Banking during the first industrial revolution

The Development of Banking from the first Industrial Revolution

During the first industrial revolution, the?banking industry also changed simultaneously with its systems and procedures along with the increased financial need of risk-taking entrepreneurs. There were three levels of banks that were in existence in 1750 but limited in number. The Central Bank of England was established in 1694 promoted by William of Orange to fund wars and had become a ?foreign exchange storing foreign country's gold. The first traditional ‘start date’ for the Industrial revolution, paper money, and commercial bills were in wide use in England, though gold and silver were used for big for major transactions and copper for daily trading.?In 1708 it was given the monopoly on Joint Stock Banking (where there’s more than 1 shareholder) to try and make it more powerful, and other banks were limited in size and resources. Joint-stock was declared illegal by the Bubble Act of 1720, a reaction to the great losses of the collapse of the South Sea Bubble.

A second tier was created by less than thirty Private Banks, though few in number growing. Most of their customers were merchants and industrialists. There were too the rural/local banks having presence in a local area, and in number 12 in ?1760.

Contrarily private banks were increasing in status and business, and some specialization was occurring organically in London.

The Role of Entrepreneurs in the Industrial Revolution

Malthus termed entrepreneurs the ‘shock troops, a ?group of individuals whose investment helped spread the first industrial revolution which was located mainly in a center?for industrial growth. These consisted middle class and well-educated?a substantial number of entrepreneurs from non-conformist religions. They believed in a ?feeling and to avoid being challenged, to organize and succeed, even if they were different in size from major industrialists to small-scale businesses. They trusted money as a tool of self-improvement, and success and some were able to buy into the landowning elite with their profits.

These entrepreneurs were termed capitalists, financiers, works managers, merchants, and salesmen. But due to the growth of business and the nature of enterprise evolved, their role changed. ?The 1st ?half of the industrial revolution was individuality control on the companies, but over a period of time, the emergence of stakeholders called shareholders and joint-stock companies which led to new management which met the challenge with specialized positions.

Sources of Finance

As the revolution grew and more prospects presented themselves, the demand for more capital increased. While technology costs were coming down, the infrastructure demands of large factories or?roads?and railways were high, and most industrial businesses needed funds to start up and get started.

Entrepreneurs had several sources of finance. The domestic system, when it was still in operation, allowed for capital to be raised as it had no infrastructure costs and they could reduce or expand their workforce rapidly. Merchants provided some circulated capital, as did aristocrats, who had money from land and estates and were keen to make more money by assisting others. They could provide land, capital, and infrastructure. Banks could provide short-term loans, but had been accused of holding the industry back by the legislation on liability and joint-stock. Families could provide money, and were always a trusted source, who funded key entrepreneurs like the Darbys (who pushed forward?Iron production.)

The Development of the Banking System

By 1800 private banks were 70 but less than local banks rapidly doubled from 1775 to 1800. Most of these were formed mainly by businessmen just to add banking into their portfolios and satisfy demand. During the?Napoleonic Wars, the banks came under pressure from panicking customers making cash withdrawals, and the government stepped in to restrict withdrawals to just paper notes, no gold. By 1825 the depression which followed the wars had caused many banks to fail, leading to a financial panic. The government now repealed the Bubble Act and allowed joint-stock, but with unlimited liability.

The Banking Act of 1826 restricted the issuing of notes and many banks had issued their own encouraging the formation of joint-stock companies. In 1837 new laws gave joint-stock companies the ability to acquire limited liability, and in 1855 and 58 these laws were extended, with banks and insurance now given limited liability which was a financial incentive for investment. By the end of the nineteenth century, many local banks had merged to take benefit of the evolving legal situation.

Why the Banking System Developed

Even before 1750, Britain had a matured money economy with gold, copper, and notes. Several factors changed in order to make growth in wealth and business opportunities increased the need for both for money to be deposited, and a source of loans for buildings, equipment and crucially circulating capital for everyday running. Specialist banks with knowledge of certain industries and areas thus grew up to take full advantage of this situation. Banks could also make a profit by keeping a cash reserve and lending out sums to gain interest, and there were many people interested in profits.

Did Banks Fail Industry?

