14 Financial services and the City Introduction The growth of London as the centre of British and international finance is one of the better-known aspects of the nineteenth-century London economy. Expansion from relatively modest beginnings took place across a wide variety of financial activities – government finance, the stock exchange, national banking, merchant (or investment) banking, insurance, international finance and commercial trade. All of these sectors underwent rapid growth, particularly after 1860, caused by expanding opportunities offered by the world market and the possibility of moving into new areas of business. Each financial sector increasingly became more specialised and international, incorporating many foreign-based rivals. The role of the financial sector is that of intermediation in money and capital markets. There are many such roles: creating safe and secure means through which transactions can be conducted; operating markets where the prices of financial instruments are uniform and known; covering temporary shortfalls in government, business and personal cash-flows by short-term lending; bringing together those that have capital to lend and those that need to borrow it; and providing a variety of other services, such as insurance and foreign currency exchange. The direct success of a financial sector depends on the returns made from these intermediation roles, rather than simply on the scale of funds that pass through them. The wider economic and social implications of financial services, furthermore, relate to the efficiency of these activities and whether they channel funds to the most economically and socially desirable ends. Financial intermediation problems in early nineteenth-century Britain were substantial, because of the localised and frequently rudimentary nature of contemporary financial institutions. The seasons and periodic trade cycles would leave either agricultural or industrial districts with surfeits or deficits of funds, which later helped to stimulate national banking activity, centred on the City. Owners of capital, particularly when smallscale, were forced to rely on trusted advisors, such as a local solicitor, who might have only limited expertise in finding the best or safest returns. Borrowers similarly had to rely on local and personal contacts. Financia

panics and bank runs were commonplace. Mechanisms were slowly put in place during the nineteenth century that limited the appearance of panics and reduced the scale of their impact, although without entirely eradicating them. An increasing concentration of financial services in London created a sophisticated national market that overcame some of these intermediation problems and helped to increase the stability of Britain’s financial system. The City directly depended for its existence on the expansion of the national economy, the important role of nineteenth-century Britain and its currency in the world economy, and the vast export of capital to other industrialising nations during the fifty years or so before 1914. Its impact on London’s economic life itself is less clear. For, although the City of London became closely associated with these financial activities and ‘the City’ became a phrase synonymous with British finance, many other activities apart from finance took place in the City.1 The scale of employment in financial activities was also modest in terms of total employment in the capital – the typical City firm before 1914 employed fewer than ten staff,2 but the wealth channelled through, and generated in, the City was substantial. The impact of this wealth on the London economy, none the less, should also not be exaggerated. The gains were for the few rather than the many and the few often lived in country mansions rather than town houses. Most financial employment was in clerical work, which provided for a modest lifestyle only. Geography is an important element in understanding the role of metropolitan financial services. The types of financial activities taking place by 1914 in the City clearly conform to the predictions of central place theory, which would suggest that they exist in the city at the top of the urban hierarchy because of the need for a large national market to sustain them. Agglomeration economies were similarly important. The means by which information could be transmitted were limited, though they improved throughout the century, and financial activity thrives on being first with ‘news’. Growing economies of scale and an expanding market led to specialisation and greater activity at the national and international scales. All of these factors and more led to close clustering of activities in the City and, also, of particular financial services within it as they grouped around the physical market places that they served, such as the Stock Exchange or the Baltic Exchange. London, furthermore, had well-established personal and institutional networks of a scale unrivalled elsewhere in the world and, with them, a stock of ‘expertise’; it also had excellent pools of ancillary services, from printers to lawyers; and the largest mass of clerical workers and other financial specialists. The City, thus, conformed to the notion of an industrial district as set out in Chapter 2 (or, in fact, a set of overlapping industrial districts for different types of financial activity). There is no need consequently for peculiar British cultural or social class factors to explain its existence or to understand why it drew most national financial activity into its net. 336 Industrial and commercial chang

The City’s locational attractiveness increased over the century as developments in transportation and communications lowered the friction of distance, reducing national regional barriers and opening up the world as a whole to its remit. Furthermore, over the course of the century the British and world economies grew and changed significantly, bringing with them new financial needs which the financial services industries responded to in a variety of ways. Some effects were cumulative. Greater scale, for example, created progressively more liquid markets as the number of buyers and sellers expanded. The agglomeration benefits of an available pool of skilled labour were similarly multiplied. Once the City achieved its national ascendance over British financial services, these cumulative effects multiplied and no other location in Britain could compete. This did not mean, however, that London was the sole source of financial service activity in Britain: the national concentration in the capital was less than for a number of other industries. In the early years of the century, the barriers of distance meant that many financial markets were local or regional in nature (although interest rates etc. were still influenced to varying degrees by national factors). As the British economy developed, these markets became more nationally oriented and focused on London; yet, at the same time, there was a deepening of financial needs, with many services having to be located near to their clients. A good example is the development of banks into national networks: each with a headquarters and several functions in London but a wide national network of branches and, hence, employment. Metropolitan financial services were similarly split between serving the needs of the local population and higher-order activities. The geographic development of financial services in Britain during the nineteenth century, therefore, should not be seen solely in terms of a growing concentration of activity in the City; although when concentrating on it, as this chapter does, the overwhelming impression is of its importance in British finance. Many of the agglomeration economies existing in the City took particular social and institutional forms. ‘Institutional’ here describes the network of formal and informal rules and practices linking a set of organisations and agents together. They prescribe particular rules of behaviour, strategies and ways of doing business.3 One outcome in the context of the City, for example, was that transactions costs were reduced considerably through the operation of degrees of trust and some procedures for redress when they failed. Analysis of the growth of finance within the context of the subject matter of this book, therefore, has to look at the development and operation of the institutions and organisations active in the various markets that made up financial services in the City. This is done below by, first, examining the growth of banking and discounting, the capital markets and insurance. The extensive commercial trade of the City forms the subject of the penultimate section concerned with other activities taking place in the Square Mile. A final section describes how its physical structure was transformed and redeveloped. Financial services and the City 33

Banking, discounting and the money market The growth of a national system Prior to the industrial revolution, English banks were overwhelmingly based in London. Many had emerged from goldsmith origins from the seventeenth century onwards, but other new private banks had been set up in the eighteenth century. By 1800, there were seventy in London – divided into a ‘West End’ group, which concentrated on dealing with the gentry, the aristocracy and lawyers, and a ‘City’ group, which concentrated on commercial paper and providing services for stockbrokers and country banks.4 Outside London, country banks had grown up to finance the needs of the industrialising regions from the 1750s onwards, and had been set up by attorneys, merchants and others to serve local areas. By 1800, there were 370 of them, reaching a peak of 1,100 in 1838.5 Private note issue was unregulated, so many different bank’s notes circulated freely, which helped to overcome chronic shortages of means of payment. By 1833, there were 430 private banks issuing their own notes.6 The exception was London, where the Bank of England (the ‘Bank’) had a monopoly of note issue within a 65-mile radius of the City, and the Bank’s notes did not circulate much beyond the metropolis before the 1830s.7 English banking, thus, was essentially local and London by no means played the leading role. Local banks had key informational advantages, at a time when it might take days to contact the capital from the more remote areas. Yet, if local bank pricing was too much out of line with national trends, arbitrage opportunities would have opened up for financial intermediaries from outside the locality. So a local basis to banking did not negate the existence of a national market. As the barriers of distance were reduced over time, moreover, such localised benefits were diminished so that wider spatial presences by banks became more feasible. Centralising tendencies can be seen clearly in nineteenth-century English banking, especially after the widespread adoption of the telegraph. By the First World War, most of the country’s major banks had headquarters in the City and the Bank was the prime currency issuer. Improvements in communications, however, cannot be the sole explanation of the changing geography because, as will be shown below, state regulation and institutional structures played an important part in the evolution of the banking system. Regulatory barriers to lending remained from previous centuries. Lending to the private sector, unlike government borrowing, was still subject to the usury laws, which limited the interest rate to a 5 per cent maximum. There were ways around the restrictions but their existence discouraged commercial lending. Changes were introduced in 1833 and 1837 as a result of financial developments, but controls on debt over three months’ maturity were not finally abolished until 1854. The usury constraints had effects on the contemporary structure of financial markets. 338 Industrial and commercial chang

