London Money Market in the 19th Century

The average investor in mid-Victorian England had fewer choices than his twentieth-century counterpart. If he wanted low-risk and moderate returns, he could tell his solicitor to put his money into national debt shares or into real estate rents and mortgages. The debt was made up of a variety of bond and stock issues supporting specific government projects, together with the 3 percent consolidated bank annuities ("consols") available since 1751. Rents and mortgages in the rapidly expanding London building estates were discounted by small and medium-size builders to obtain capital for further speculative constructions Bills of exchange, first used as negotiable paper and then as credit instruments, were riskier. They were sold along with railway and other construction stock issues at a highly variable discount rate, usually for short terms of less than three months. Returns on domestic railway investments varied enormously, but averaged just under 8 percent in the 1840s, better than most other domestic opportunities. Overseas railways built by British contractors also matched high dividends with high risk, except the Indian railway system, which was guaranteed by British authorities. Finally, one could speculate on loans to foreign governments, on imported commodities such as tea or cotton, or on gold and other precious metals.

Until 1856, most business investments involved the assumption of unlimited liability by everyone in a company, a condition that tended to restrict the supply of venture capital. A company could incorporate, after 1844, simply by registering at the Board of Trade; in doing so, however, its prospectus was made accountable to government supervision and its operations opened to public scrutiny. Most commercial, industrial, and construction enterprises were still operated as partnerships or sole proprietorships, and, in the case of the Thames Embankment, such contractors often had trouble raising capital for large-scale projects. Nevertheless, the railway boom got the public used to investing and reassured individuals that the failure of a company did not usually mean the loss of one's entire assets.

During the nineteenth century, the Bank of England only gradually built up its institutional control over the London money market. Until the 1840s, it competed with other private banks, both in the capital and in the provinces, and sometimes speculated as irresponsibly as any other investor. But the bank had the only sizable gold reserves and came to monopolize government stock issues and short-term loans. Along with the East India Company and a few large insurance firms, it administered the financing of the national debt, subscribing its share through competitive bidding and then reselling it in small amounts to ordinary investors at a premium. The smaller City banks, private and independent, acted as agents for provincial investors, rural estate mortgage funds with private industrial and business capital. After the Joint-Stock Act of 1833, the latter type of banking proliferated and led to speculative surges and crises. In the troubled economic climate of the late 18305, Robert Peel and other business-oriented political leaders saw the need for tighter credit control. The Bank Act of 1844 retained the decentralized system of private provincial banks but allowed the Bank of England to compete with them in the speculative loan market, on the theory that it would stabilize rates of interest.

Unfortunately, the bank's competition had exactly the opposite effect. Coupled with the railway mania of the 1840s, it led to a stock market panic and financial crash in 1847. Thereafter, the bank withdrew from the speculative market, fixing instead a minimum discount rate that, along with a statutory level of gold reserves for currency issues, controlled to some extent the expansion and contraction of credit.

This information has been provided by the kind permission of George P. Landow, Dean, University Scholars Programme, Shaw Professor of English and Digital Culture, National University of Singapore