In contrast to the US and Germany where banks met the long-term loans requirement of an evolving industry, ?Britons preferred short-term needs which was a cause of failing industry as a result. However, America and Germany started at a higher level, and needed much more money than Britain where banks weren’t required for long-term loans, but instead for short-term ones to cover small shortfalls. British entrepreneurs were doubtful of banks preferred older methods of finance for start-up costs. Banks evolved along with British industry and were only a part of the funding, in contrast, America and Germany were creating industrialization comparatively at an evolved level.

The role is performed by financial institutions in a special manner as per the circumstances of time and place. Political, economic,?geographic, etc -factors affect their atmosphere. It made ?'national styles' in the financial structures of different nations, especially to political and other historical situations which were inimitable to each nation. The other aspect of the character of the economic demand for their services would ill shape the character of the institutions. Specifically, the demands expected from the financial sector by an economy undergoing rapid industrialization were different from those in both?industrialized economies and agrarian, pre-industrial economies, consequently,??changes in financial structure and function. Due to the manner in which financial institutions work their functions constituted an important determinant of the rate and direction of economic growth.?

Since the population was mostly sparse who engaged in subsistence agriculture and the tribal. London intensified a campaign to eradicate it after the Jacobite rebellion of 1745-46. As per its general economic backwardness, gold and silver had almost completely disappeared from the monetary circulation of the country, drained off to England and abroad to pay for the sizable surplus of imports over exports. After Less than a century, Scotland stood at the forefront of the world's industrial nations, along with its sister England. It had flourishing textile and metallurgical industries and was the acknowledged leader in the strategic new technology of engineering. Its booming export surplus enabled Scottish investors to contribute to the development of new lands throughout the world. Scotland's transformation from a backward household economy to a leading industrial economy was even more spectacular than the contemporary 'industrial revolution' in England.

?As admired, poverty in ??Scotland had three major advantages for entering the modem era. It had an excellent educational system, from parish primary schools along with its four old universities. Secondly, after 1707 Scottish merchants and manufacturers had access to the markets of the British Empire. Access to markets alone does not assure that a nation will develop industrially (Ireland had access to the same markets, but a very different economic history) but already by 1750 the merchants of Glasgow especially had taken a leading position in the Virginia tobacco trade and consequently played an important role in the West Indian trade.

?Finally, Scotland had a very advanced banking system. The Bank of Scotland, chartered by the Scottish parliament in 1695, but could not meet any strong demands for financial services by a developing economy. Partly an imitation of the Bank of England, founded in the previous year (the principal promoter of which was an aScot), it epitomized the frail hope that the bank might create the prosperity which was sadly lacking in the disordered state of the country. For almost half a century, however, it had to struggle desperately -and by means of dubious tactics-merely to survive. The Royal Bank of Scotland, founded in 1727, responded even less to economic demands; it owed its existence purely and simply to the political influence of the Scottish allies of the BANKS AND INDUSTRIALIZATION 119 ruling government in London. The British Linen Company, chartered in 1747 in an effort to assist the vacillating linen industry, did not tum exclusively to banking until the 1760s; but it constituted the third of the three great Scottish joint-stock banks enjoying limited liability. These were by no means the only banking institutions in Scotland, but others were responded more directly to existing economic demands.

?The merchants of Glasgow, Aberdeen, Dundee, and several smaller cities, who felt their interests unduly neglected by the great Edinburgh banks, soon erected banking enterprises of their own. Although unable to obtain charters of incorporation from the parliament in London, they nevertheless benefited from the fact that the charter of the Bank of England, which limited other note-issuing banks in England to partnerships of not more than six persons, did not apply to Scotland. Legally the banks took the form of extended partnerships, in some cases with several scores of partners; functionally, they scarcely differed from the old chartered banks except that the partners lacked limited liability.

?The first of these new hybrid banks appeared in 1749; their numbers grew steadily thereafter for more than fifty years, reaching a maximum of 42 in 1810. Moreover, another significant financial innovation-most of the banks, both those with charters and those without, opened branch offices. In spite of some fluctuation as a result of bankruptcy, voluntary liquidation, and amalgamation, the total number of bank offices amounted to 75 in the year 1800 and to more than 400 in the 1840s. (There were in addition a number of merchant bankers who did not issue banknotes). In the latter years the ratio of bank offices to population-men, women, and children-was one to 6,500, a ratio approached at that time in no other country with exception of the United States. Apart from pure numbers and density (with the resultant competition among the banks), the Scottish banking system had several distinctive characteristics which made it unusually conducive to rapid economic development.