The relaxations in the 1830s, for example, arose because of the impediments that were imposed on institutional changes in the discount market. Other constraints on institutional practices had arisen with the 1720 Bubble Act, which had been introduced after the fiasco of the South Sea Bubble with the implicit aim of limiting the circulation of company shares, as a draconian measure to avoid further bubbles. One result was that joint stock company status was hard to achieve and so most British firms were organised on an individual owner or few partners basis, with unlimited liability. Partnerships remained the main form of firm organisation until the last quarter of the nineteenth century – long after the Bubble Act had been repealed in 1825. This type of firm structure had important implications for the stock market because it meant that only small parts of British industry had shares that were issued or transacted – a situation that persisted through the nineteenth century.8 The small, localised nature of banking in the 1800s was encouraged by further legislative constraint. Until 1826, all note-issuing banks were forbidden to have more than six partners and note issue was a profitable opportunity that few bankers would voluntarily forgo. The only exceptions to this rule were the Bank of England and two Scottish banks, both of which were permitted joint stock status. The Bank of England, in addition to its own select list of clients, acted as the government’s banker and had the only gold reserve in the country. These last two roles gave it influence over government monetary policy. In order to meet exceptional demands for funds during financial crises, private banks maintained a reserve of ‘call’ money, part of which was kept in cash and the remainder was invested on a short-term basis. They sent the funds to the City where their agents used them to buy bills of exchange (known as ‘bills’ for short). Bills were financial instruments that had developed to finance international trade in the seventeenth and eighteenth centuries and were commonplace in Britain during the eighteenth century. They were drawn on a bank by the purchaser of goods and given to the seller prior to delivery, who then took the bill to the bank, or its corresponding one, for acceptance that the bill would be paid at a specified date. The bill could then be used as a means of exchange until it expired, because bills under English law were negotiable, with payment made to the bearer, which meant that they could easily be exchanged between parties. A discount on the face value of the bill provided the means of profit for the financial intermediaries involved. The advantages of bills were that they overcame currency exchange problems in national and international trade; provided trade credit so that a firm’s receipts and expenses could be smoothed out; and offered an investment outlet for those, like banks, that wished to lend short-term funds. As successive governments failed to increase the money supply in line with economic expansion, for much of the second half of the eighteenth century and into the nineteenth, bills formed the bulk of the English money supply and were the dominant medium of exchange. Small bills, Financial services and the City 33

in particular, circulated as money in face of a lack of small denomination notes and coin. With the growth of bills of exchange, the influence of London was felt throughout the national market because of its centralplace role in discounting them. The credit needs of the Lancashire cotton industry, for example, were primarily met via bills discounted in London.9 But why were these inter-relationships linked via London, rather than some other place in Britain? The historical scale of finance in the capital was one factor. Other influences were the port and associated historic links with other European and American finance centres, such as Amsterdam and Baltimore, over trade in foreign bills of exchange and international loans. Napoleon’s conquests in continental Europe and the British blockade led to the demise of centres like Amsterdam, and more business moved to London, increasing further its scale advantages. Last but not least, the Bank of England was located in the capital and had the country’s only stock of gold. Private banks needed to go to the Bank for help from time to time to make up imbalances in their receipts and out-goings. With only rudimentary regulation and monitoring, personal contact and a bank’s reputation were important in persuading the Bank to lend in such circumstances. So, for these reasons and more, the banking system was inevitably centred on London. The regionally fragmented nature of the banking system gave further encouragement to the use of City facilities. The small country banks could not balance a surplus of demands for funds in one locality with deficits in others through internal transfers between branches, as can banks with nation-wide branch networks. This gave London banks a key intermediation role in the country’s banking system. Glyns, a ‘City’ private bank, for example, had sixty country bank relationships in 1849 and, earlier in 1802, the twelve leading London banks in the field all together corresponded with 205 provincial banks.10 Banks with surplus funds would send the money to London for purchase of bills of exchange; while banks with a greater demand for loans than available funds would send bills to London for rediscount. In these ways, London acted as a conduit for the reallocation of funds between deficit and surplus areas. There thus developed a ‘correspondence’ relationship between country banks and the metropolitan financial system: business between them included the transfer of bills and bank notes, the purchase of government securities or dividend payments for customers, and the financing of local trade via inter-bank transfers. In addition, London agents acted as important conduits of information on investment opportunities and market titbits for the country banks. In this way, an early integration of the national banking system was achieved. As the country banks were generally weak and undercapitalised, however, a crisis occurring in one region would rapidly affect the London bill market and could cause a national financial crisis.11 As well as the correspondence system, businesses in London themselves needed bills discounted, as the capital was the major commercial centre in the country. Spatial specialisation of London-related banking business 340 Industrial and commercial chang

occurred within the City and its environs and it was influenced by the location of commercial markets. Smithfield bankers, for instance, were unsurprisingly heavily involved in the droving trade, and banks in Southwark concentrated on hops, which were bought and sold in the area. Such proximity was presumably necessary in order to have the most upto-date market information and to be able to meet clients in the general course of their business.12 The emergence of discount houses During the Napoleonic Wars, two new financial specialists emerged in London: first, merchant banks that discounted and issued foreign bills of exchange and underwrote government debt;13 and, second, specialist bill brokers that began to intermediate between the buyers and sellers of bills.14 Further developments followed a severe financial crisis in 1825; one of which was the gradual emergence of discount houses.15 Discount houses played a key role in binding the English money market together and in determining the role of the City within it, so it is worth considering the implications of their evolution. When pressed for cash, the London private banks had previously relied on the Bank of England to buy – that is, rediscount – the bills in their possession. The Bank was thus their lender of last resort, helping them to avoid failure at times when they could not sell enough bills to meet the demands for cash put on them. During the 1825 crash, the Bank had to stop doing this because it ran out of funds. Recognising the finite resources of the Bank, prudence encouraged the banks from then on to increase their own reserves. Most of these new reserves were then lent on call to City bill brokers. The interest rate paid by brokers for this call money was half a per cent or so below bank rate in normal times, and the lowestrisk bills were used as security – so that in normal times the business was both profitable and low-risk. Bill brokers previously had only been intermediaries between sellers and buyers, but they had then turned into dealers by using these call loans from banks to buy bills on their own account: profiting from the difference between the cost of their borrowings and the returns on bills. By doing so, they created a deeper and more liquid market for bills and thereby improved the earlier role of London in smoothing out surpluses and deficits in the English banking system. The strength of the new system was reinforced when the Bank of England agreed from 1830 to discount bills for a select number of bill dealers – thus, acting as their lender of last resort. The last resort role would be required most in financial panics when bill dealers would have difficulty selling bills and be pressed for call money to be repaid. Such bill dealers had created embryonic discount houses. As these discount houses were principally obtaining their funds by borrowing the reserves of private banks, this meant that the Bank was effectively reaffirming its previously uncertain role as lender of last resort Financial services and the City 34

