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Time machine: Recurring risks in banking

10 February, 2020Ouida Taaffe

Ouida Taaffe looks at some early issues of the Journal of the Institute of Bankers where many of the same talking points in banking and finance that concerned readers, are still an issue today.

Historic-picture-of-the-Bank-of-England

Banking is not usually associated with tension and excitement – for good reason. In Three Men in a Boat, for example, which was published in 1889, the narrator says, “George goes to sleep at a bank from ten to four each day, except Saturdays, when they wake him up and put him outside at two.”

George was based on George Wingrave who rose to become a senior manager at Barclays.

Banking aims to be boring because it is about managing risk. But what is often underestimated is how often banks and their clients have to tackle the same risks in different forms.

Recurring risks in banking

The Journal of the Institute of Bankers was founded in 1879, the same year as the Institute itself. A look inside shows that some issues in financial services – and the need for society to discuss and tackle them – never go away.

One of the first papers the journal published was On ancient systems of weight, by Barclay V Head (January 1880). It sounds arcane and, in some respects, it is.

Head was assistant keeper of the coins at the British Museum and a corresponding member of the Imperial German Archaeological Institute.

At the time, Heinrich Schliemann was still in the process of excavating what was thought to be the site of Troy. A lot of golden treasure had been found there. The gold standard was in use.

But the article is not really about ancient civilisations, as the Journal’s report of the discussion that followed its publication shows.

One of the discussants, a Mr Cazalet, argued:

“It is my unshaken belief that the different governments of Europe will find it necessary before long to come to a definite arrangement for a bi-metallic international currency. The times are not, at present, propitious for such a change.

“It would involve the earnest desire of all governments to maintain peace, whereas every government in Europe is arming to the teeth.”

Just as now, unilateral decisions by a jurisdiction could have painful consequences for trade partners.

International finances

Another participant, Mr Langley, noted, “Hitherto, up to 1876, all the balances of trade due by silver-using countries to this country – and all the balances due by this country to silver-using countries – were settled through the instrumentality of France.

“If a merchant in London owed silver to a house in India, France was the source by which it was mainly supplied... It is the suspension of the law for the unlimited coinage of silver in France that has caused the disorganisation of the whole Asiatic trade...all trade with the East is falling into absolute gambling.”

He went on to worry that the US would cease silver coinage – which it did, but not until 1964 – and called for some “international agency to settle this question”.

This is still a work in progress.

The issues of the journal for 1879 and 1880 also make clear how important international affairs were to the work of the Institute – as they still are.

In May 1880, for example, the journal looked at “some points of difference between the English system of law and that prevailing on the continent regarding ‘negotiable securities’”.

The article calls for “a uniform system of law and practice, universally recognised in Europe...because these negotiable instruments are the carriers of the accumulated capital...the ultimate resources of families, the reserve to fall back upon in the hour of need.”

That particular discussion still sounds familiar today. Undertakings for the Collective Investment in Transferable Securities (UCITS) anyone? Or banking union?

Fintech

But surely banks themselves have changed so much that the small institutions of the late 19th century have nothing in common with the IT-heavy behemoths of today?

Not so. Greater efficiency through the use of computing was very much on the minds of 19th century bankers.

The article in volume ix, 1888, by Edwin Guthrie, The development of the art of numeration, for example, calls for decimalisation.

“In every direction, the advantage of such a reform would be simply immeasurable,” it enthuses.

Decimalisation came to the UK in 1971.

Guthrie also brought some exhibits with him, including part of the original difference engine made by Charles Babbage and a circular calculating machine with detached reckoners that “will work the four fundamental rules of arithmetic, its range in multiplication being up to a product of 20 figures…

“It will multiply together two factors, and, at the same time, add them to, or subtract them from, a third…square root can be worked on the machine, but the operator must insert each digit of the divisor...”

More than 130 years later, calculating machines in banks are infinitely more powerful than anything Guthrie hoped for.

However, the lesson from the Journal of the Institute of Bankers is that the problems that business people, and the firms that help them, face will constantly recur. In 140 years’ time, there may not be banks, but there will almost certainly still be banking – as well as discussions about how to do it best.

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