?Almost all of the banks issued their own banknotes, which circulated widely among the population and thus made up for the shortage of species. Its significance might be seen in some cases on record of fishermen on the west coast of Scotland who refused to accept gold from the vessels sent up from England to buy their catch, insisting on Scottish banknotes instead. For a few years during the 'small note mania' the banks and many private individuals issued 'notes of hand' for sums as little as one shilling Scots (equal to one penny sterling); but in 1765, at the request of the larger and better-established banks, the parliament in London passed a law fixing one pound 120 RONDO CAMERON sterling as the smallest denomination of banknote legally permissible.

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?In spite of this limitation, the Scots' reliance on banknotes saved the nation, as Adam Smith correctly pointed out/ thousands of pounds annually in the unnecessary expense of maintaining a large stock of sterile metals. Another way in which the Scottish banks popularized the banking habit and encouraged thrift was by nurturing deposits by the general public. Although attempts were made in earlier years, the practice did not definitely become established until the 1790s. Thereafter the growth of deposits was rapid, and the banks' deposit liabilities soon exceeded their note issues. Unlike the contemporary practice in other countries, the Scottish banks welcomed small depositors, paying interest on deposits of as little as ten pounds sterling. In no other country until well into the twentieth century was banking so thoroughly democratized. Perhaps the most effective device employed by the Scottish banks, from the point of view of rapid economic development, was their method of granting loans.

?Contrary to the old view, ?which held that banks should lend only on the security of goods in process or existence, and for periods of not more than ninety days, the Scottish banks did not hesitate to lend for unspecified periods without any tangible securities. Bills of exchange, the primary assets of many contemporary banks in other countries, were the least important earning ‘assets of the Scottish banks. Of greater importance were loans on personal bonds. These bonds, almost similar to modern mortgages, were accepted in exchange for long-term loans. The proceeds were used most often for agricultural improvement or for investment in such public utilities as bridges, ?canals, and roads, et cetera.

??The largest volume of lending, however, took place by means of the 'cash credit' system. Under this system, an enterprising merchant or manufacturer could obtain a 'running cash' (credit) against his own signature, along with those of two, three, or more (depending upon the size of the credit) of his friends as security. The agreement with the bank stipulated a maximum amount which the customer might borrow (similar to a modern overdraft); he was then free to withdraw, in the form of the bank's own notes, any sums not exceeding in total the agreed limit. He paid interest only on the amount actually borrowed and repaid the principal at such times and in such amounts as his circumstances permitted. No fixed terms were set for the loans, but the close contact of banker and borrower made possible by the esteem of branches

It made an example that ?David Dale attained the resources to build up the famous New Lanark cotton mill. The banks held in check the potential danger of inflation through unrestricted note issues by means of regular and frequent note exchanges. Thus no single bank could get far out of line with the general development of the economy without calling into play corrective action initiated by its competitors. Financial crises and bank failures did occur, of course; sometimes the precipitating factor occurred outside the Scottish economy, sometimes within as a result of imprudent or fraudulent activity among the banks themselves. But in this respect Scotland differed in no way from other countries in similar stages of development; its record of crises and failures was certainly no worse than that of its contemporaries. In analyzing the reasons for the absence of chronic inflationary pressures recognition must be granted to the fact that the vast majority of bankers' loans went for genuinely productive purposes. Thus, although waves of investment facilitated by bank credit might generate temporary inflationary pressures, the fructification of the investments after a period of months or perhaps even years produced new streams of goods and services to offset the nominal increase in the means of payment.

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In this connection, it is important to note that the absence of a sovereign central government in Scotland was undoubtedly a blessing in disguise. At no time did the Scottish banks become engines of inflation to feed the ravenous appetite of a government for war finance or other unproductive expenditure. The Bank Act of 1845 extended to Scotland many of the provisions of the Act of 1844, which applied only to England. Although it left intact some of the distinctive features of the Scottish system, such as the separate Scottish note issues, it tended, in general, to assimilate Scottish banking practice to that of England. For this and other reasons, Scottish economic history after the mid-nineteenth century loses its distinctive character and merges into that of Britain.

