BANKS

and

BANKERS.


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HISTORY


LOMBARD STREET

The word bank is derived from the Italian word banco, a bench erected in

the marketplace for the exchang e of money. (In Creek, on the other hand, a bank is still called a table.)


The first of these benches was supposed to have been established by Jews living in Lombardy around the year 808.


Much later, some left Italy and settled in Lombard Street, still the heart of London’s financial district. The mint in the Tower of London was in ancient times the only depository for merchants’ cash, until Charles 1 laid his hands upon the money and destroyed the credit of the mint in 1640.


The traders were driven to some other place of security for their gold to prevent their apprentices from absconding with it. In 1645 they consented to lodge it with the goldsmiths in Lombard Street, who were provided with strong chests for their own valuable wares. Thus was born the English banking system.


There are several reminders in English of the Italian origins of banking. The word bankrupt owes its origin to banuo rottn , because when a money-changer could not pay his way, his bench was broken. The use of the letters “L. s. d.” to denote English currency until very recently came from the precursor of Italian, the Latin words. Libra,. Solidus .and. Denarius.


Passbooks are so called because customers in the old days examined their own accounts regularly and allowed them to continue, or to pass. The word came from the Italian passare, which is still used to denote current money. In the records of Child’s Bank, going back three hundred years, the phrase appears at the end of many of several entries: “I allow, or pass, this account.”



Checks


In the early days of English banking, a deposit was recorded by putting a notch on a stick, which was split in half. The customer would take home one end and the bank keep the other. Money could only be withdrawn when the depositor matched his piece, called a bank stock, with the other half, which was called a check.


On the other hand, the great etymologist Walier Skeat connects the word “cheque” to the game of chess, which goes hack thousands of years. The squares of the game became known as “checkers,” and we retain the use of the word “exchequer” because of the chequered board, or cloth in patterns of chequers, which were originally helpful for computation.


Checkers were used in counting and reckoning, and Skeat believed that they implied an order for which we have a check, or siop, just as in the game of chess “checkmate” is derived from the Persian “Shah mat,” meaning “the king is dead.” The cheque then became a counterfoil, by which, if necessary, one could stop payment, referring not to the slip of paper given to someone, l)ut to the stub in the cheque-book, which is retained for such an eventuality.


The National Debt


The first European bank was probably the one established by the Republic of Venice in the twelfth century. Venice was the leading mercantile state at that time, but it was war and its concomitant evil—the income tax—that led to the introduction of a banking system. A levy was raised on the richest citizens, in return for which the republic undertook to pay an annual interest of 4 percent. The lenders established an office for the accounting and disbursement of this interest.


Eventually, as the interest on the national debt was always paid promptly, eveiy registered loan came to be considered productive capital and could be transferred for other loans. So, gradually, this office became a deposit bank; its chief depositor being the government of Venice. The demise of this venerable institution came with the French invasion of 1797, when in the words of a contemporary observer, “the freedom of the city and the independence of the state being lost, the guarantee, and consequently the credit, of this ancient bank vanished like a dream.


Saving England


The defeat of the Spanish Armada in the English Channel in 1588 is traditionally seen as the beginning of the rise of the British Empire and the decline of the Spanish.


But the real battle was fought a year earlier behind the scenes by an anonymous banker who came to the help of Queen Elizabeth. When the queen heard of the designs of Spain, she had no ships capable of opposing their fleet; it would take twelve months to build and ready those vessels that stood in various ports and docks . A banker who was well acquainted with the state of Spanish finances knew that their fleet had to be financed through bills drawn on the Bank of Genoa. Without the bills, the armada could not set sail. The financier as chronicled, then conceived the idea of buying up all the paper or bills that could be met with in every commercial town in Europe, and to deposit them in the bank of Genoa, that by his large remittances he might have the bank so in his power as to incapacitate it, whenever he chose, from giving any aid to the Spaniards. Being well aware that it only required those remittances be so long in Genoa until the season should obstruct the sailing of the fleet, he calculated that these exchange operations would cost about £40,000 sterliug, and he proposed to the queen to extricate her at this price from the dilemma. The proposal was accepted and carried into effect with so much secrecy that King Philip’s hands were tied, and he could not send out the fleet till the following year.