for the whole British financial system, and the modern (pre-1980s ‘Big Bang’) London money market was beginning to form. Four leading firms, including Sanderson & Co. and Overend Gurney & Co., were given the privilege of a Bank discounting facility in the 1830s.16 Discount houses were now increasingly important in the financial system, but periodic financial crises brought some of them perilously close to grief and several folded. One difficulty was the ambiguous relationship between the Bank and the money market because the Bank was caught in a dilemma. On the one hand, its privileges rested on its special role in the British financial system and, on the other hand, it was a private bank and as such in competition with the discount houses for bill business. It competed particularly vigorously for bills between 1844 and 1847, but a financial crisis occurred in 1847. The resultant calls on its funds made it clear that the policy of competing in the bill market had made that market more risky. This led to a new policy of holding the Bank’s discount rate generally above the market rate and varying it in line with prevailing interest rates and market conditions.17 Faced with the penalty of a higher interest rate, the discount houses would only come to the Bank for assistance at times of real need. In this way, variable Bank Rate was born and greater control exerted over the money market. Yet there was still a notable weakness in the discount market, because individual discount houses could disadvantage competitors by taking extra risks in the knowledge that if things went wrong, with a lender of last resort facility at the Bank, they would be bailed out. And there was little in the system as it existed to contain the moral hazard of discount houses taking unreasonable risks. The potential fragility of the discount houses came to a head within the space of a decade. During the financial panic of 1857, caused primarily by bank failures in America, the discount houses were again in trouble. Sanderson failed and Overend Gurney had to be lent £700,000.18 After this threatening experience, the Bank changed its lending policy and refused to offer further facilities to discount houses and brokers. This move again brought uncertainty to the Bank’s implicit role as lender of last resort to the financial system and subsequent events were to force the Bank to reverse its decision, because the unilateral loss of Bank support, rather than limiting the risk-taking of the discount houses, turned out instead to increase it. The reaction of the discount houses to the Bank’s new policy was influenced by changes in their ownership and financial structures. Restrictions on the formation of joint stock companies were relaxed between 1855 and 1862, and several discount houses took advantage of these developments to adopt limited liability status. The National Discount Co. and London Discount Company were founded in 1856 and their success in weathering the 1857 crisis, combined with the Bank’s reaction to that crisis, encouraged others to take up joint stock status. Financially, discount houses after the withdrawal of the Bank’s credit line faced the need to raise and hold higher reserves, which, in turn, reduced the profitability of the bill business. 342 Industrial and commercial chang

At a personal level, partners had operated with unlimited liability and they now had no lender of last resort and so they faced far greater personal financial risks at times of general market panic. Going public would ameliorate these difficulties, though not all took that route quickly – Alexanders, for example, delaying it until 1891.19 But, in the absence of clear financial accounts and explicit or implicit regulatory constraints, the costs of the moral hazard of excessive discount house risk-taking were merely extended from the Bank as lender of last resort (even if at the time it did not want to be) to shareholders as potentially gullible investors in the new joint stock discount houses. The weakest link by the 1860s was the firm of Overend Gurney & Co. It successfully floated as a joint stock enterprise in 1865, having previously failed to merge with the National Discount Co., but it did not tell investors about the huge losses it was making in non-discount activities. The firm had in recent years diversified away from the now less profitable discount business into reckless lending of substantial funds on a partnership basis in shipbuilding, ship-owning, grain, iron, railways and other unlikely ventures. Although rumours were circulating long before its final collapse, intervention was impossible because of the absence of a regulatory structure. When financial uncertainty struck in 1866, the Bank refused to lend it money and the firm went under, causing an enormous financial panic that then forced the Bank to lend £4 million to other discount houses, banks and merchants. The ambiguity in the Bank’s behaviour, therefore, was brought starkly into the open in this crisis and subsequent debate. The collapse of Overend Gurney had forced the Bank of England to play its hand as lender of last resort and it was subsequently always expected to do so when required, though the discount houses were also expected not to take such risks again.20 This episode in the history of the London money market illustrates that changes in the institutional structure of City finance had important consequences for the stability of the financial system of the country as a whole. Far greater stability was subsequently achieved because of significant organisational changes in the geography of British banking, which diminished the previously pivotal role of the discount houses. This occurred through the growth of national branch banks centred on London, and was primarily induced by technological advances. But, before turning to this, the subsequent history of the money market to 1914 can be briefly summarised. The stock of bills of exchange declined from the mid-1870s to the mid1890s,21 reflecting changes in financial intermediation and trade. New large national banks could deal with surpluses and deficits within their own branch networks by offering overdrafts rather than by recourse to bills. In addition, the volume of credit needed in trade was falling as transportation and other developments reduced the need for stocks and working capital to finance it. All banks, however, continued to lend some of their funds on call or short notice – 14 per cent in 1914, most of it lent on the London money market.22 Financial services and the City 34

As domestic bills business declined in relative importance, the demand for bill facilities from abroad grew dramatically, through the functioning of the gold standard and as overseas countries industrialised or joined the world economy as primary producers. Much late nineteenth-century international trade was funded on bills drawn on London, so that by 1913–14 two-thirds of outstanding commercial bills were foreign. Bill brokers and discount houses remained at the centre of the money market after the 1880s, but had to share the greatly expanded foreign business with merchant banks, whose ranks had been increased by the expansion of this line of activity. Merchants banks had good overseas contacts, which gave them an edge. Foreign enterprises, like Morgan from the USA, set up or expanded London-based merchant banks, bringing their networks of overseas contacts with them.23 By 1913, merchant banks were undertaking 40 per cent of London’s trade finance business.24 Joint stock banks The 1825 crisis was blamed on undercapitalised country banks – eighty English ones had failed25 – so legislation was passed ending the Bank of England’s monopoly of joint stock banking south of the border. Joint stock banks were permitted outside of the Bank of England’s 65-mile sphere of influence and, later, in 1832 the Parliamentary Committee charged with examining renewal of the Bank’s own charter imposed the condition that non-note-issuing joint stock banks could set up in London itself – made law in the 1833 Bank Charter Act.26 The result of these legislative measures was a rapid growth of joint stock banks and a decline in the importance of private ones. By 1844, joint stock banks numbered 107 nationally, compared to 286 private banks.27 Six operated in London in 1841, including the London and Westminster (1834) and the London and County (1839).28 The London ones were set up to cater to the metropolitan middle class and were successful, but most early joint stock banks in the provinces were little different from their private banking predecessors – small, local and undercapitalised – and they utilised the traditional correspondence system with London. Only the National Provincial Bank of England quickly achieved a wide coverage through England and Wales, while the rest were regional or local and remained so until the 1870s. Expansion of joint stock banks’ deposits was substantial, none the less, nationally averaging almost 6 per cent a year between the late 1840s and the 1870s.29 The Londonbased ones increased their deposits from around £9 million to £43 million in the decade after 1847, despite being excluded from the Clearing House by the private banks until 1854.30 But the overall banking system, particularly in industrial areas, remained weak. The Bank Charter and the Joint Stock Banks Acts of 1844 aimed to strengthen the banking system, but their impacts slowed down the decline of private banks and the expansion of joint stock ones. No new banks were allowed to issue notes and it was expected that this would eventually 344 Industrial and commercial chang