??France in 1815, unlike Scotland two generations earlier, was a relatively rich country. The minor material damage suffered in the last years of the Napoleonic wars was quickly regained. France had the largest population in Western Europe, fertile soils, and a high level of technical skill. The institutional and legal framework of the French economy had been recently reconstructed on more modern lines by the reforms of the Revolutionary and Napoleonic regimes. AI9 Scand. Econ. Hut. Rev. 122 RONDO CAMERON though the industrial progress of France was considerable in the next half-century some economic historians had been willing to recognize undoubtedly that it might had been even more rapid. That it was not, especially before 1850, must be attributed in part to the character of its banking system. The central feature of the French banking structure was the Bank of France, chartered by Napoleon in 1800 as an aid to government finance and to oblige his supporters among the commercial and financial circles of the capital.

?Almost from the beginning (1803), it had a legal monopoly of note issues in Paris, but its banknotes scarcely circulated beyond the city's financial center. Between 1817 and 1839 merchants in such provincial centers as Rouen, Lyons, Marseilles, and Bordeaux founded nine local banks of issue, modeled on the Bank of France but much smaller. Eventually, the success of these institutions aroused the greediness of the Paris bank; beginning in 1836 it undertook to create branch local monopolies of note issue) in other provincial cities in order to forestall new competitors, and at the same time persuaded the government to forbid the creation of new, independent local banks. In the crisis year of 1848, all of the banks of issue suspended specie payments and, with government authorization, the Bank of France forcibly absorbed its erstwhile competitors. Since then its monopoly of issue stretched to the whole of France.

Grouped around the Bank, owing to the majority of its shares, and participating with the government in its direction stood the small group of powerful private merchant bankers known as La Haute Banque Parisienne. As private bankers these individuals did not issue banknotes but, using their own resources and funds deposited with them (usually by means of long-term contractual arrangements), they financed the movement of goods in international and other long-distance commerce, and performed other banking services. Increasingly during the course of the century, they developed the art of investment banking. This took several forms, ranging from direct participation in the ownership of industrial enterprises to underwriting issues of government and corporate securities. Although this financial aristocracy was quite limited in number, lesser figures both in Paris and the provinces paralleled its functions on a smaller scale at the local level. These private bankers constituted, in fact, the greater part of the banking system of France throughout the first half of the nineteenth century and well into the second. It is most unfortunate, therefore, that we do not know more about them both individually and collectively. It is impossible even to make a precise estimate of their number since many were ephemeral and frequently combined banking with other kinds of enterprise. Nevertheless, since they did not issue banknotes or engage in other types of money creation. Before 1848 the government received a number of petitions for the establishment of joint-stock banks (under French law, societies anonymous) both in Paris and the provinces. Some of these projects involved note issues, but many did not. Even so, except for the few local banks established on its model before 1840, the Bank of France persuaded the government to withhold its authorization. This formidable opposition resulted in the abandonment of most of the projects, but a few hardy entrepreneurs such as Jacques Laffitte adopted the commanding form of the enterprise (limited partnerships, with or without shares to bearer), which did not require governmental authorization. The Bank of France did, however, prevent them from using the word 'bank' in their names, which accounts fn the financial annals of nineteenth-century France.

More importantly, the terms of the Bank's monopoly prohibited them from issuing banknotes payable to bearers on demand, whereas the commanding form of enterprise limited the amount of capital they could raise and made them more vulnerable to financial crises. All that survived until 1848 went down in the great crisis of that year; the Bank of France, even with its existence and privileges guaranteed by the government, made no effort to save them. In addition to jealously guarding and extending its monopoly of note issue, the Bank of France pursued a number of other restrictive practices. By virtue of its privileged position, it could avoid all operations, even the potentially most profitable, that involved or seemed to involve more than a bare minimum of risk. An obvious example of the latter policy was its fixed rule for the eligibility of commercial paper for rediscount: every bill of exchange presented had to carry the signatures of three merchants or bankers 'of notable solvency,' have a term of 90 days at most (and less in times of stringency), and be payable in Paris. Another example of its restrictive policies. Until 1847 the smallest denomination of its notaas 500 francs.