The Merchant Banker


Sir Thomas Gresham, who later founded the London Stock Exchange, originally had a store on Lombard Street. Over his door hung his crest, a grasshopper, by way of a sign. Gresham was both a banker and merchant. According to the nineteenth-century antiquarian John Timbs: A banker in early times pursued a very different trade from that which occupies the attention of the opulent and influential class so called at the present day. It is well known that the latter derive their profits from the employment of fluctuating sums of money deposited in their hands for convenience and safety by the public; and for the security of which, the respectability of the banker is a sufficient guarantee. But this is a refinement of comparatively recent introduction, with which our forefathers were wholly unacquainted. As late as the time of Swift, bankers gave and took a bond on receiving and lending money, and made their profit by obtaining a higher rate of interest, or usury, as it was called, on the latter operation than they allowed on the former. Ten or twelve percent was the  customary rate of interest during the reign of Queen Elizabeth; at which period, we mean no disrespect to the banker when we say that he united in his person the trades of the usurer, the pawnbroker, the money-scrivener, the goldsmith, arid the dealer in bullion. A German traveler, called Hentzncr, who visited England in 1593 says that he saw in Lombard Street “all sorts of gold and silver vessels exposed to sale, as well as ancient and modern coins, in such quantities as must surprise a man the first time he sees and considers them.”


Defaced


The bank of Amsterdam was founded in 1609 to assist the thriving commercial activity in that city. Amsterdam was then a perpetual fair that brought in coins from all over the world. But the gold and silver coins were often worn and defaced, losing as much as 10 or 15 percent of their face value. The merchants could never find enough new coins for their transactions, and the value of bills became variable to a great degree of fluctuation when the worn coins were weighed. It was to remedy this problem and to fix the par value of the currency that the merchants of Amsterdam established a bank on the model of that of Venice. Ironically, its first capital was formed with Spanish ducats, a silver coin that Spain had struck to finance its war against Holland, and which, as one writer put it, “the tide of commerce had caused to overflow in the very country which it was formed to overthrow.”


The Old Lady


The Bank of England was given a Royal Charter in 1694. It was the brainchild of William Paterson, who had tried and failed to establish a Bank of Scotland. Paterson, a grand visionary, was also the first with the idea of joining the Pacific and Atlantic oceans at the Isthmus of Darien, more than 200 years before the great Panama Canal was built.


The first governor of the bank was Sir George Houblon, whose house was conveniently built on the present site of the bank in Threadneedle Street. Sir George is remembered another way: the messengers still wear pink frock coats and scarlet waistcoats based on the liveries of his household.


The first deputy governor was Michael Godfrey, the man most intimately involved in formulating the l)laI~ with Paterson. Unfortunately, he was killed by a cannonball while inspecting a trench at Narnur, where he was seeking an interview with William of Orange. This incident was recalled by a later governor of the bank while touring France during World War I in the company of Lloyd George. When they were invited to visit the battlefield at Bethune, Lord Cunliffe was reported to have said to the Prime Minister, “When poor Godfrey fell at his King’s side they acclaimed him a hero, but if I die in your company, the comment may be less flattering.”



Scottish Peril


Just as the Jews, dispossessed of their country during two millennia, built a power base through commerce and finance, the Scots, too, after they lost independence, spread out all over the world.


Despite the fact that its founder was a Scotsman, the Bank of England later tended to exclude any Scots from its management, adopting perhaps the view of an anonymous Irishman who waxed indignant over the influence of the Scots in his own country, remarking that “if ever a Scotch plebeian succeeded in acquiring a fortune in China, he would end by becoming prime minister there; and if the Chinese emperor would let him go on, there would riot be a single ecclesiastical, civil or military situation in the whole empire that in the course of ten years would not be filled by Scotsmen.”


This recalls a story B. C. Forbes told almost 300 years later, about the Glasgow chamber of commerce sending one of its prominent members on a fact-finding tour of English factories, hoping that the Scots might benefit from their examples.


“Weel, what kind o’ lads did ye find the Englishers?” they asked him on his return.


