Banking as an emerging technology: Hoare's Bank, 1702-1742

Financial History Review

Volumn 13, Issue 2, 2006, Pages 149-178

  Temin, Peter ^a   Voth, Hans Joachim ^b  

^a MASSACHUSETTS INSTITUTE OF TECHNOLOGY   (United States)

^b UPF Economics   (Spain)

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EID: 33750351236     PISSN: 09685650     EISSN: 14740052     Source Type: Journal    
DOI: 10.1017/S0968565006000229     Document Type: Review

References (89)

1. We thank Henry Hoare for kindly permitting access to the Hoare's Bank archives and Victoria Hutchings and Barbra Sands help with the ledgers. Claudia Goldin, Farley Grubb, Ephraim Kleiman, Bob Margo, Petra Moser, Dick Sylla and Stephen Quinn helped us with their comments; seminar participants at Harvard offered important suggestions. Financial support by the Leverhulme Trust through a Philip Leverhulme Prize for Hans-Joachim Voth and through CREI (Barcelona) is gratefully acknowledged. Chris Beauchamp, Anisha Dasgupta, Marek Polonski, Elena Reutskaya and Jacopo Torriti provided excellent research assistance
2. Charles P. Kindleberger, A Financial History of Western Europe, 2nd edn (Oxford, 1984).
3. J. K. Horsefield, 'The duties of a banker: the eighteenth century view', Economica, 8 (1941);
4. D. M. Joslin, 'London private bankers, 1720-85', Economic History Review, 7 (1954);
5. Stephen Quinn, 'Goldsmith-banking: mutual acceptance and interbanker clearing in Restoration London', Explorations in Economic History, 34.4 (1997), p. 411.
6. P. G. M. Dickson, The Financial Revolution in England: A Study in the Development of Public Credit, 1688-1756 (New York: 1967);
7. Larry Neal, The Rise of Financial Capitalism (Cambridge, 1990);
8. Stephen Quinn, 'Money, finance and capital markets', in Roderick Floud and Paul Johnson (eds.), Cambridge Economic History of England (Cambridge, 2003).
9. H. P. R. Hoare, Hoare's Bank: A Record, 1673-1932 (London: Hoare's Bank, 1932).
10. Neal, The Rise of Financial Capitalism;
11. Quinn, 'Goldsmith-banking';
12. Herman Van der Wee, 'Monetary, credit and banking systems', in E. E. Rich and C. H. Wilson (eds.), The Cambridge Economic History of Europe (Cambridge, 1977).
13. J. K. Horsefield, 'British banking practices, 1750-1850: some legal sidelights', Economica, 19 (1952), pp. 308-21;
14. Peter Temin and Hans-Joachim Voth, 'Credit Rationing and crowding out during the industrial revolution: evidence from Hoare's Bank, 1702-1862', Explorations in Economic History, 42.3 (2005).
15. We thank an anonymous referee for helping us clarify these points.
16. Alfred Dupont Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, MA, 1990);
17. Alfred Dupont Chandler, The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA, 1977).
18. Ann Carlos, J. Key and J. Dupree, 'Learning and the creation of stock-market institutions: evidence from the Royal African and Hudson's Bay Companies, 1670-1700', Journal of Economic History, 58.2 (1998).
19. Gary Becker, Human Capital (New York, 1964);
20. Drew Fudenberg and David K. Levine, The Theory of Learning in Games (Cambridge, MA, 1998), p. 7.
21. Nathan Rosenberg, Inside the Black Box: Technology and Economics (Cambridge, 1982), p. 120.
22. Philippe Aghion et al., 'Optimal learning by experimentation', Review of Economic Studies, 58.4 (1991).
23. David Easley and Nicholas M. Kiefer, 'Controlling a stochastic process with unknown parameters', Econometrica, 56.5 (1988);
24. David Easley and Nicholas M. Kiefer, 'Optimal learning with endogenous data', International Economic Review, 30.4 (1989);
25. Michael Rothschild, 'A two-armed bandit theory of market pricing', Journal of Economic Theory, 9.2 (1974).
26. Aghion et al., 'Optimal learning by experimentation', p. 642.
27. Charles P. Kindleberger, A Financial History of Western Europe, 2nd edn (Oxford, 1993), pp. 53-4.
28. Douglas North and Barry Weingast, 'Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England', Journal of Economic History, 49.4 (1989);
29. Ross Levine and Sara Zervos, 'Stock markets, banks, and economic growth', American Economic Review, 88.3 (1998).