?In the latter year, under the combined .pressure of the Paris Chamber of Commerce and the government, it began to issue notes for 200 francs, and during the suspension of specie payments in 1848 it issued still smaller notes, it began to retire the small notes even before the resumption of specie payments. As a result except during the suspension of cash payments, ?its notes circulated only among wealthy financiers and wholesale merchants.?Prior to 1848 the average value of discounts cs, far too high for ordinary merchants. (It should be remembered that the per capita annual income of Frenchmen during this period was between 200 and 300 francs). Even in Paris, the majority of inhabitants had never even seen a banknote. ?The combination of notes of the large denomination with the rarity of issuing agencies meant that the French economy had to rely very largely on the precious metals, mainly ?silver, since gold was undervalued at the mint, ?for its means of payment -and that during a period of worldwide secular deflation. It is estimated that in the 1830s and 1840 the stock of money metals in France amounted to not less than 3.5 billion francs, , they imply that at no time before 1848 did banknotes constitute as much as one-tenth of the money supply. (The maximum note issue before 1848 was 311 million francs in December 1846). Another contemporary observer stated that in France 90 percent of all payments were made in silver, 3 percent in gold, and 7 percent in banknotes; but in England at the same time, the proportions were 30 percent gold, 5 percent silver, and 65 percent in banknotes and cheques. In Scotland, the proportion of gold and silver in total payments may have been as low as 10 percent. Apart from the important factor of the inelasticity of such a money supply, the very expense of maintaining it amounted to a considerable drain on the potentialities for economic growth.

??France owned almost one-third of the total European stock of money metals or about five times as much as England in spite of the more highly developed commerce and industry of the latter. Assume for the moment that France had managed with the same proportion of precious metals in its money supply as England and that the excess had been invested in industry or agriculture yielding a real return of only 5 percent per annum: with a total money supply of 3.5 billion francs and a national income of approximately 10 billion, the annual addition to real income would have been on the order of 1 to 1 percent an increase in the annual growth rate of between 50 and 100 percent!

?The major drawbacks of the French banking system in the half of the nineteenth century were: 1) inadequate numbers and distribution of banking offices (the majority of departments were complete without banks of issue); 2) an insufficient variety of specialized financial institutions (I have made no mention of the particular deficiencies of agricultural credit, and agriculture was by far the most important form of economic activity) ; 3) artificial and unnecessary restrictions on the total volume of credit, commercial as well as industrial and agricultural; 4) an inelastic and unnecessarily expensive money supply. Finally, it should be emphasized that remedies for these deficiencies were to be found not only in some never-never land of perfect foresight, rationality, and disinterestedness; on the contrary, many specific proposals for reform were made throughout the period but ran head-on into the entrenched monopoly position of the Bank of France and the conservatism and inflexibility of government officials.

?After 1849 the inflow of gold from California and Australia and the resulting worldwide inflation compensated to some degree for the inelastic currency and the restrictions on note issue. (Nevertheless, the unnecessary expense continued; according to the most reliable estimate, France alone among the major gold-using countries absorbed more than 40 percent of the total increase in the world's monetary gold between 1849 and 1871. Even more importantly, the new political regime of Napoleon III broke for a time-the stranglehold of the Bank of France on the country's financial system. The Bank retained its monopoly of note issue (and even strengthened its legal position as a result of the affair of the Bank of Savoy in the 1860s), but the state obliged it to reduce the minimum denomination of its notes to 100 francs in 1850 and to 50 francs in 1865. The law of 1857 which renewed the Bank's privilege imposed upon it the obligation to establish at least one branch in every department (not finally achieved until 1880), and in other ways, the government forced the Bank to liberalize its credit provisions. Most important of all, perhaps, the state-chartered a number of new joint-stock financial institutions and in 1860 repealed the requirement of special government authorization for joint-stock companies.

?The shortest-lived but in many ways the most important of the new financial institutions was the Credit Mobilier, founded in 1852. It specialized in the formation and finance of new industrial enterprises and public utilities, especially railways, at a time when the demand for such facilities was particularly great. Its early demise in 1867 may be attributed to a variety of factors: imperfections in its own structure, unwise management policies, and especially the enmity of the Bank of France and the old-line private bankers. But its basic principles were imitated and adapted throughout Europe, where they made especially potent contributions to industrialization and economic development in Germany and the Scandinavian countries." The sister institution of the Credit Mobilier was the Credit Foncier, intended originally to supply the want of agricultural credit. Although deflected from its original course by political considerations, it also made important contributions to economic growth both in France and abroad and was widely imitated throughout the world. Even now it is one of the most powerful financial institutions in France. The majority of the largest and most important commercial banks in France also date from the period of the Second Empire. Several of them began with the avowed purpose of 'naturalizing' in France the English system of deposit banking. Actually, in the beginning all of the new joint stock banks engaged in 'mixed' banking; that is, both commercial banking and investment banking such as that pioneered by the Credit Mobilier. Nevertheless, by 1872 the system of deposit banking was sufficiently developed to enable the principal Paris banks to establish a charnbre de compensation modeled on the London Clearing House. Finally, most of the banks inaugurated a policy of establishing branches throughout the country, so that at last all of France could have access to some form of bank credit. But It would be na?ve to give credit the prosperity of the Second Empire and the rapidity of the industrial transformation which it witnessed were due solely to financial reforms. Many other factors contributed to the same end. Moreover, in spite of the reforms many deficiencies in the financial structure remained. Nevertheless, the correlation between the rate of economic growth and changes in the financial structure and mechanisms before and after 1848 is striking, and cannot be laid to mere coincidence.