“As I met only with the heids o’ businesses,” replied the emissary, “I didna meet ony o’ thim. They were a’ Scotsmen.”


Rocky Start


The exclusive firm of Coutts Company has served the banking needs of the British royal family since the eighteenth century . It began with James and Thomas, the Sons of an Edinburgh merchant, who founded the bank when they settled in London. After James’s death, Thomas put the stamp of his personality on this great institution. As an illustration of his character, there is a story of how he acquired and almost lost his first royal customer.


Thomas Coutts was entertaining fellow bankers at his house one evening when one of them related that a certain nobleman had applied to him for a loan of~30,000 and had been refused. Coutts said nothing, but after his guests left at ten o’clock, he took a stroll over to the noblemen’s house and left a message with his steward: “Tell his lordship that if he calls on me in the morning, he may have what he requires.”


On the following morning the nobleman went to the bank. Mr. Coutts received him with great politeness, and taking £31,000 notes from a drawer, presented them to his lordship, who was most agreeably surprised and asked: “What security am I to give you?”


I shall be satisfied with your lordship’s note of hand,” was the reply. This was instantly given.


Mr. Coutts’s generosity was not forgotten. A few months later, his lordship sold an estate and deposited £200,000 with Coutts. He recommended the bank to several members of the nobility and told George III of the helpful banker, whereupon the king opened a sizable account. However, when his majesty learned that Comitts had advanced the huge sum of £100,000 to help the parliamentary election campaign of Sir Francis Burdett, whom the king disliked, he closed his account and transferred this money to a local bank at Windsor. King George, whose financial judgment seemed to match his political acumen, subsequently lost much of that money when his Windsor Bank failed. And that is how Thomas Coutts received again the patent of Royal Banker.


The Napoleon of Finance


Gabriel Julien Uuvrard was the dominant French financier in the early part of the nineteenth century; following the French Revolution he was empowered to issue his own paper currency. During the reign of Napoleon, Ouvrard became the business partner of Charles IV of Spain, enjoying a monopoly of commerce with the Spanish possessions in America during the war with Great Britain. When Napoleon read this contract, he crumpled it in his hand, and admonished Ouvrard in the presence of the council of his ministers: “You have lowered royalty to the level of commerce.


Whereupon. M. Ouvrard, to the surprise of all present, respectfully but boldly replied: “Sire, commerce is the life-blood of states; sovereigns cannot do without commerce, but it can do very well without sovereigns.” Napoleon’s answer, if any, is not preserved. But Ouvrard had the last word anyway: after the emperor’s fall, he became known as the “Napoléon of finance.”


A Good Place to Make Money


At one time Ouvrard chose debtor’s jail rather than pay five million francs he owed a creditor. He lived like a prince, spending extravagant sums on food and his own lodgings in jail. Since the financier also held the post of the contractor-general, the government of France was anxious to avoid the scandal of having one of its own appointees in prison. But when M. de Villele, the finance minister, came to dinner expressly to ask him to pay his debt, the banker replied : “Parbleu, Monsieur, it is easy for you to suggest this, but I must serve five years here for the five millions I owe. I gain, therefore, by my imprisonment, one million francs a year. If you know of any speculation that is more lucrative and sure, 1 am not obstinately wedded to this—I’d pay and come out tomorrow.


The Bank Always Wins in the End


During one of the many Irish rebellions, some of the rebels decided to get even with a powerful banker against whom they had many grievances. This was in the days when banks issued demand notes that they were obliged to redeem with gold. So when the rebels decided to burn the banker’s notes, they forgot that they were actually destroying his debts, and that for every note that went into the flames, a corresponding value went into the banker’s pocket and out of their own. Which goes to show that the bank, like the casinos, usually wins, even if it is a Pyrrhic victory.


Xenophobia


Some believe that America’s chronically unbalanced trade with foreign nations is at least partly due to a lack of desire to trade abroad. The domestic market in the United States, the largest in the world, had for a long time satisfied most American manufacturers. The other reason is the kind of banks we have. As anyone knows who has tried to cash an out-of-town check or obtain foreign currency in New York or Los Angeles, the U.S. banking system is perhaps the most parochial and undeveloped among Western nations. Joseph Wechsberg, in his book about our merchant bankers, recalls visiting a prominent investment banker on Wall Street. On his desk, in beautiful leather binding, was a volume he had prepared with the title What I Know About Foreign Securities. He handed it to Wechsberg with a smile. Inside, all the pages were blank.


