The Origins of Modern Banking in Spain

The Role of Monetary Plurality

Carles Sudrià, Yolanda Blasco-Martel

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429849169
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

This book analyses the formation of the Spanish banking system. It provides a general overview of European financial systems in operation during the mid-nineteenth century, followed by a detailed analysis of the economic and institutional changes that gave rise to a new form of banking in Spain.

The chapters analyse changes on banking regulation; study the social origin of banks' promoters; investigate the economic results of banks; and evaluate the interaction between banks and the economy as a whole. Finally, the causes, extent and consequences of monetary plurality in Spain and its European context are discussed. As such, this book covers the gap that exists in the Spanish banking historiography. Until now only the Bank of Spain and its predecessors had been adequately examined. As the Bank of Spain acted mostly as the state's financial agent, we know very little about private-sector financing. This text provides data and analysis for a more comprehensive view of early Spanish financial development in a comparative European framework. The Origins of Modern Banking in Spain should be considered essential reading for financial history students and scholars, as well as anybody interested in longview approaches to modern financial development.

1 Money and banking in Europe, 1700–1890

The formation of new financial systems

Carles Sudrià

The formation of an efficient financial system is a fundamental element in the process by which contemporary capitalist societies have taken shape. Neither industrialisation nor modern economic development would be conceivable without the establishment of mechanisms to mobilise resources and provide means of payment to keep up with increased trade and financing requirements.

As part of this process, the spread of fiat money plays a key role. To become effective, the extraordinary increase in trade from rising production and growing specialisation required an equivalent quantity of means of payment. Until the mid-nineteenth century, the available means of payment were limited to metallic money, basically gold and silver coins. Bills of exchange, entries in bankers’ account books and other formulas facilitated remote payment and reduced the use of physical currency, but they did not replace or eliminate the need for new means of transaction. The supply of precious metals was, by definition, random. An increase in their demand and price could not be expected to spur an increase in their production. Given this state of affairs, there was a real possibility that an intense process of deflation would occur, with knock-on effects on productive activity and on the very capacity to exchange products.

This is the scenario in which it is necessary to locate the appearance of the banknote, of paper money in general and of demand deposits and current accounts. They were all instruments that could replace metallic money at large scale and become primary methods of payment. The introduction of an innovation of this scope, however, took time and effort. While paper money issued directly by the state, such as French assignats and Spanish vales reales, did have some importance at some particular periods, banknotes and current accounts were at the forefront of the new developments.

Understandably, the introduction and potential consequences of this new type of money immediately caught the attention of people concerned with economic issues, both from an analytical standpoint and from a merely practical one. The issue was also a matter of concern for the authorities, who wondered about the potential effects of the innovation and about how advisable it would be to intervene somehow in its spread. At this point, it is worthwhile looking briefly at contemporary observers’ perceptions of the advantages and disadvantages of paper money and at the terms of the debate sparked by the subject.

1.1. The economics of the banknote: monopoly or plurality, a debate

Adam Smith was one of the first to call attention to the importance of banknotes and current accounts and to study their effects on the economy as a whole. In the years that Smith was at work on his famous essay, the prevailing banking system in Scotland was one in which most banks issued banknotes. Smith was a staunch supporter of the freedom to issue banknotes, though he did not deny the need to introduce some restrictions:

The gold and silver money which circulates in any country … is … all dead stock … a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable [s] the country to convert a great part of this dead stock into active and productive stock; … [It would be] a sort of waggon-way through the air; [that] enables the country to convert, as it were, a great part of its highways into good pastures and corn fields, and thereby to increase very considerably the annual produce of its land and labour.

(Smith, 1789, I, pp. 483–484)

Smith argued that over-circulation could not occur under normal circumstances because banknotes that were not needed for transactions would be returned to the banks of issue. However, he did acknowledge that the United Kingdom had witnessed episodes of over-circulation in the recent past that had spurred massive outflows of gold. In Smith’s view, the reason for the anomaly lay in the glut of credit granted by the banks to merchants, which was associated with an excessive issue of banknotes. This might have been because of the banks’ own rashness or a result of fraudulent practices on the part of merchants, who created and discounted bills of exchange that did not correspond to real transactions.

Smith did not propose regulatory measures to prevent episodes of an over-supply of means of payments. He did, however, give unambiguous support to prohibiting the issue of small-denomination banknotes that could be used by small merchants and individuals:

Where the issuing of bank notes for such very small sums is allowed and commonly practiced, many mean people are both enabled and encouraged to become bankers. A person whose promissory note for five pounds, or even for twenty shillings, would be rejected by everybody, will get it to be received without scruple when it is issued for so small a sum as a sixpence… . It were better, perhaps, that no bank notes were issued in any part of the kingdom for a smaller sum than five pounds. Paper money would then, probably, confine itself, in every part of the kingdom, to the circulation between the different dealers.

