The Rise of Merchant Banking

Stanley Chapman

• Editorial: Routledge
• Año: 2013
• ISBN:
  9781135032456
• Edición: 1
• Categoría: Business
• Categoría: Business General

This is the first serious history of merchant banking, based on the archives of the leading houses and the records of their activities throughout the world. It combines scholarly insight with readability, and offers a totally new assessment of the origins of one of the most dynamic sectors of the City of London money market, of the British economy as a whole and of a major aspect of the growth of international business.

Dr Chapman has researched new material from the archives of Rothschilds, Barings, Kleinwort Benson and other leading houses together with a wide range of archives and published work in Europe, America and South Africa to trace the roots of British enterprise in financing international trade, exporting capital, floating companies, arbitrage, and other activities of the merchant banks.

While mindful of the subtleties of international financial connections, this book assumes no previous acquaintance with the jargon of banking, economics and sociology. It will therefore prove equally interesting to students of history, business and finance, and offers a 'good read' to anyone interested in the City of London and the international economy.

1 The Evolution of Merchant Roles in Eighteenth-Century Finance

It is well known that during the seventeenth and most of the eighteenth century international finance was centred on Amsterdam. The Dutch were then the carriers of international commerce and in conducting this business their commission merchants acquired increasing expertise in the finance of trade. By degrees British merchants learned to bypass Amsterdam, while the rise of the heavily protected British home industry gradually dispensed with several sorts of foreign imports, particularly of linens and paper. As competition between Dutch and British merchants intensified, it inevitably happened that those on the losing side found it easier to shift their accumulated capital into financial dealings. Consequently Amsterdam merchants became the first masters of the various financial techniques and developments which, in the course of the nineteenth century, became identified with the emergent profession of merchant banker. It will be helpful, at the opening of this book, to identify developments at the period they became familiar to most British merchants.¹

Eighteenth-Century Dutch Influences

Professor Charles Wilson, whose writings on Dutch trade and finance opened the subject up to British historians, explains that much of the trade to and from Amsterdam was conducted by commission merchants, that is agents who sought out customers but did not own the commodities in which they traded. This enabled them to trade on less capital and, by degrees, introduced them to shipping agency and acceptance credit, a most important development in the history of international trade. Acceptance credits worked in this way: during the eighteenth century it became an established practice for smaller merchants finding their way into international trade (such as many British merchants were doing at the time) to ask the established houses to endorse their trade bills so as to make them acceptable without question to foreign exporters, or to bankers at home and abroad. The long-established practice (which still continues) is for the importer to draw a three months or six months bill of exchange on its accepting house, the bill maturing when payment becomes due from the customer. The accepting house concerned receives the bill and may hold it to maturity or (as increasingly happened in the course of growing specialisation) discount it with one of the financial intermediaries that made a trade of this function. When the bill matures the importer’s remittance is paid direct to the accepting house for the account of his customer. This self-liquidating instrument for financing trade can readily be renewed on a ‘revolving’ basis, but meanwhile offers the accepting house the opportunity of maintaining his liquidity and operating on a moderate capital. It is impossible to say exactly when this practice became widespread, but several London merchants were acting as agents for Dutch financiers in the 1660s, quite likely on the basis of this kind of credit.²

The actual buying and selling of bills of exchange, usually referred to in the literature as the function of foreign exchange, was also centred on Amsterdam for most of the eighteenth century. It was largely conducted by the city’s colony of Sephardic Jews, who connected it with the precious metals trade between London and Amsterdam. The Jews had secured the trade because they had developed such expertise and such reliable chains of international correspondents that they were able to prosper on thin profit margins. And of course the exchange business followed on easily from the traditional economic pursuits of the Jews, for deficiencies on one side or the other had to be settled in coin and bullion. At a period when a large array of gold and silver coins were used to make settlements, money-changing itself had for centuries been a distinct specialism. In later chapters of this book we shall see that this ancient Jewish specialism survived well into the nineteenth century.³