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?The banking system of England, the first industrial nation, lies somewhere near the center of the spectrum. The Bank of England, established in 1694, pursued a policy very similar to that of the Bank of France (or vice versa). Until 1826 the terms of its charter prohibited other corporations or partnerships of more than six persons from issuing banknotes payable on demand anywhere in England and Wales. This provision was widely interpreted as a general prohibition on joint-stock banking. In 1826 the Bank's monopoly of issue was limited to an area within a 65 mile radius of London, and joint-stock banks were specifically authorized. The Bank Charter Act of 1844, however, prohibited any new banks of issue and provided for the eventual extension of the Bank of England's monopoly to the entire country. Until its privilege was attacked in 1826, therefore, the Bank paid little heed to developments in the country at large. Its principal business was with the government, most of the remainder with the private bankers of London who soon gave up any attempt to compete with it in the matter of note issue. Under these circumstances its operations involved little risk or undue exertion on the part of the directors, and produced an eminently satisfactory rate of profit. Meanwhile the growth of industry in the country created a demand for banking services which the existing structure would not or could not supply. To fill this vacuum nature responded with the phenomenon known as 'country banking' : Individuals and small partnerships supplied the demand of entrepreneurs for mercantile and industrial credit and the public demand for an enlarged monetary circulation by issuing their own notes to bearer, payable on demand. From no more than a dozen in 1750 the number of these country banks (though located in Birmingham, Manchester, or Newcastle, they were still 'country banks' in the eyes of ~e metropolis) grew to more than 300 in 1797 and to almost 800 during the Napolionic Wars, when the suspension of specie payments by the Bank of England (1797-1821) facilitated entry into banking at the same time that war induced industrial growth stimulated demand. During this period the country banks supplied about half the total circulation of banknotes," as well as providing the main source of credit for the rapidly growing industries. The country banks thus made a vital contribution to England's industrial revolution. The system nevertheless had serious disadvantages. The clause in the charter of the Bank of England limiting other banks to partnerships of not more than six persons ensured the small size of the latter. It has been estimated that?Country Banking in the Industrial Revolution, ?the 'typical' equity capital of a country bank at the beginning of the nineteenth century was about ￡10,000. As late as 1825 the total capital engaged in country banks amounted to about six million pounds, or less than half that of the Bank of England alone. Moreover, bank managers were frequently inexperienced in the banking business; many of the country banks functioned as mere adjuncts of single industrial enterprises, to which they made the greater part of their loans. The combination of limited resources and inexperienced managers resulted in a highly unstable system. Bank failures were frequent and, owing to the nationwide networks set up by London bankers, who acted as City agents for country correspondents, these failures had a tendency to develop into general financial panics