leave the Bank as the only note issuer, as older banks amalgamated or switched to joint stock status. But the loss of the profits on note issuance discouraged banks from changing their status. At the same time, stringent new rules were imposed on the setting up of new banks. The combined result was that only one new joint stock bank opened between 1846 and 1860 and few private banks merged with joint stock ones.31 The Bank was empowered to issue £14 million of notes plus any amount backed by bullion, whose volume at the Bank depended on foreign exchanges. The Bank could no longer issue money as and when it wished, and thus lost its flexibility over extending credit at times of trouble. In the panics of 1847, 1857 and 1866, the Act had to be waived to allow the Bank to act as lender of last resort. After 1866, however, the Act was never suspended again before 1914 – indicating the degree to which the banking system had finally stabilised in the last third of the nineteenth century. The growth of joint stock banks eventually transformed British banking. Deposit banking led to the introduction of the overdraft and the provision of cheque accounts. Cheque writing was facilitated by an 1853 reduction in the stamp duty charged on cheque writing and by the admittance of the London joint stock banks to the London Clearing House. The lull in joint stock bank formation ended in the 1860s, especially after the Companies Act of 1862 which repealed the remaining constraints on joint stock banking from the 1844 Act and, amongst other things, granted limited liability to insurance companies.32 This legislative change encouraged private banks to switch status through conversion or merger. The pull of London also increased, with the National Provincial Bank, for example, deciding in 1866 to forgo its £0.5 million provincial note issue in order to get a London office.33 The significance of the London money markets and better means of communication gradually encouraged other banks to set up London offices or headquarters, while serving other regions or the country as a whole through an extensive branch network. From the late 1880s, joint stock banks began to acquire each other at an accelerated rate. London firms moved into the provinces and provincial firms took over London banks to obtain a City foothold. Then the newly merged banks would open branches in regions where they were underrepresented. (The Midland is a well-studied case.) In many ways, the banks were acting in a similar fashion to the new multiples in retailing. In banking, a national presence offered economies of scale and scope, a clear brand image, and a ‘balanced’ regional network of branches. Locationally, a London headquarters placed these banks at the centre of the nation’s money and capital markets, at the gateway to international activity, and gave them the image of competence, respectability and security. Many private and smaller joint stock banks disappeared in these takeovers. For instance, there were thirteen City private banks in the London Clearing House in 1870, yet only five in 1891.34 As a result of the merger movement, by 1911, London-based banking groups controlled 56 per cent of UK branches and 65 per cent of deposits, as compared to only 18 per Financial services and the City 34

cent and 36 per cent respectively in 1871.35 The era of regional banking was over and London-based organisations now predominated – in 1895, the value of provincial clearings was only 5 per cent of that of London. Subsequent bank growth was spectacular with London clearings rising from £6.3 billion in 1894 to £16.4 billion in 1913.36 This geographic structure of banking then lasted for much of the twentieth century, with London gradually increasing its centralising position. Banking also extended its international role. The position of merchant banks in the foreign bill market has already been mentioned, and the UK clearing banks competed by developing their own overseas links. The City became home to a number of British-owned overseas banks – forty in 1900, with an international network of over a thousand branches – and the offshoots of foreign banks – approximately twenty-eight in 1913.37 The impact of distance on nineteenth-century financial markets In 1820, a stagecoach journey from London to Liverpool would have taken around thirty hours. Using the fastest means of transport, therefore, a correspondence to Liverpool initiated by some London banker or broker to enquire about some matter of finance of concern to them would have generally taken a week or more for the round journey, and there was always the risk of delays. There was also no guarantee that the questions would have been satisfactorily answered or that the response would not stimulate the need for further information. The ease with which a telephone conversation, or other means of communication, can deal with such matters today can make it hard to understand how difficult and unreliable was the transfer of information across distances in the early nineteenth century. London financiers, therefore, were at an informational disadvantage with regard to much of their own national market, even though they would have been generally better informed about national and international events than many of their provincial counterparts. Trusted agents could be used in distant towns but there were limits to such relationships, which were much better at dealing with routinised events than at dealing with rapidly changing situations or in grabbing unexpected opportunities that could make or break fortunes. Accounting systems and rules of disclosure were also rudimentary, so that publicly available information was poor. These information constraints reinforced the need to have someone with their ear to the ground, searching out vital information, and this reinforced the barrier of distance. The correspondence system enabled extensive, but usually routine, financial exchanges to occur and this enabled much integration of the national market, but distance barriers still made it impossible for individual organisations to gain a competitive advantage through having a national presence. By the early years of the nineteenth century, consequently, there existed regionally distinct financial markets linked via the contemporary transport 346 Industrial and commercial chang

and communications systems. Price differences between these markets would exist that could not be instantaneously overcome because of communication barriers and, even where information was available, transaction costs could make arbitrage unprofitable. Such barriers, however, have limits and are more easily surmountable in the long run. By the end of the eighteenth century, there is evidence that regional markets were reacting to London interest rates.38 An integrated national capital market seems to have emerged by then, albeit with important local differences in terms of the organisational structure of financial services. The huge financial demands by the state during the Napoleonic Wars and the increasing use of domestic bills of exchange further helped to integrate the financial system. The problems of distance were compounded with overseas transactions. London had long been bound up with the financial aspects of international trade and in advancing large foreign loans, particularly to governments. The Atlantic crossing is a good illustration of the slow communications prevalent in the early part of the century. A ship from Liverpool to New York in the years 1791 to 1815 on average took 21–28 days eastbound and, against the prevailing winds, the westbound trip lasted 35–84 days. These times gradually fell, and the advent of steamships, which overcame the westbound disadvantage of sail, cut the trip down to eight days eastbound and nine west.39 Along with greater speed came lower cost, greater reliability and security, and an improved availability of insurance so that insurance rates tumbled. The freight rate on a shipment of specie, for example, fell from 0.5 per cent of value on a voyage from New York to London in 1827–8, to 0.16 per cent in 1896–1900; while the associated insurance rate dropped from 0.63 to 0.13 per cent.40 The impact of the communications revolution from the 1860s was, unsurprisingly, dramatic as it allowed information to be passed nearly instantaneously between distant markets, altering the organisation and geography of financial services. London was connected to all the major British cities by telegraph in the late 1860s, though technical difficulties at first limited its usefulness. Communications were then further improved by the arrival of the ticker tape machine in 1867, the telephone in the 1880s, direct telegraph links with provincial exchanges in the 1890s, and private telephone lines in the 1900s. In 1851, the first submarine telegraph cable was laid between Dover and Calais. This enabled London dealers to be almost instantly aware of prices on the Paris Bourse. Cables were subsequently laid to other European countries and then further afield: to New York in 1866, Melbourne in 1872 and Buenos Aires in 1874. The international telegraph was followed by the telephone, with the first London to Paris link appearing in 1891.41 These new forms of communication were immediately used by the financial community for information, to place orders in foreign markets and to transfer funds.42 Such innovations lowered both risk and transaction costs and created new market relations. Enhanced use of cable communication across the Atlantic Financial services and the City 34

after 1882, for example, created integrated price movements on the New York and London stock and bond markets – it had a greater impact on drawing prices together in these two markets than in US regional markets themselves.43 Both real and nominal interest rate differentials between the two countries also narrowed, as suggested by evidence for sixty-day sterling bills.44 As communications improved and markets became more sophisticated, therefore, price differences between markets were greatly narrowed, limiting arbitrage opportunities. Better communications also encouraged further spatial concentration of many aspects of financial services. Greater clustering arose because of the need to be aware of recent information or that which was available only informally. With prices between markets narrowing and a much faster speed of reaction to changing market events, proximity to the main dealing places became of even greater importance. Cumulative effects would then enhance the clustering in a typical process of increasing agglomeration economies – with knock-on developments in labour markets, specialist services, etc. The communications revolution, therefore, is of considerable importance when examining both national and international capital market developments and it will be a theme of what follows. Stocks and shares The domestic market The first and continuing locational advantage of the City as a place for financial services was that its near neighbour was the biggest debtor in the country – the government. Specialist dealers in government stock developed in the 1690s with the advent of a permanent national debt. A London location for the market in already existing stock was strengthened by the fact that the capital was the only place in England where the ownership of government stock could formally be transferred. Originally, dealers worked from the coffee houses of Change Alley and then they moved to premises in Threadneedle Street, where members of the public were charged 6d to enter in order to do business.45 In 1801, the modern Stock Exchange was born, regulated by a deed of settlement, and membership was restricted to candidates chosen by the ballot of an elected overseeing committee; a purpose-built exchange was opened a year later. In the early 1800s, holders of public debt were principally located in London and the Home Counties, reinforcing the concentration of stock dealing in the capital. Provincial savers, in contrast, tended to invest in local mortgage markets46 (although common price effects were observable, as noted earlier). In 1840, government stock accounted for 89 per cent of the securities quoted on the Stock Exchange,47 with the rest consisting of the shares of the narrow range of bodies that had won joint stock status in the Parliamentary charters that had set them up – the chartered 348 Industrial and commercial chang

