possessed some silver. France, meanwhile, had a bimetallist monetary standard where paper money was redeemable into either gold or silver. So, either metal was in demand there.
In 1825, the Banque de France swapped its gold for the Bank of England’s silver. The two central banks did not interact directly but the trade was intermediated by the Rothschilds. The transaction increased the resources of the Bank of England and allowed it to provide liquid money where needed. By Christmas Eve, the panic had waned.
Further Cooperation
In the mid-1830s, British capital was being invested in United States state and municipal bonds. Rather as in the case of Latin American loans in Britain in the 1820s, this had the effect of tying up a lot of capital in investments that also involved a large outflow of capital from Britain. Bankers engaged in selling American bonds or financing American trade were borrowing from the Bank of England, stretching its reserves thin. To augment its reserves in 1836, the Bank of England drew on £800,000 in short-term bills payable in Paris using Barings as an intermediary.
Still, the Bank of England’s gold reserves fell from £7.8 million in April 1836 to £4.0 million in February 1837. This was despite various actions being taken to curtail the supply of credit; for one, the Bank’s discount rate increased from 3.5% in spring 1836 to 4.5% in July and 5% in August. That month, the Bank also refused to discount various bills, including American bills that had been guaranteed by well-regarded British banks. Eventually, gold reserves were bouncing back in the first half of 1837.
The price of this recovery in reserves was the availability of credit which was quickly evaporating. Before long, some banks in Britain and Ireland were facing trouble. Bankruptcies rose in 1837 and there was financial crisis underway in the United States. The Bank of England stepped in with a bailout of banks with substantial American exposure, tying up £2 million. Still, the withdrawing of credit had doubled gold reserves to £9.5 million.
From here, the Bank cut interest rates from 5% to 4% in February 1838 and the rate was eventually taken as low as 2.5% in early 1839. The Bank of England was even selling bullion to the United States believing this would help get the Americans’ financial system back to good health. It was hoped that this in turn would allow the Bank to recover on the bailout it had made to British firms with American assets. Unfortunately, normalization proved difficult.
The Bank of England’s gold sales to the U.S. led to renewed issuance of questionable American securities in Britain as the public’s confidence returned prematurely. There was also a financial panic underway in France and Belgium. The combined effect was another drain on gold reserves in the first half of 1839. Reserves fell from £9 million at the start of 1839 to £5 million in May, prompting the Bank to raise rates not only back to 5% but to 5.5% in June and 6% in August 1839. Suspending redemption of Bank of England notes for precious metal specie was even considered and reserves reached £2.3 million in October.
To restore reserves, another £2 million was drawn from France in 1839 together with £900,000 drawn on the Hamburger Bank in Hamburg. The Banque de France could not legally make a loan to the Bank of England directly or discount British bills, but it could discount bills on Paris banks. So, in a workaround, a consortium of ten French banks made 48 million francs in three-month bills available to the British bank Barings. Barings’s repayment to the consortium was then guaranteed by the Bank of England and the Banque de France discounted these bills, making gold available to Barings. The Bank of England also guaranteed the discounting provided by the Banque de France.
Timothy Abraham Curtis, a former governor of the Bank of England dispatched by the Bank to arrange this loan from French bankers, commented on the two institutions’ mutual interest in closer partnership. This one transaction was a consequential one for the Bank of England; by January 1840, its reserves had increased by £1 million compared to their October low. Yet this form of cooperation was not readily welcomed by all; a contemporary economist regarded this as “almost national humiliation” for Britain. Even the French government expressed that such assistance should not be taken for granted in the future. Curtis’s opinions notwithstanding, there was little enthusiasm for a formal and regularly-employed partnership.
“[This negotiation] elicited the expression of a great desire on the part of the Bank of France to be able to establish a direct intercourse and interchange of good services between the establishment and the Bank of England … Such an arrangement might be of the highest advantage to the Bank of England in freeing it in the first place from the necessity of applying to individuals on business when it may be desirable to operate on the foreign exchanges in the second, and therefore in giving greater facility to the intended action, from the powerful means it would place at the disposal of the Bank of England” – Timothy Abraham Curtis, Report of the Bank of England, Bank of England archives, G4/62
Lesson
The Bank of England was a private company in the 19th century. So, while it may have been a central bank, it was still answerable to shareholders. Yet, it was not completely free from political constraints either, and cooperation with foreign banks was contentious. Nonetheless, these foreign engagements were crucial because the 19th century international gold standard was not perfectly self-correcting. It required intervention in order to be maintained, at least during acute shocks. Waiting for the panic to die down and reserves to return would mean waiting too long. In the period from 1800 to 1840, it was largely the Bank of England needing assistance. Thankfully, the Banque de France’s bimetallist standard meant it often had gold that it would happily swap for silver. In the subsequent period though, it was often the Banque de France in need of gold from abroad.
More from the Tontine Coffee-House
Read part two of this post and about the 1820s bubble in mining shares and the Panic of 1837 which crippled the public finances of American state governments. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Clapham, J. H. Bank of England. Cambridge University Press, 1945.
2. Kindleberger, Charles P. A Financial History of Western Europe. Taylor and Francis, 2005.
3. Marc, Flandreau. “Central Bank Cooperation in Historical Perspective: A Sceptical View.” The Economic History Review, vol. 50, no. 4, Nov. 1997, pp. 735–63.
4. Parent, Antoine. “When Economists ‘tell Histories’: The Truncated Story of Central Banks’ Cooperation Over the Bimetallic Period.” Historical Social Research, Social Science Open Access Repository (GESIS – Leibniz Institute for the Social Sciences), vol. 33, no. 4, 2008, pp. 264–73.
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