30. Gregory Clark, 'The political foundations of modern economic growth: England, 1540-1800', Journal of Interdisciplinary History, 26.4 (1996);
31. Stephen Quinn, 'The Glorious Revolution's effect on English private finance: a microhistory, 1680-1705', Journal of Economic History, 61.3 (2001);
32. Nathan Sussman and Yishay Yafeh, 'Constitutions and commitment: evidence on the relation between institutions and the cost of capital', unpublished manuscript, Hebrew University, Jerusalem (2002);
33. Patrick O'Brien, 'Fiscal exceptionalism: Great Britain and its European rivals - from civil war to triumph at Trafalgar and Waterloo', LSE Economic History Working Paper, 65 (2001).
34. Quinn, 'The Glorious Revolution's effect on English private finance'. We thank Stephen Quinn for pointing out that, initially, Hoare's was simply adopting practices pioneered by other goldsmith-banks that had made the switch at an earlier stage.
35. Thomas S. Kuhn, The Structure of Scientific Revolutions (Chicago, 1970).
36. Child's recorded a similar proportion. Quinn (private communication).
37. The bank put the value of shares (approximately) at their historical cost - 250 per share. The market price on the day before had been 765.
38. Peter Temin and Hans-Joachim Voth, 'Riding the South Sea Bubble', American Economic Review, 95.4 (2004).
39. Carlos, Key and Dupree, 'Learning and the creation of stock-market institutions'.
40. Henry Peregrine Hoare, Hoare's Bank. A Record 1673-1932 (London, 1932), p. 18;
41. Quinn, 'The Glorious Revolution's effect on English private finance'.
42. See Table 1.
43. We calculated the average cash balance and the standard deviations, and derived the probability of the reserve ratio falling below zero. There is good reason to think that deposit withdrawals follow a lognormal distribution, which would mean that the bank's risk of running out of reserves was markedly higher before and after 1720 - and that the relative difference is probably somewhat smaller. Cf. Roger Chen and Dale Osborne, 'Random deposits, liquidation discount and deposit insurance pricing', University of Texas Working Paper (2002).
44. We experimented with our sample selection, excluding the somewhat unusual year of 1718 - the results were almost identical. They are available from the authors upon request.
45. J. K. Horsefield, 'The cash ratio in English banks before 1800', Journal of Political Economy, 57 (February 1949), pp. 70-74.
46. This practice changed in later years, when the partners' capital is subsumed under the category of amounts due to others.
47. Note that, with unlimited liability partnerships, this concept of equity in the family firm is somewhat artificial. Yet Hoare's used this as a distinct category of liability, and it is not identical with cash-on-hand at the time of drawing up balance sheets.
48. Richard Hoare to Madam Jane Hursey, dated 9 Oct. 1703, cited in Hoare, Hoare's Bank, p. 16.
49. Mathias Dewatripont and Jean Tirole, The Prudential Regulation of Banks, translation, Walras-Pareto Lectures, vol. 1 (Cambridge and London, 1994).
50. We assume that Hoare's earned 5 per cent on the amount labelled 'as lent with interest' in the balance sheet.
51. Joslin, 'London private bankers, 1720-85'.
52. T. S. Ashton, Economic Fluctuations in England, 1700-1800 (Oxford, 1959), pp. 116-21, 172-3.
53. The t-test shows a significant increase from an average of 227 in 1704-19 compared to 289 bankruptcies in 1720-43. Based on Julian Hoppit, Risk and Failure in English Business, 1700-1800 (Cambridge, 1987); adjusted series.
54. Neal, The Rise of Financial Capitalism.
55. Hoppit, Risk and Failure in English Business, 1700-1800, p. 132.
56. Joslin, 'London private bankers, 1720-85', p. 174;
57. John Carswell, The South Sea Bubble (London, 1960), p. 163. Others experienced great difficulty in meeting their obligations.
58. Adam Anderson, An Historical and Chronological Deduction of the Origin of Commerce, vol. 3 (London, 1801), p. 114.
59. It may also be that their growing overall wealth allowed them to devote less capital to the banking business, since the distinction between total net private wealth and partners' equity is more of a theoretical one with unlimited liability.