merchant companies, the Bank, canal owners, turnpikes, water and gas enterprises, insurance companies, and, just appearing, rail companies and joint stock banks. Scale advantages were apparent in the operation of the Stock Market, with numerous specialised brokers, extensive daily trades so that extreme fluctuations in price were limited, and a growing network of ancillary services – law, accounting, printing and so on. Over time, the relative importance of central government debt declined as public policy switched to a regime of lower borrowing. This led to a reduction in the supply of government stock as the outstanding national debt fell significantly – declining from £794 million to £680 million between 1850 and 1913.48 This contraction, however, was countered by the substantial growth of other public sector borrowing, with the great capital works of local authorities and statutory agencies, including the Metropolitan Board of Works. The funding of the newly formed provincial joint stock banks and the first rail boom led to the setting up of stock exchanges in many large provincial cities and towns. Formal markets started in Liverpool and Manchester in 1836 and fourteen were added elsewhere during the 1840s. In 1840, for example, only 37 per cent by value of Scottish securities were quoted in London.49 The emergence of so many regional exchanges reflected the localisation of capital markets at the time, but many of them were short-lived and disappeared in the aftermath of the collapse of rail share prices in 1845.50 Stock Exchange members were not allowed to partake in new share issues but only to deal in second-hand stock. Merchant banks did much issuing and joint stock banks and short-lived finance companies were involved in the early 1860s share-issue boom, but the 1866 financial crisis then squeezed them out. With the growth of company flotations from the 1870s, a variety of promotion companies emerged in the new issues market – advertising their wares and drumming up commentary in the press. Unable to organise the underwriting of issues, many promoters manipulated share prices at flotation in order to make money, so that a share would initially trade at an artificially high price before falling. In the late 1870s, 75 per cent of all public company formation was found to be affected by such premiums by an 1878 Royal Commission investigating the Stock Exchange.51 This practice affected provincial exchanges as well, and would have discouraged investors from subscribing to such shares at least in the initial period of their existence. The Stock Exchange was not the only dealer in existing company shares in the City, because not all companies could get their shares listed on the Stock Exchange, so secondary markets emerged. A Stock Exchange listing was important for the liquidity it conferred, meaning that investors would be attracted to a firm’s shares as they could buy and sell them in a broad market. Exchange members, however, found it unprofitable to deal in companies with a small share circulation, so smaller issues tended not to be listed. This encouraged two developments. First, in London, brokers Financial services and the City 34

who were not members of the Exchange developed a secondary market in smaller issues and these and other shares were bought and sold at auctions outside of the Exchange’s remit, which threatened but did not supplant the Exchange’s activities. Second, a new lease of life was given to provincial exchanges by dealing in these smaller issues and tapping local sources of finance for larger issues. Several new local exchanges were opened in the 1870s, and several of the thirteen provincial exchanges in the early 1880s specialised in particular industries – Manchester and Sheffield, for example, dealt in iron companies.52 Although many company shares were only quoted on a local exchange, as London was by far the largest exchange, it was convenient to have parallel quotations for some larger share issues on both the relevant local and the London exchanges – and the practice increased over time. By 1900, 99 per cent of the securities found on the Glasgow market were also quoted in London.53 One result of the development of multiple quoting on different exchanges was the adoption by brokers of ‘shunting’ – the monitoring of security prices in a number of markets to make arbitrage profits. When a price difference emerged between exchanges, the security in question would be purchased in the lower price market and almost simultaneously sold in the higher price market. Common in the 1850s, this practice became widespread in the 1860s – and was aided by the introduction of the telegraph. By permitting City brokers to discover prices on provincial markets almost immediately, communications improvements during the decade enabled them to make alliances with provincial brokers in order to trade in commercial stocks on behalf of clients with no risk of sudden, unknown price fluctuations. The introduction of private telephone lines, however, then restricted this activity to the ten or so brokers able to afford such lines. Instantaneous communication gave these brokers an advantage that the others could not match.54 This contributed to the decline of the provincial exchanges. The amount of shunting fell further after new London Stock Exchange rules, introduced in 1909, put severe restrictions on the practice. These prevented jobbers from dealing with non-members of the Exchange, including provincial exchange personnel, and forbade brokers to sell or buy on their own account.55 None the less, such practices had helped to integrate members of provincial exchanges with the London market, and the number of brokers grew in London, completely dwarfing the scale of activity in the provincial exchanges. In terms of the overall involvement of the British stock exchanges in funding the capital requirements of private companies, their roles were relatively small. The limited scale, however, was demand- rather than supply-driven. In addition, once the national rail system was more or less in place by the 1860s, there was relatively little effective private British demand for infrastructure capital. The infrastructure needs may have been there, but the organisational forms in which they came to market frequently did not impress investors, as can be seen with the underground 350 Industrial and commercial chang

system which relied on US funds for the development of the tube (see Chapter 10). The providers of social infrastructure – transport, communications, power, water and sewerage, etc. – and housing were by far the greatest consumers of capital in the country and so needed the intermediation facilities offered by the City far more than did manufacturing enterprises. As an approximation of the types of demand for capital, Table 14.1 breaks down the 1856 and 1913 national capital stocks into their sectoral components. Services constituted by far the largest share – almost a half in 1913 – and housing added another 24 per cent, but the City had little to do with that. Even so, almost three-quarters of the capital stock was in these two sectors rather than in manufacturing, mining or agriculture. Social overhead capital dominates over the manufacturing capital stock. As this was the case it is unsurprising that railway shares dominated the stock market, that private utilities were significant, and that much funding of social overhead capital was done through the public sector bond market. In respect of manufacturing investment, there was little demand for City finance and what was on offer was often highly risky. Most new British firms were small and required limited start-up capital. Such sums could more cheaply be obtained from savings, friends, relatives or local investors. Similarly, firm expansion generally occurred through investing retained profits or by the introduction of a ‘silent’ partner. Trade debt was covered by issuing bills of exchange or by borrowing from local provincial banks, and later through overdraft facilities at one of the new national banks. Many manufacturing firms, as a result, remained private companies rather than converting to joint stock company status with a listing on the London or a local exchange. Conversion to joint stock status occurred in specific industries rather than randomly throughout industry. Nevertheless, by 1907, the Stock Exchange share listings contained 570 domestic industrial and commercial concerns, worth around £500 million.56 Financial services and the City 351 Table 14.1 The capital stock of the United Kingdom, 1856 and 1913 Percentage shares 1856 1913 Agriculture 19 6 Manufacturing 13 19 Services 39 49 Construction 1 1 Mining, etc. 2 2 Existing dwellings 27 24 Total 100 100 Source: Millward, 1990, 424. Note: Rounding errors may affect summations

Yet few of them had adopted joint stock status simply to raise capital. Rather, for banking, insurance and other financial enterprises, the incentive for issuing share capital was to spread risk. The breweries were reacting to the high cost of pub properties. Among industrial, commercial and mining concerns, the purpose was generally to facilitate a growing division between ownership and management. The need for this arose when problems emerged in founding families or because of the increasing complexity of organisational structures in some industries. Even so, the vast majority of British firms remained relatively small-scale, family businesses, using only limited amounts of fixed capital, until after the First World War, unlike contemporary developments in the USA.57 The trend towards restricting competition evident in a number of late nineteenth-century industries also stimulated flotation on the London exchange. Attempts by firms in an industry to limit competition by setting up cartels often led to disagreements; whereas joint stock status of a merged enterprise solved many such conflicts of interest. Once a new firm was established, shares could be issued to previous owners, giving them a common interest in the firm’s success, and competent staff could be employed to manage the merged businesses. One factor associated with limited involvement of capital markets in the funding of investment and innovation in British industry was the poor accounting and regulatory environment, which meant that markets could not function effectively. Firms could hold back vital investor information because of laxities in disclosure and accounting procedures; insider information could be used extensively to the detriment of the ordinary investor; the over-pricing of share issues has already been mentioned; and it was virtually impossible for shareholders to sack managements or for hostile take-overs to be successful.58 The shareholding principals, therefore, often could not trust their management agents. The result was both credit rationing and higher costs of capital for all firms, as investors had little means of distinguishing between the duds and the diamonds in the mantle of industrial enterprise. This failure can hardly be blamed on investors or the Stock Exchange, but rather on public policies that, despite successive piecemeal reforms, did not create an adequate institutional framework for better functioning of domestic capital markets – though the scale of the consequences is hard to discern from other factors influencing the ownership structure of firms. International share dealing International dealings began in the eighteenth century, when British securities were bought and sold on behalf of foreign clients, particularly the Dutch. The long period of European warfare from 1789 to 1815 led to a fall in the foreign possession of British securities, but there was a compensatory increase in British holdings of foreign securities. By mid-century, however, London’s involvement in foreign business remained small. In 352 Industrial and commercial chang