. Between 1790 and 1826 334 bank failures were recorded, 60 of them in a single year from July 1825 to June 1826. The panic of 1825 persuaded the government that banking reform was overdue. It accordingly enacted the law of 1826, which attempted to strengthen the country banks by limiting the monopoly of the Bank of England on a geographic basis and by authorizing joint-stock banks. In the beginning the response was sluggish; the first seven years of the law saw the formation of only 28 joint-stock banks (including conversions of private banks), although with their branches they opened a total of 79 bank offices. A further law of 1833 specifically authorized joint-stock banks in London (where the ambiguity of the earlier law had left the matter in doubt) provided they did not issue banknotes. Thereafter the growth of this form of banking was extremely rapid; by 1844 more than 140 new joint-stock banks had been created which, with branches, gave a total of 600 offices. The law of 1826 also brought the Bank of England out of its lethargy. Faced with the possibility of strong competition by the new provincial joint-stock issuing banks, it began to establish branches in the provinces and attempted to deter, by both persuasion and coercion, the new banks from exercising their right of issue. On the legislative front it succeeded, in the Bank Charter Act of 1844, in halting the extension of rival note issues and provided for their eventual absorption by itself. Although widely hailed at the time and subsequently as a triumph of 'sound banking policy', the law of 1844 was in reality a step backward. Its restrictive influence was partly offset, however, by the growth of demand deposits subject to cheque, popularized by the London joint-stock banks in particular, which supplemented and eventually overshadowed both coin and banknotes as ordinary means of payment. More fundamentally, perhaps, England had already completed the most difficult phase in the transition to an industrial economy. The case of Belgium was ?especially interesting because of the unique features of its banking system. In 1822, when Belgium still formed part of the Kingdom of the United Netherlands, King William I chartered the Societe Generale pour favoriser l'industrie nationale des Pays-Bas. His avowed purpose in doing so was to contribute to the industrial development of the southern (Belgian) provinces of the country, and he endowed the bank with the largest possible powers. According to its statutes it could accept and create deposits, issue banknotes, discount commercial paper, make advances on securities, and purchase, hold, and sell bills of exchange, securities, specie, merchandise, and real property. In spite of these extensive theoretical capabilities, however, the bank in its early years scarcely responded to the hopes or expectations of its founder, owing chiefly to the inexperience and conservatism of its directors. Not until some years after the Belgian revolution of 1830 did it undertake a vigorous policy of monetary expansion and industrial promotion. Meanwhile the new government authorized the creation of other financial institutions, in part for purely political reasons. These included two local banks of issue in Liege and Ghent and another bank of national importance with powers similar to those of the Societe Generale, the Banque de Belgique. For fifteen years, from 1835 to 1850, the rivalry of the Societe Generale and the Banque de Belgique dominated the financial history of Belgium. This was also the period which witnessed Belgium's 'take-off' into sustained industrial growth. Both banks made use of their extensive capabilities to engage in ordinary commercial banking and also to pioneer the techniques of corporate investment banking subsequently popularized on a wider European stage by the French Credit Mobilier. In less than four years, 1835-38, the Societe Generale promoted 31 new enterprises with a total capital of more than 100 million francs (its own capital amounted to slightly more than 30 million francs) including metallurgical plants, mining companies, and a variety of other industrial, commercial, and financial establishments. The Banque de Belgique, though substantially smaller with a capital of only 20 million francs, was scarcely less active. During the same period it created 24 new industrial and financial concerns with a total capital of 54 million francs. The rapidity and success of Belgian industrialization was due in large measure to the direct promotional activities of those two banks. The Belgian financial system had its shortcomings also, however. The combination of commercial and investment banking, the feverish pace of their active rivalry of the two placed continual strains on their liquidity.

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?A short financial crisis at the end of 1838 actually forced the Banque de Belgique to close its doors for a few weeks and brought its rival close to the same fate. In the more general crisis of 1848 both banks suspended specie payments and resorted to issues of inconvertible currency with the authorization of the government. As a result of that episode the government relieved both of their right of issue after the crisis had passed, and created the new Banque Nationale de Belgique with a national monopoly of note issue. Thereafter both banks continued on their way, engaging in both commercial and investment banking. The Banque de Belgique eventually succumbed during the crisis of 1873, but the Societe Generale ranks today as one of the world's great privately awned financial institutions.