The Past Is But Prologue


Charles Il, the pleasure-loving monarch of England, had very little patience

for the details of running the country. Between pleasing his mistresses and rewarding his friends, there was not much money left to fight the Dutch, who were paying a visit with an armed flotilla. Wrote a later historian: The government had suffered a succession of humiliating disasters. The extravagance of the court had disipated all the means which Parliament had supplied for the purpose of carrying on offensive hostilities . It was determined only to wage defensive war; but even for defensive war the vast resources of England were found insufficient. The Dutch insulted the British coast, sailed up the Thames and carried their ravages to Chatham. The blaze of ships burning in the river could be seen in London; it was rumored that a foreign army had landed at Cravesend. The people, accustomed to the secure reign of Cromwell, were in utter consternation. The moneyed portion of the community were seized with panic. The country was in danger. London itself might be invaded. What security was there, then, for the money advanced to the government? The people flocked to their debtors; they demanded their deposits; and London now witnessed the first run upon the bankers. The fears of the people, however, proved fallacious, for the goldsmiths—as the bankers were then called—met all demands made upon them. Confidence was restored by a proclamation from the king, stating that the demands on the exchequer should be met as usual; and the run ceased.


Blood in the Streets


Sampson Gideon, a great Jewish banker in the eighteenth century, was the most famous financier of his day. Economic advisor to Sir Robert Walpole, the prime minister of England, he was known for his humor. Gideon’s shrewdness combined with experience gave rise to such comments as, “Never grant a life annuity to old women: they wither, but they never die.”


Gideon’s greatest coup was during the failed rebellion of Bonnie Prince Charlie in 1745. As the Pretender’s army approached London, the king and his government were trembling, and stock prices fell precipitously. Gideon unhesitatingly spent ever penny he had, mortgaged and borrowed to the hilt, until he bought. up more than half the stocks in the market.


When the Pretender retreated, the stocks rose, and Gideon made another fortune, illustrating the dictum (attributed to Bernard Baruch) that the best buy signal is blood actually running in the streets.


A Way to Deal with Panic


Bonnie Prince Charlie’s rebellion caused a financial panic in the City of London. As the Pretender marched from Scotland to Derby, there was a run on the Bank of England. The clerks evolved a dual strategy for facing the crisis. First, they worked to rule and paid out very slowly with the smallest coins available. Because of the amounts involved and the distractions caused by hysterical people waiting their turn, the tellers frequently were forced to check their calculations and start counting out the coins all over again. The directors of the bank were also smart enough to plant their own agents in the line, with instructions to immediately return the money that had just been withdrawn. By such means the panic of real customers was gradually reduced or turned into miserable weariness.


Post-Haste


Up to about 1775 almost anybody in England could start a bank, even if he did not have money: “Every grocer, draper, tailor and haberdasher who chose might flood the country with his ‘miserable rags.”’ Every country banker had a London agent who flooded tradespeople in the city with so many country banknotes that they became completely dis-credited. In the crisis of 1793, about 100 country banks stopped payment and 300 were seriously shaken. There was the story of Jonathan Backhouse, banker, driving from London to Darlington in a chaise full of gold to meet a threatened run on his hank in Darlington. One of the wheels came off the carriage, so Backhouse piled the gold at the back of the chaise, thus “balancing the cash” and made it into Darlington on three wheels. According to Maberly Phillips (in his History of Banks, Bankers and Banking), the threatened run was deliberately organized by Lord Darlington in retaliation for a disagreement.