1853, only 8 per cent of the £12.5 million of paid-up securities quoted on the Stock Exchange were foreign.59 Trading in overseas securities was largely confined to government stock from continental Europe, the USA and South America. These were issued in London and bought and sold by British investors. Like domestic trading, international dealing was transformed by the communications revolution. The result of these innovations was that the London financial community increasingly began to act for both British and foreign clients, buying and selling stocks in London and on foreign exchanges.60 Initially, this international business was dominated by merchant banks, because they generally possessed good contacts abroad and had geographically dispersed funds. From the 1860s and 1870s, however, merchant banks gradually became less involved in international stock dealing, because it distracted them from their more lucrative issue work and was believed to involve excessive risk. Their place in the international arena was taken over by stock exchange brokers, who generally formed alliances with foreign brokers and international banks. The 1860s and 1870s saw a substantial increase in the value of internationally traded securities in parallel with economic development and industrialisation elsewhere in the world. The first internationally traded stocks were those issued by the governments of countries of recent development, such as Canada, Brazil, Argentina and Australia; later they were joined by issues from governments in underdeveloped regions, for example, China, Mexico and Japan. Most of these loans were raised for the construction of infrastructure and other public works. International government issues were complemented by corporate bonds and stocks issued by US railroad companies and subsequently by Canadian and Argentinian railways. Added to these, in turn, were mining securities issued by companies, such as Rio Tinto, and by industrial and commercial stock floated by international firms, such as the Nobel Dynamite Company and United States Steel. Eventually, such corporate stock formed the largest part of the international securities business. The creation of an international market provided opportunities for London brokers to profit from price differences in international stock markets. Such arbitrage operations were at first centred on the differences between London and the Paris Bourse, but then they expanded to encompass other European exchanges. The activity was initially confined to European government debt, and then London firms gradually began to deal in all markets and securities. Because of their complex nature, such operations were undertaken by only a limited number of broking firms 262 in 1909.61 Most concentrated on a particular country and specialised in a certain class of business, like railroad stocks. The success of these brokers attracted foreign dealers to London, who tended to retain strong links with their countries of origin, giving them an informational advantage. Foreign banks, such as Credit Lyonnais and Deutsche Bank, set up branches in London and they captured a significant part of the arbitrage Financial services and the City 35

business in some types of foreign share, such as US corporate bonds, South African gold mining issues and Malaysian plantation stock. These developments, however, did not lead to perfect price equality across international stock exchanges. The Amsterdam and London capital markets had been closely integrated since the eighteenth century, and Amsterdam led London in the local trading of foreign securities. (Of the 87 securities listed on the Amsterdam Beurs in 1855 only 16 were domestic or colonial.) Paris joined in from the 1850s. Even so, the evidence suggests that substantial price differences still remained into the 1900s, so that (risky) arbitrage possibilities were still available.62 The export of capital The City’s involvement in overseas investment was immense, with the greatest outflow of funds occurring in the second half of the century. Between 1870 and 1914, a net average of 4.3 per cent of British national income was invested abroad, so that by 1913 overseas assets represented 32 per cent of the stock of net national wealth and British investors earned £200 million in foreign income alone. The flow of net overseas investment varied and was significantly reduced by domestic investment booms, but was particularly high in 1871, 1888–90 and 1909–11.63 Britain was not the only European country to export capital – considerable sums went abroad from France and Germany. They were not quite at the scale of British investments, however, but still very large by modern standards (see Table 14.2), and they mainly went to different countries from British exports, notably central Europe and Russia. The majority of the capital exported from Britain during this period was channelled to the temperate regions of recent settlement and around 70 per cent of it was used to finance infrastructure. Less than a fifth went directly to agricultural, mining and manufacturing activities, although the proportion did increase in the last quarter of the century.64 The focus of overseas investment consequently was to open up temperate areas of the world to meet the large demand for primary products generated by Western industrialisation. Of the £4.1 billion invested in foreign securities issued in London from 1865 to 1914, a third went to South America and Australasia and a further third to North America.65 Foreign investment occurred in two ways. A small proportion of funds was used to purchase the share issues of British firms that owned and managed foreign operations. The vast majority, however, was invested in loan debentures/stock issued in London and to a lesser extent abroad, largely by foreign governments, other institutions whose loans received government guarantees and railway companies. The share of lending to non-government bodies grew substantially to reach 60 per cent of the total in the 1905–14 period.66 Institutional specialisation existed in overseas new issues. Loans to noncolonial governments were floated through well-established merchant banks 354 Industrial and commercial chang

such as Rothschilds and Barings. Within the Empire, self-governing colonies’ loans were handled by the Bank of England and the London and Westminster Bank; while the issues of the dependent Crown colonies and protectorates were initiated by the Crown Agents, a quasi-government body under the supervision of the Colonial Office. Private sector loans were generally dealt with by, amongst others, the newer merchant banks, which tended to specialise in issues for particular areas or purposes. J. P. Morgan, for example, concentrated on US railroads and, later, industrial flotations. Despite such specialisation, competition still existed – the joint stock banks, for example, increased their share from virtually nothing in the 1870s to 17 per cent of all overseas issues between 1910 and 1914.67 The principal influence on the export of capital was the return achieved relative to investments in Britain – when overseas investments were more profitable, capital flowed abroad. Edelstein has estimated that, between 1870 and 1913, the average risk-adjusted returns on overseas investments were almost a quarter greater than on domestic ones (5.72 per cent overseas to 4.6 per cent domestic). Arguments that either the City or British investors had an irrational bias towards the international over the domestic economy seem misplaced in face of such evidence. The surplus of savings over investment in the UK, instead, was directed to the opportunities offered by the opening up of the resource-rich areas of new European settlement, in what was an approximately integrated world capital market.68 British investments, therefore, had roughly to match returns overseas, and the scale of the export of capital indicated that diminishing returns were being experienced by investments in Britain. Financial services and the City 355 Table 14.2 Net foreign investment as a percentage of domestic savings, 1850–1913 UK Germany France 1850–4 12.3 – 20.1 1855–9 30.2 – 21.6 1860–4 21.5 1.4 24.8 1865–9 32.2 3.4 25.9 1870–4 38.0 7.3 29.0 1875–9 16.2 13.1 18.7 1880–4 33.2 18.3 –1.1 1885–9 46.5 19.3 11.3 1890–4 35.3 12.6 10.0 1895–9 20.7 11.5 23.0 1900–4 11.2 9.0 16.1 1905–9 42.7 7.6 22.0 1910–13 53.3 7.3 12.5 Source: O’Rourke and Williamson, 1999, 209

