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Ann Arbor, MI 48106 BANKING BEFORE THE BANK: LONDON'S UNREGULATED GOLDSMITH-BANKERS, 1660-1694 BY STEPHEN FRANCIS QUINN B.A., Rockford College, 1988 M.S., University of Illinois, 1994 THESIS Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics in the Graduate College of the University of Illinois at Urbana-Champaign, 1994 Urbana, Illinois UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN THE GRADUATE COLLEGE MAY 1994 WE HEREBY RECOMMEND THAT THE THESIS BY STEPHEN FRANCIS QUINN ENTITLED. BANKING BEFORE THE BANK: LONDON'S UNREGULATED GOLDSMITH-BANKERS, 1660-1694 BE ACCEPTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF_ nnr.TOR OF PHTT,OSOPHV Head of Department Committee on Final Examination-]- Chairperson \cuJL t Required for doctor's degree but not for master's 0-517 ® Copyright by Stephen Francis Quinn, 1994 To my parents, whose love is my greatest blessing. iii Acknowledgements I must thank my advisor Larry Neal for assistance at every step. Likewise, I wish to thank my two other committee members, Charles Calomiris and Paul Newbold. Little of the original research in the thesis would have been possible without the generous support provided by Alison Turton and Philip Winterbottom, both archivists at the Royal Bank of Scotland, the Social Sciences Research Council and the Institute for Humane Studies. Additionally, I am indebted for comments, corrections, quibbles and other aid supplied by Lee Alston, Jeremy Atack, David Mitchell, Leslie Pressnell, Forrest Capie, Duncan Ross, D.W. Jones, William Kennedy, Dudley Barnes, George Selgin, Gerald Dwyer, Joel Mokyr, Eugene White, Lynne Kiesling, Will Hausman, Diane Owen, Case Sprenkel, Bill Bryan, Paul Johnson, Rod Long, Mary Gregson, Kyle Kaufman, Joe Mason, Tom Nonnenmaker, Rich Sicote, Mike Maciosek, the Northwestern University Economic History Workshop, the Indiana University Economic History Workshop, the Quantitative Methods in Economic History Workshop at the London School of Economics and the Centre for Metropolitan Studies, London. Special thanks go to Shelly Frank. Finally, all remaining are the author's. iv Table of Contents Banking Before the Bank: London's Unregulated Goldsmith-Bankers, 1660-1694 Chapter 0, An Introduction to Goldsmith-Banking 1 Chapter 1, Why Bills of Exchange were Endorsed and Bank Notes were Not; Transferability of Debt Contracts in the Early Modern Era 27 Chapter 2, Uncleared Balances and Goldsmith-Bankers: The Endogenicity of Decentralized Inter-banker Debt Clearing 60 Chapter 3, How a New Fashioned Goldsmith Avoided the Ancient Course of the Exchequer: A Story of Private Bank Notes Paying Public Taxes 111 Chapter 4, Tallies or Reserves? Sir Francis Child's Balance Between Reserves and Extending Credit to the Crown, 1685-1695 143 Chapter 5, Gold, Silver and the Glorious Revolution: International Arbitrage and Goldsmith-Bankers 164 Chapter 6, Conclusions 217 Bibliography 223 Appendix 231 Cirriculum Vitae 264 v Chapter 0 An Introduction to Goldsmith-Banking Out of shops located primarily on Lombard Street and in the West End, a few of London's goldsmiths specialized in offering banking services during the second half of the seventeenth century. In addition to traditional goldsmith activities such as selling silverware and exchanging coins, goldsmith-bankers supplied sophisticated financial intermediation between customers. Goldsmith-bankers accepted deposits, payable on demand, called "running cash." Goldsmith- bankers also accepted deposits under conditional withdrawal but with greater interest. The same goldsmiths loaned deposits, managed fractional reserves, issued bank notes and offered checkable accounts. Goldsmith-bankers supplied virtually any intermediary service that might define a bank. This thesis, however, seeks a larger story for London's goldsmith-bankers. The following chapters examine how goldsmith-bankers connected their customers to the various monetary and financial institutions of late seventeenth-century England. The intermediation that an individual banker provided to his depositors and borrowers formed a core of services. Goldsmiths-bankers grew into a network by joining together through a system of inter-banker clearing. The net widened as many goldsmith-bankers branched out into tax collection and funding government debt. Strands of intermediation even reached overseas as goldsmith-bankers orchestrated international credit and bullion movements. Goldsmith-banking wove a web of intermediation that filled the interstices between fellow bankers, specie, the English Treasury, and overseas capital markets. Connecting these institutional nodes created positive network externalities. The public could deposit bank notes with competing banks, which enhanced the viability of all bank debt as a means 1 of payment. Goldsmith-banking made the use of bank notes and checks common. Moreover, goldsmith-banking made taxes easier to pay and budget deficits easier to fund. The intermediation of goldsmith-bankers contributed to the expanding financial capabilities of the English Treasury and played a critical role in the origins of the Financial Revolution. Goldsmith-banking integrated London's financial and monetary institutions and laid a framework of which later innovations, like the Bank of England, would take full advantage. London's goldsmith-bankers connected so many institutional nodes by turning obstacles into opportunities. After the Restoration of Charles II in 1660, the state of the coinage was terrible. In response, goldsmith-bankers supplied paper debt as a medium of exchange. Also, most financial assets were not marketable, so depositors delegated the investment of their funds to goldsmith- bankers in exchange for interest. Such delegated lending permitted goldsmith-bankers to intermediate between suppliers and demanders of capital. As with other assets, government debt was too illiquid for merchants' tastes, so goldsmith-bankers pooled deposits (short run liabilities) to finance investment in Treasury debt (long run liabilities). Goldsmith-bankers also joined separate forms of intermediation to unblock financial bottlenecks. By supplying paper debt and investing in government debt, goldsmith-bankers induced tax collectors to accept bank notes and checks. Goldsmith-bankers lowered transactions costs, overcame differences in information, reduced risks and accessed international markets as opportunities required. The overall picture demonstrates that goldsmith-banking integrated a number of critical seventeenth century institutions. Chart 0.1 maps the range of institutions that goldsmith-banking reached. Each connecting line in Chart 0.1 represents an interstice that goldsmith-bankers bridged. Each intermediation is examined within the correspondingly numbered chapter. For example, this introductory chapter (0) examines the relationship between two basic services that coexisted within the businesses of individual goldsmith-bankers: the supply of bank debt used as a medium of 2 J3 Z 3 (D c o ^ m =, o i 3 3 o 1 P (D 3 CO r* (D CO a o o a o 0) i CO —i 3" •T§ !8 Ix- W oi "S *< ! (D i__ ^ ^ 2. CO i 3 co o (D (D i 3 8- Si 0) &—« l o 3. ?(D 7T o oi (D % r-* Q g_ CL en 3 CO o 3 o ! < < (D 0) —T (D «-*- (D 5~ Q CD 0 0 0) 3 3 3 t-t- 7T CD CO -i 3 Q. CD. sr (Q S-" 0 -t O a Q m CO 1 jn (D o oi m 3 O 3 3 3 o Id. 3 3 CO * 5 8- 3 exchange and the supply of delegated lending. The chapters that follow describe how goldsmith- bankers provided intermediation that connected such a wide net of economic activities by building off of these two core banking functions. Our picture of goldsmith-banking is not based on any single banker; rather, the findings of this thesis are a composite. The extant records of three different goldsmith-bankers have been tapped, which takes advantage of the strengths of available sources. For example, only Stephen Evance's