The Panic of 1832


One of the more extraordinary panics in history caused a run on the Bank of England and was said to have been caused by placards appearing all over London with this instruction: “To stop the duke, go for gold.” The duke of Wellington was very unpopular at the time of the Reform Bill of 1832, and was considered leader of the gold guard. Rumor spread on May 14th that he had formed a cabinet. “The run upon the Bank of England for gold coin was incessant, that in a few hours upwards of half a million was carried off.” according to a contemporary historian. The graffiti were “the device of four gentlemen, two of whom were elected members of the reformed Parliament. Each put down twenty pounds, and the sum thus clubbed was expended in printing thousands of these terrible missives, which were eagerly circulated, and were speedily seen upon every wall in London. The effect was electric.


Main Street.


Although speculators and brokers are the most immediately affected in a market crash, the much wder tragedy of a financial crisis is felt on the Main Street. .This extract is from an anonymous New York merchant’s diary as he was going under during the Panic of 1857.


August 18th, 1857 – Refused discounts at bank. Couldn’t raise money to pay duties, and obliged to make over a valuable importation of goods. Cashier says come again next offering day.

 

21st – Went and saw matters ten times worse. Saw the bank president who told me I deserved to be “pinched “ for importing so heavily, and that I needn’t come there again for at least six weeks. Couldn’t discount a dollar. Concluded to call on B. and borrow a few thousands. Found a note on my desk from B. begging me to lend him some money, or he would break. Tried C. Same luck.


22nd –Pitched out at another bank. Customer in, wanting to see that fresh importation. Spent three hours trying to borrow enough to pay the duty. No success.


24th – Ohio Life & Trust Company failed. Tried to sell paper in the street at three percent per month. No buyers. Fortunate remittance from the West—know the post mark–Jones is a good fellow. Draft for $5,000----drawn on gthe hio Life & Trust Company!


25th – Loan called in. Begin to feel choky in the throat. No appetite. Tried to sell out my importation of dry goods at twenty per cent less. No body with any money to buy. Went home sick.


27th – Resolved to never put myself in the power of the banks again. Miserable institutions. Spent the whole day trying to borrow and barely escaped protest march. My own notes stuck in my face at three per cent per month. Overheard broker say: “You’re a gone man if you can’t take your own paper at that price.” Feel very much so, but got to keep a stiff upper lip.


28th – Four brokers failed. Times worse than in 1837. Feet sore with running about to raise money. Can’t collect a dollar from the country. Everybody out on the same business—all borrowers, no lenders. Desk full of bills receivable, perfectly useless. Wish I’d never seen a piece of dry goods. Would have been as easy as an old shoe if I had not imported. I had no business to build that new house; the old one was good enough. Ought to have been content with the moderate things, and lived on half the money. Store rent too high. Obliged to spread out too much on credit to pay expenses.


29th – Neighbor failed. Bank failed. Friends call to ask if the rumor of my failure be true . Air black with foul reports . Half past two P.M., account withdrawn, and— notes unpaid.


The rest is silence.


Perfect harmony


In later years Congressman Francis Cushman of Washington State used to dine out on how hungry he went during the panic and depression years of 1893 to 1895: “It was fortunate for me that I lived in Tacoma then, for Tacoma is on the seacoast, and on the seacoast there is always an abundance of clams. When the tide is out the table is set. I assure you that I ate clams and ate clams and ate clams until my stomach rose and fell in perfect harmony with the ebb and flow of the tide.


Shrug


George Washington Carver, the great agriculturist, lost his entire life savings during the Great Depression, due to the failure of an Alabama bank. “I guess somebody found a use for it,” the septuagenarian remarked philosophically, “‘cause I wasn’t using it myself.”


His Last Stand


When the Ohio Home State Savings failed in the early 1980s, its owner, Marvin Warner, unburdened himself. As Fortune quoted him: “I feel like

Custer being shot at from all sides. Maybe it’s because I’m flamboyant, maybe it’s because I’m a Democrat, maybe it’s because I was a bachelor for a long time, maybe it’s because I’m Jewish. . . . I have no idea.”


Failure of the bank or the consequent losses to thousands of individuals and businesses obviously had nothing to do with it.


SOURCE:

The Book of Business Anecdotes.

Copyright © 1988 by: Peter Hay (pgs. 16-26)


This 1993 edition is published by Wings Books,

distributed by: Outlet Book Company, Inc.,

a Random House Company,

40 Engelhard Avenue,

Avenel, New Jersey 07001



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