60. Richard Cantillon, Essai sur la nature du commerce en général (New York, 1755 [1964]), pp. 299-303 [spelling and capitalisation as per the original].
61. See J. K. Horsefield, 'The cash ratio in English banks before 1899', Journal of Political Economy, 57 (February 1949), pp. 70-4, for more debate.
62. For the shorter duration of loans to help in explaining the change in cash holdings, some repayments have to be unanticipated, which is a plausible assumption.
63. Hoare's had a cash-liability ratio of 30.8% in 1724, similar to the post-bubble sample average. The pre-crash average was 19.6%. 2,811*((30.8-19.6) = 1,022. This would have been equivalent to more than one-third of the average annual pre-bubble profit.
64. Temin and Voth, 'Riding the South Sea Bubble'.
65. Frank Knight, Risk, Uncertainty, and Profit (Boston, 1921).
66. Larry Epstein and Tan Wang, 'Intertemporal asset pricing under Knightian uncertainty', Econometrica, 62.3 (1994).
67. Julian Hoppit, 'Financial crises in eighteenth-century England', Economic History Review, 39 (1986);
68. Hoppit, Risk and Failure in English Business, 1700-1800;
69. Isabel Schnabel and Hyun Song Shin, 'Liquidity and contagion - the crisis of 1763', Journal of the European Economic Association, 6.2 (2004).
70. Roger Lowenstein, When Genius Failed (London, 2001).
71. Epstein and Wang show that Knightian uncertainty can lead to multiple equilibria in asset prices, opening up the possibility of substantial volatility as a result of 'animal spirits' (Epstein and Wang, 'Intertemporal asset pricing under Knightian uncertainty').
72. Daniel Ellsberg, 'Risk, ambiguity, and the savage axioms', in The Economics of Uncertainty, vol. 2:
73. Uncertainty and Dynamics, ed. John D. Hey (1997).
74. Hoare, Hoare's Bank, p. 16.
75. Since the collateral could be readily sold, it was also easier to identify the defaults.
76. Quinn, 'The Glorious Revolution's effect on English private finance', table 4, p. 608.
77. John Brewer, The Sinews of Power: War, Money and the English State, 1688-1783, 1st US edn (New York: Alfred A. Knopf, 1989).
78. Quinn, 'The Glorious Revolution's effect on English private finance'.
79. This does not rule out that the bank could have made additional profits, and hidden them in annual balance sheets, too. Yet this would have been a highly complicated undertaking at a time when balance sheets were not published or audited and there were no taxes on profits.
80. Quinn, 'The Glorious Revolution's effect on English private finance'.
81. We also added the single-transaction loans where repayment amount was equal to loan value.
82. When we estimate a median regression for the whole period, with the average interest rate on loans against interest as the dependent variable and a dummy for the 'new' usury ceiling from 1714 onwards, we obtain a coefficient of -0.9, significant at the 0.1% level. This strongly suggests that the bank followed the new legal requirements rather closely, and that lending before and after 1714 was almost always at the legal maximum. For methodological background, cf. Roger Koenker and Kevin F. Hallock, 'Quantile regression', Journal of Economic Perspectives, 15.4 (2001).
83. Joseph E. Stiglitz and Andrew Weiss, 'Credit rationing in markets with imperfect information', American Economic Review, 71.3 (1981).
84. Quinn, 'The Glorious Revolution's effect on English private finance'.
85. Philip T. Hoffman, Gilles Postel-Vinay and Jean-Laurent Rosenthal, Priceless Markets: The Political Economy of Credit in Paris, 1660-1870 (Chicago, 2000);
86. Philip T. Hoffman, Jean-Laurent Rosenthal and Gilles Postel-Vinay, 'Private credit markets in Paris, 1690-1840', The Journal of Economic History, 52.2 (1992);
87. North and Weingast, 'Constitutions and commitment'.
88. The only possible exception is the use of government debt as collateral in loan transactions. We thank Stephen Quinn for this observation.
89. The change in the composition of customers is documented in Peter Temin and Hans-Joachim Voth, 'Financial repression in a natural experiment: the change in the usury laws in 1714', MIT Economics Department working paper (2004).