Insurance Insurance had evolved well before the nineteenth century but expansion was considerable after 1800.69 The history of insurance in the City requires its subdivision into several types: marine, fire and life. Marine insurance and Lloyds Marine insurance had developed out of London’s role as a port. Both vessels and cargoes were initially insured by shipping agents and shipping brokers, who then began to specialise in providing insurance alone. After meeting at the Royal Exchange and later in a room in Cornhill, underwriters finally settled in Edward Lloyd’s coffee house in Tower Street. Lloyds gradually provided services that its clientele would otherwise have been unable to afford individually, such as the provision of shipping news and experienced clerical staff, in a classic instance of agglomeration economies. For much of the eighteenth and early nineteenth century Lloyds underwriters prospered. The 1720 Bubble Act gave Lloyds and two chartered companies, the Royal Exchange Assurance and London Assurance, a monopoly of the insurance of ships and goods at sea. Lloyds prospered at the expense of the other two because the latter charged rates 20–30 per cent higher, limited their cover to £10,000 on any one ship and were reluctant to insure cross-risks – such as voyages taken between two ports outside the UK. By 1810, the two assurance companies possessed only 4 per cent of marine business.70 Prosperity faltered at the end of the Napoleonic Wars. The marine insurance market contracted and rates fell by 75 per cent due to the disappearance of war risks. Then, in 1824, Lloyds lost its monopoly and this led to new joint stock companies being formed, such as the Alliance and Indemnity. These new firms soon captured part of the London business and, more importantly, the growing insurance needs of northern ports, such as Liverpool and Glasgow. The result was a rapid reduction in underwriters from a peak of 2,000 in 1800 to only 189 in 1849.71 Lloyds responded to the increased competition in four ways. First, it turned to the international shipping market, which because of the growth of world trade was undergoing rapid expansion. Clients were offered highly competitive rates, foreigners were admitted as members, and a network of overseas brokers – generally merchants and shippers – was established. Such was the success of this strategy that others followed their lead and, by 1900, two-thirds of world marine insurance was handled in Britain, half by Lloyds and most of the remainder by other City institutions. Lloyds, secondly, moved into fire reinsurance. Reinsurance involves underwriters taking the risk of policies for a share of the premium. This could not be done prior to 1865 because of imposition of fire insurance duty and the Inland Revenue would not recognise Lloyds as an agent for 356 Industrial and commercial chang

its collection.72 With the duty abolished, non-proportional reinsurance was developed, whereby risks were pooled across policies. In doing this, underwriters agreed to pay claims in excess of an agreed figure in return for a percentage of all the premiums received by the original insurer, without concerning themselves with the detail of every policy. As the large fire insurance companies were reluctant to allow rival firms to participate in their policies and non-proportional reinsurance reduced their costs, Lloyds’ share of the business grew rapidly. The third initiative was to develop new lines of insurance. A number of underwriters began to cover against burglary, loss of goods in transit and motor and aviation accidents. In the 1900s, these lines became the main businesses of several underwriters, who reinsured their risks with marine counterparts. The fourth change was organisational. With the Lloyds Act 1871, it became an incorporated society – a legal entity with its own rules and self-governing constitution.73 New members were required to provide securities, while insolvency, bankruptcy or a conviction for fraud were automatically followed by expulsion. To fund and spread the risks of new ventures, individual underwriters were superseded by syndicates. These comprised an active member and a number of others, called ‘names’, who pledged their wealth as security for the insurance granted, for a share of the premium. The result of these developments was that by 1913 around 20 per cent of premium income came from non-marine insurance and membership had risen again to 621.74 Life insurance Stimulated by the 1799 exemption of premiums from tax, life insurance underwent rapid expansion in the early nineteenth century. By 1806, London contained eight life offices and between 1806 and 1839 a further 100 were opened, though 32 of them failed. They either concentrated solely on life policies or additionally transacted fire and marine business. The number of policies held by each firm was relatively small. Sun Life (1810) in the 1830s, for example, sold 200–250 new policies a year; even as late as 1841 it only issued 478. At first, the policies came in two forms: an assurance payable on the death of the life insured or an endowment payable at the end of the agreed period provided the person was still alive. Later, in the 1840s, endowment insurance policies appeared, which combined these two elements. Companies also began to offer bonuses on policies.75 During the second half of the century, life insurance extended its market to include the middle and the upper working classes, who used life policies to fund retirement at a time when private pension schemes were rare.76 Underwriting became a more orderly and predictable business due to advances in actuarial practice and legislation requiring companies to furnish accounts and actuarial returns. Financial services and the City 35

London’s lead in the industry, however, was gradually challenged by provincial firms, particularly those based in Edinburgh and Norwich. In earlier years, the size of the market for life insurance in the capital had made the London firms unassailable, but improvements in communications meant that the whole UK market could be served from one location. The pull of the City was thereby reduced because insurance companies’ long-term investments in land mortgages and government stock did not require them to be close to a financial market. With the advent of the international telegraph, international business was made feasible. Sun Life, for example, appointed agents in Spain, Hamburg, Belgium and Baden in the late 1880s and early 1890s, transacted business in the Near East through branches of the Imperial Ottoman bank, and established a separate company in India in 1891. Firms developed new products as market opportunities opened. Railway accidents were covered from the 1840s and, in the 1890s, bicycling injuries and occupational hazards. Business in the latter grew particularly after the 1901 Workman’s Compensation Act with its obligations on employers over injuries at work. In 1900, Sun Life introduced a monthly premium scheme aimed at artisans and a non-medical policy whereby it provided life insurance without a medical examination.77 Fire insurance Fire insurance dated from the Great Fire in the seventeenth century, which led to the formation of a number of firms. By 1800, the capital contained seven fire offices, the largest of which were the Sun, the Phoenix and the Royal Exchange, with market shares of respectively 34, 22 and 16 per cent. The City’s early lead in the industry, however, was slowly challenged by provincial firms as industrialisation had generated as fire risks many factories and warehouses in the North. By the 1860s, two of the largest fire insurers were based in Liverpool, with London covering only 56 per cent of the fire risks insured in Britain, as compared to 66 per cent in the 1830s and 90 per cent in 1800.78 Fire companies developed overseas business much earlier than their life counterparts. In the 1820s and 1830s, several companies appointed agents in Germany and France and, from the 1850s, there was a movement into other countries, particularly in North America. Provincial companies also developed overseas business, so that by 1888 a fifth of all the fire insurance in the US was in British hands. Consolidation again increased the role of London. By 1850, the Phoenix had taken over thirteen companies, the largest being Protector Fire, which had 7 per cent of the fire market; Sun Insurance had merged with twelve firms; and the Alliance had bought out three other smaller ones.79 358 Industrial and commercial chang

Investment portfolio diversification From the 1870s, British insurance companies began to extend the areas in which they invested their funds. At mid-century, most firms wished to obtain a combination of liquidity and high yields and so bought a mixture of land mortgages and government stock. Land mortgages gave a high return but were illiquid, and government stock provided low yields but could easily be sold. As returns in agriculture collapsed with the onset of competition from world markets, this strategy had to be reassessed. Investments were made, instead, in overseas mortgages and in non-government and foreign government securities. By 1913, 56 per cent of life insurance assets were in securities, as compared to 34 per cent in 1870, and only 1 per cent was in UK government stock. The new investment strategy required far more skill and expertise than its predecessor. This encouraged more provincial companies to move to the City in order to be close to the money market.80 Commercial trade The nineteenth-century City contained thriving businesses in commercial trade and also some manufacturing enterprises – the two would often merge together under one proprietor. Overall, according to the 1891 census, such enterprises constituted up to two-thirds of the firms operating in the City. They included manufacturing chemists and 435 commercial brokers dealing in such commodities as tea, cotton and ivory. Textile and clothing businesses – merchants, warehouses and manufacturers – added another 652 firms. There were 207 ‘makers’ of a wide variety of goods including chronometers and revolving-shutters; and 602 manufacturers making things as un-City-like as sausage machines, springs and sheep dips. A further 2,461 merchants could be added dealing in a wide variety of goods.81 The list is as long as it is varied and illustrates the dangers of simply seeing the City as a place for high finance. Commercial activities can be split into four sectors – physical trade, office trade, futures trade and ship management. Physical trade involved goods moved through the port. Given the continued importance of the nearby wharves and the warehouses behind them, and the difficulty of working in the enclosed docks, a City location continued to be the obvious and most proximate place for such firms to locate. Major changes occurred in physical trade from the 1850s. The port and its merchants lost business, particularly in bulky commodities, to its northern rivals; while its re-export trade was affected by the growth of European ports, such as Amsterdam. The telegraph and steamship further undermined the merchants’ traditional role because they permitted direct trade between consumers and producers. The response of the merchant community was to concentrate on the import and re-export of high-value goods, such as platinum, diamonds, furs, etc., where transport costs were of less importance Financial services and the City 35