(Smith, 1789, I, pp. 486–488)

In the wake of Smith’s initial assessment, however, the debate over paper money, its forms and the consequences of its spread not only did not get settled, but it went on to become one of the chief topics of discussion among social thinkers in the late eighteenth and early nineteenth centuries. The terms of the debate have already been pulled together by other authors (Arnon, 2011; Rist and Boissieu, 2002 [1951]). Of interest here are those aspects that influenced the policies adopted by states on the issuing of paper money by banks.

The most important and internationally influential discussion on the topic took place in England in the 1820s and culminated in the passage of the so-called Peel Banking Act of 1844. The terms of the debate were not unrelated to the surrounding economic and social landscape. It must be remembered that in the period from 1797 to 1819 the inconvertibility of the pound remained in effect. That is, banknotes were forced tender. This obviously affected the Bank of England, but it also affected hundreds of smaller banks that issued notes. At various stages of the period, major bouts of price inflation and the attendant depreciation of banknotes with respect to their face value were one of the triggers of the debate, which was also spurred on by the lapsing of the privileges granted to the Bank of England.

While the discussions were much more wide-ranging in scope, the focus here will be on two specific questions: first, whether the state had a responsibility to ensure the convertibility of banknotes or whether it should refrain from doing so, regarding the matter as a private transaction; and second, whether it was advisable to concentrate banknote issue in a single bank or allow several banks to issue notes. A host of people took part and many arguments were put forward. The stances, however, essentially revolved around two schools of thought known as the Currency School and the Banking School. A third strand, originating from the Free Banking School, also played a small part.

The Currency School defended the principle that price fluctuations and inflows and outflows of gold bore a direct relationship to the amount of banknotes in circulation. When the amount was ‘excessive’, it caused prices to go up, leading to an external accounts deficit and eventually the outflow of gold abroad. The state’s introduction of a control mechanism on the issue of banknotes was, therefore, indispensable.

For the Banking School, this was a wrong approach. Under a system of fully convertible banknotes, excessive issuing was not possible. In any event, it would be temporary and have no effect because of the immediate return of unnecessary credits to the bank of issue and a corresponding reduction of banknotes in circulation. As for the inflows and outflows of gold, the Banking School attributed them to changes in international prices and took them to be circumstantial phenomena that market mechanisms would correct on their own. As a result, there was no need for any regulations and the issue of banknotes should remain in the banks’ hands.

The Free Banking School concurred with the latter position, but with one important caveat: banknotes in circulation would only adjust to existing demand with the necessary speed if there was competition in the issuing of banknotes. The Bank of England’s de facto monopoly was the main cause of the imbalances observed.

The legislation that was ultimately passed by the British parliament, which was called the Bank Charter Act of 1844 and known popularly as the Peel Banking Act, proved more in line with the arguments of the Currency School. The new law allowed existing banks of issue to continue, but it set total issue limits for each of them and prohibited the creation of new banks of issue. Practical and political reasons probably outweighed theoretical ones. Support for this suspicion can be found in the British parliament’s passage in subsequent months of legislation with a different orientation for Scotland and Ireland, where the overwhelming hegemony enjoyed by the Bank of England in its own territory did not apply.

In spite of its undeniable importance and theoretical value, the British debate took place against a very particular backdrop that differed from other European countries. The circumstances of the financial market in the British Isles were not the same as those on the continent, nor did the authorities and the citizens themselves have the same perception of the treatment that should be given to the commercial innovation of banknotes. Accordingly, the debate on the issue of paper money took on a different character in other European countries, where it lagged behind Britain.

It is impossible to follow the debates on the topic in every country, where they reflected the specific circumstances of each one. Accordingly, it is of particular interest to look at the content of a monumental survey undertaken by the French state in 1865, followed by the publication of its findings in 1867. The survey, entitled “Enquête sur les principes et les faits généraux qui régissent la circulation monétaire et fiduciaire”, was launched as a political response to complaints levelled at the Bank of France because of interest rate hikes at the time. The outcry against the Bank of France’s monopoly grew even more intense when the institution demanded and obtained the closure of the Bank of Savoy, which held the right to issue in the Duchy of Savoy, newly annexed by France in 1860.

Politicians, businesspeople and the leading experts in France and abroad were asked to complete an extensive questionnaire. The two sections of greatest interest here focused on the utility of fiat money and the conditions that should govern its issue. One of the survey’s basic reference points was the debate that had taken place in Great Brita...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• Acknowledgements
• Editors’ note
• Introduction
• 1 Money and banking in Europe, 1700–1890: the formation of new financial systems
• 2 Banking regulation and the emergence of provincial banks in Spain
• 3 Bourgeoisie and provincial banks: social origins of the new banking elite
• 4 A profitability approach to Spanish banks’ performance: earnings and assets
• 5 Provincial banks of issue and the Spanish economy: money and credit
• 6 The unexpected end of monetary plurality: a premature demise?
• 7 A final assessment: Spanish banking development in nineteenth-century Europe
• Index