Money, Banks and Finance in Economic Thought

Bank business models and “fringe banking”: a fresh economic history perspective of the 1809-10 British monetary policy debate

Gent Dr. John, LSE (alumni, guest speaker) / Queens University Centre for Ec History - International Advisory Board member

Affiliation etc: I completed a MSc + PhD at the London School of Economics in Jan 2017, supervised by Prof. Mary Morgan and examined my Prof. Perry Mehrling and Prof. Charles Goodhart. This paper is an extract of that. I presented a different paper at a session led by Prof. Harro Maas at the ICHSTM in 2013. I am a member of the International Advisory Board of Queens University Belfast Centre for Economic History. Abstract The paper introduces business model research to deepen our understanding of the well-known monetary policy debate around the British Bullion Committee of 1809-10. I situate the debate within important concurrent changes in the banking system that mostly eluded political economists using the Hume-Smith theoretical tool kit. The paper shows how three key challenges facing monetary policy thinkers today were equally present two hundred years ago, namely how best to account for (1) recent innovations in financial products and practices (2) the role of credit extended by the “fringe” banking sector, and (3) the behaviour encouraged by the incentives operating upon bankers. The emergence of a new London bank business model after the 1770s was in sharp contrast to Hume’s 1750 concept of the ideal bank as one that “locked up all the money it received, and never augmented the circulating coin”. In 1776 Adam Smith had already questioned some of the assumptions underlying the Price-Specie Flow Mechanism and the Real Bills Doctrine, but these had not yet become overly problematic (Scotland excepted) while Britain remained on the gold standard. I argue that scholars’ conception of the typical bank business model was and has been the older Goldsmith bank founded a century earlier and described in Temin & Voth (2013). The Goldsmith bank mirrored Classical theories insofar as it followed a low loan-turnover and low asset-gearing business model focused on multi-year secured lending to a few top-quality counterparties. By contrast (and in refutation of Temin and Voth, 2005), I use new data to show how, after Britain suspended the gold standard in 1797, a newer Discounter bank business model combined with rapid (and inter-related) growth in Country banks and dominated the growth in British bank liabilities during the early Industrial Revolution. The Discounter was a high asset-turnover and high asset-gearing business model focused on unsecured lending to multiple counterparties for an average term of one month. This had implications for the velocity of high-powered money (i.e. specie) and the broad money supply, and led political economists to revisit the Hume-Smith theories of money. I argue that how each responded can be explained by which function of money they privileged – a unit of account attached to an abundant means of exchange or a standard of value requiring the intrinsic value of scarce commodity money. I argue both sides of the debate misjudged the role of the “fringe” banking sector – but for different reasons.

Area:

Keywords: Money, monetary policy, business models, credit, fringe banking, gold standard, Hume, Smith, Bosanquet, Huskisson, Real Bills Doctrine, Price-Specie-Flow

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