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Germany presents an instructive example of the way in which banks may contribute to industrialization, and also of the way in which political authorities may restrain or distort the development of the financial system. Prior to 1848 the German financial system was quite backward. Joint-stock banks of issue existed only in Bavaria (1834), Saxony (1838), and Prussia (1847) i 6 even these were limited in function and conservative in outlook. The monetary circulation consisted to an even 19"eater degree than in France of gold and silver coins, of which there was a great variety owing to the numerous issuing agencies and the use of foreign monies. Private bankers were numerous, but in fact they functioned mainly as commission merchants and money changers. In the Rhineland, the most progressive area economically, merchants and industrialists resorted on a large scale to bills of exchange as a means of payment (not merely as credit instruments) in default of other media, as their counterparts in Lancashire and several provincial French cities had done in similar circumstances. Although Rhenish merchants and financiers made repeated requests to Berlin for joint-stock banks, with and without the right of issue, the conservative Junker bureaucracy turned deaf ears until 1848. The result was a very slow and painful beginning of industrialization, financed in large measure by foreign capital. Gradually, after 1848, the governments of the various German states relaxed their restrictive policies. The first significant developments took place in the smaller states such as Hesse-Darmstadt, where the sovereign authorized the Bank fiir Handel und Industrie, a Credit Mobilier type bank more commonly known as the Darmstadter, in 1853, and the Bank fiir Siiddeutschland, a bank of issue, in 1855. Partly as a matter of defense or retaliation the larger states, Prussia in ? Rondo Cameron, 'Founding the Bank of Darmstadt', Explorations in d suit. Even though they made a stiff ?distinction between banks of issue and other banking activities, and kept tight controls over the former. One result of this was to force the non-issuing banks to develop new techniques for financing large scale industry which Soon began to produce spectacular results. After the unification of the empire in 1871 and the adoption of a more liberal, uniform commercial code, which gave the bank’s ?an unusual degree of freedom, German industry made extraordinarily rapid strides. By the end of the century not only was German industry the most highly developed on the Continent, but the German banking system was also the most powerful and fully integrated.?Though ?simple in principle, but important,??the nature of bank liabilities imposes rather rigid limitations on this method of contributing to the formation of industrial capital. Banks are normally required to pay their note holders and/or depositors on demand; thus they must maintain a high degree of liquidity, which prevents them from tying up more than a small proportion of their assets in long term facility.?Belgium and Germany indirect methods by which banks have contributed to industrial capital formation. Naturally, commercial banks grant short-term credit for working capital, thereby permitting industrialists to devote more of their own resources to fixed investment. In industries with high rates of profit and re-investment-typical of new industries in periods of rapid industrialization-the contribution made in this fashion can be considerable. If all profits are reinvested, the growth rate of the firm (which is also the rate of profit on invested capital) will be 50 per cent per annum if it is completely self-financing, but 100 per cent-doubled-if it resorts to bank credit to supply its need for working capital. over, as specialization increases in the course of industrialization it produces a 'layering' effect in the demand for money transactions, as commodities move from farms to factories to final consumers. In highly developed economies with long chains of production and marketing the total volume of money transactions exceeds the total national income several times. e use of money substitutes has been far more important. Prior to the twentieth century people thought of money almost exclusively in terms of gold and silver, the supply of which is relatively inelastic. Because of ?increases in supply did take place..

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Merchants and financiers start practising the use of money substitutes such as bills of exchange and?bank deposits in 12th ?century in the economically advanced?people. The dawn ?of commercial banking with note issues and demand deposits in the 18th ?and 19th ?centuries helped the use of money substitutes common?on a large scale among?entire populations, after ?the rise and spread of modem industry, first in England and Scotland, then on the continent of Western Europe and in North America. Even after that in agrarian, pre-industrial societies the flow of resources through the economy tends to be the same year after year: the same crops are planted in the same proportions, the same subsidiary activities take place, the whole process of social change moves at a snail's pace. Even in a modem industrialized economy, it was ?to be a similarity in the flow of resources from year to year, with entrepreneurs and suppliers of the factors of production made ?marginal adjustments to changes in tastes and technology.

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An ?industrializing economy ?described as ?one in which there must be large sectoral shifts in the flow of resources. The empirical data shown the most important shifts have been from agriculture and other primary occupations to secondary and tertiary industries, but there have also been important shifts within the sectors as stagnant or declining industries (handicrafts, for example) pave the ?way to newer, mechanized ones; even within the primary sector more efficient market oriented agricultural production changed ?traditional subsistence production. The?payment facilitates made ?the ?economy more progressive and more ?buoyant and responsive, more liable ?to changes in the shape of resource deployment. Great historic inflations induced ?by continued increases in the supply of money metals had produced such effects in some cases. But the stimulus which general inflation provides to economic change is also uncertain in its consequences, and appeared ?by grave social ills. The increase in the means of payment through the use of bank credit or money substitutes, however, by placing newly created purchasing power directly in the hands of individuals most likely to use it for productive purposes, has acted far more directly flow of ?resources, and with less unwanted side effects. It is true , bank credit and money substitutes can also produce general inflation if they are not used for productive purposes, and use in wars or to finance corrupt or inefficient governments; it might boomerang but that is a separate topic.

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CONCLUSION

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We may conclude that ?banks have, historically, not only part of ?the process of industrialization in various ways but also ?facilitated capital accumulation by serving as intermediaries between lenders and investors and providing other financial services, but they have also contributed to it both directly and indirectly by means of their own lending activities.?It is proven that ?different circumstances of time and place call for different systems and functions.