than marketing and specialised knowledge. They also became involved in new products – rubber, petroleum and manufactures – and new markets such as Latin America. To improve their competitive advantage, they began to employ foreigners for their knowledge and contacts, and to specialise in particular goods, markets or countries of supply. Their success attracted foreign merchants to the City – for example, Germans, who specialised in the sugar and tea trades, and Greeks, who concentrated on shipping and grain. Office trade was associated with the movement of goods that never physically passed through London. The business grew rapidly in the second half of the century because the telegraph made available good supply-anddemand information. This enabled produce to be sold world-wide on the basis of newly formed world prices. Linked by telegraph with most major countries and with unparalleled expertise in products and markets, London merchants soon began to dominate. A City location was important in this activity in order to take advantage of the communications facilities, expertise and information available there. The success of existing traders attracted others to the City from both within the UK and overseas. As business expanded, there was also increasing specialisation in particular markets or products. To gain further agglomeration economies, those concentrating on particular sectors began to congregate – Mincing Lane, for instance, became the haunt of firms dealing in coffee, tea, sugar and spices. Specialised markets then developed, such as the Metal Exchange, dealing in tin, copper and lead; the Baltic Exchange, concentrating on shiploads of grain for international sale; the Corn Exchange, handling smaller grain consignments for domestic sale; and the London Commercial Sale Rooms, covering a variety of produce. Similar growth was experienced in futures trade, in which commodity contracts are traded in advance of their completion. The telegraph reduced the uncertainties of this type of trading, so firms wishing to ensure regular supplies at known prices began to buy goods in the forward market. Risks, however, were still high. Purchasers of commodities could be left with supplies that they did not want at prices above the prevailing rate; whilst sellers could face sudden surges in demand for goods that they had already sold at relatively low prices. There consequently developed markets in the contracts themselves in which there was no expectation of final delivery of the physical product by the parties involved; rather they facilitated the spreading of the risks away from those actually involved in the physical trades. Other refinements occurred. Purchasers of contracts for future delivery, for example, often took out reverse contracts to sell the same amount of goods bought in the buy contract in order to hedge their risks. Losses on the latter, if the price of the commodity fell, were therefore offset by a corresponding rise in the value of the sell contract and vice versa. As with office trade, various official futures markets were established – in corn in 1878 and coffee and sugar in 1888. Finally, ship management also underwent considerable change during the second half of the century. The telegraph removed much of the autonomy 360 Industrial and commercial chang

of ships’ captains, with decisions on journey time, return cargoes and other ships’ matters increasingly made in the UK. Simultaneously, the expansion of world trade encouraged many firms to specialise in particular types of ship, cargo or route. There was a drift of shipping management firms from other parts of Britain to the City, because it provided access to a world-wide communication system and proximity to those operating in the physical and office trades. They were followed by ship owners and managers from other countries – in particular, from Germany and Scandinavia. The redevelopment of the City The decline in the City’s resident population accelerated from mid-century onwards. From 130,000 in 1851, it fell to 112,000 in 1861, and the outmigration accelerated so that only 27,000 were left by the turn of the century.82 Some residents were lured by the attractions of the suburbs; while many others had to make way for the new offices and warehouses that arose throughout the Square Mile. The ancient characteristics of the City were lost in the throng of new commerce and transportation. It has been estimated that four-fifths of the City’s buildings standing in 1905 were not there fifty years before. Only 7 per cent remained in use as residences by 1911.83 The exceptions to the transformation, though few, had a surprising impact in keeping the district more domestic and ‘London’ in style than would otherwise have been the case. This is particularly true of the many small churches, splendidly sustained by ancient City charities; a handful of public buildings and monuments; and the old street pattern behind the new broad thoroughfares cut through by the Corporation and the Metropolitan Board of Works. The two decades between 1857 and 1877 were a time of active new building with headquarters erected in an opulent manner for banks, insurance companies and firms whose business spread across the UK. Equally grand new stations opened up to ferry workforces from suburban home to office and back again. Office rents rose rapidly towards the end of the century – by 60 per cent between 1887 and 1910, according to Turvey’s calculations.84 Such rent rises stimulated a boom to an extent that severe overbuilding occurred. One result was that the Edwardian nature of the City survived for decades afterwards. Property companies started to appear from the 1860s to supply firms’ office and warehousing needs, though most buildings continued to be owned directly by occupiers themselves. Lifts began to be introduced, but the City, like the rest of Europe, shunned the new, steel-framed, high-rise office building which were developed in Chicago in the 1890s and quickly diffused throughout North America. The few steel-framed buildings that were built failed to pierce the skyline and were disguised in heavy masonry casings. Building regulations helped to maintain a uniform height, though it is unlikely that the rules would have remained the same if large numbers of enterprises had wanted high-rise structures. Financial services and the City 36

The first lifts were water-powered, thanks to the London Hydraulic Company. (At the time of writing, such a lift still existed in St Pancras Chambers.) Water under pressure also powered theatre machinery and cranes and had other industrial uses, such as hat presses. What was eventually a 187-mile network of high-pressure pipes ran throughout the central areas and the East End, fed by five pumping stations spread along the Thames and the Regent’s Canal. In 1895, the London Hydraulic Company provided 221 passenger lifts and over 500 goods lifts and cranes in the City.85 The high number for goods indicates the importance of warehousing as a City land use. The London Hydraulic Company itself provided a Victorian technology that was soon to be overtaken by electricity, though it survived until 1971. Founded a hundred years before, it was given a statutory monopoly over its role at its inception – like the earlier water and gas monopolies but unlike the electricity and telephone companies that were to follow. Activities in the City as they expanded from their earlier roots, or developed as new parts of the City economy, were highly clustered. The tiny area of the City thus itself became divided into specialised districts of financial and commercial activity. This highlights the importance, even at the centre, of tight clustering and illustrates the dual agglomeration benefits for many urban activities of being part of an industrial district and, at the same time, located to share in the benefits of a large urban area as a whole. The pull of centrality led to high land values in the Square Mile, so that only activities that gained the most profit from being there survived. The high rents and external economies, as well as the nature of the service activities involved, meant that most of the businesses were small in size, with over 11,000 recorded in the City in 1901. The 673 acres of the City became a goldmine for the Corporation of London, as well as for many of the owners of the firms active there. The average rateable value of an acre of City property was estimated to be around fifteen times more than that in the rest of the capital. This rate base was tenaciously kept for the Corporation’s own expenditures against threats of redistribution from the rest of the capital and Parliament; although a judicious use of philanthropy brought several London parks, Epping Forest and some other non-City-based activities into its fold. City charities were also encouraged by the Corporation to be generous outside of the Square Mile. The scale of the rise in City land values can be glimpsed in the growth in rateable values, which increased 161 per cent between 1861 and 1881 and by another 40 per cent between 1881 and 1901. The rise in property values benefited the seventy-six traditional Livery Companies, whose membership in 1880 had dropped to 9,000 but whose property was worth a total of £15 million. Their annual trust and corporate income made them some of the richest and most influential institutions in the capital. By 1900, the Companies’ annual income was £600,000, with a third devoted to charitable or trust purposes.86