Abstract

This paper examines the emergence of two competing London bank business models during the last quarter of the eighteenth-century, and draws out some implications for how the banking system manufactured additional supplies of money during the early stages of the Industrial Revolution.

To the best of my knowledge this is the first time such forensic accounting analysis has been done for continuous years across a complete sample of London banks with surviving records for the period 1780 to 1832. Using this data, I extract a taxonomy of the balance sheet compositions of their assets and liabilities. I use this to infer a vertical typology of two contrasting business models labelled the ‘Goldsmith’ and the ‘Discounter’; and analyse their respective revenue and cost dynamics. I use the business model typology to examine the different incentive effects driving the banks’ response to Britain’s decision to come off the gold standard in 1797 (the ‘Restriction’). While I do not claim the sample is stratified, triangulation with a vital Bank of England document strongly supports the sample’s robustness.

The findings stand in contrast to the previous understanding of what was the typical London bank in this period. This paper can be viewed as both a sequel to Temin and Voth’s (2013) account of the emergence of the goldsmith banks during the earlier eighteenth-century, and a refutation of Temin and Voth (2005) that proposed Hoares & Co.’s goldsmith bank business model as sufficient for evaluating the micro-economic evidence of the role of banking and credit in the early Industrial Revolution. The findings have a bearing upon the debates over credit rationing and the “crowding out” of private sector investment during the Napoleonic Wars, but can also help situate the institutional context surrounding the intellectual history of monetary theory as it evolved from the classical writings of Hume and Smith (both topics being the subject of further papers).