The wealth of Amsterdam also gave rise to another financial specialism, that of lending to foreign governments. Already in the seventeenth century the Dutch were lending substantial sums to Brandenberg, Denmark, Sweden, Hamburg, Bremen, Emden, East Friesland and the Empire. At the end of the century when the Dutch Stadtholder, William of Orange, became William III of England, Scotland and Ireland, he borrowed heavily in Amsterdam to fight his continental wars. During the course of the eighteenth century successive British administrations drew on the same source, and William concluded that Dutch money was indispensable to the British government. Sweden, Russia and the German states also contracted a sequence of loans in Amsterdam, and after 1780 bold attempts were made to develop the financial tie with New York. The details need not detain us here, but two features of the system should be noted for their future importance. Transfer of money for investment, or of interest earned or won on successful speculations, was made through agents by means of the established commercial instrument, that is the bill of exchange, so that the loan business was quite conveniently run in harness with that of the merchant. We shall see that this duality continued well into the nineteenth century in London as well as Amsterdam. Secondly, particular firms specialised in the state issues of particular countries, for which they distributed prospectuses and recruited other financial supporters to share a sequence of loans. The best-documented instance of the maintenance of such a connection is Hope & Co.’s ten loans to the Swedish crown (1767–87) and eighteen loans to Russia (1788–93) but there are numerous other cases on record. Thirdly, the loan contractors assumed the responsibility for retailing the bonds not only on the Amsterdam bourse and in the Netherlands, but also throughout Europe. The loan business was from the outset essentially an international one.⁴

The connections between Amsterdam and London were maintained at various levels. Each was the most important European trading partner of the other, while the Dutch merchants’ lending was largely focused on the British government and the largest part of the foreign-held part of the national debt owed to Dutch creditors. But in the context of this book, the more interesting connection was the personal and family ties that developed to span the two capitals. The commitment of numerous Amsterdam merchants to trade and investment in London was so considerable that, from the early eighteenth century, they began to send younger sons or other members of their families to act as agents and factors for them, and by the middle of the century a considerable Dutch colony was collecting around Austin Friars in the City of London. In the second quarter of the eighteenth century there was an exodus of Dutch Jews to London, usually beginning, like the Gentile houses, with a younger son, with the branch house growing to strong independence as the volume of business continued to grow. A few of the most successful immigrants, like the Van Necks, acquired landed estate and entered the ranks of the English aristocracy. There were others again that, coming of more modest backgrounds, owed their ascendancy in England to the patronage of richer houses in Amsterdam. The best-known case of this kind of development is that of Barings, a family of Dutch origin that prospered in the textile trade, first in Exeter then London, with the support of Hopes of Amsterdam.⁵

It is convenient to label the kind of family business that operated simultaneously in two or more centres of trade as an ‘international house’. This kind of business structure was familiar from at least the late Middle Ages, but the expansion of international trade in the eighteenth and nineteenth centuries gave it great impetus. While the Dutch operated it with striking success, ethnic trading groups that had been dispersed by religious persecution were more tenacious in holding to it as it had become a way of life for them. From French historians we are familiar with the activities of the ‘international Huguenots’ whose family dynasties linked Geneva, Berne, Frankfurt, Amsterdam and Paris with London, and who ‘practically monopolised the financial relations between England and France’ in the eighteenth century. Already at the mid-century the Huguenots who had settled in London were intermarrying with Dutch Protestants.

During the French Wars (1793–1815), the Dutch, French and Sephardic Jewish émigrés were overtaken by a new wave of international trading families. Ashkenazi Jews from Hamburg, Frankfurt, Berlin and Leipzig were attracted to London by the dramatic growth of the British textile trade as well as by a greater degree of religious toleration. Other German merchants, sometimes with Huguenot backgrounds, joined the growing community when Napoleon occupied Frankfurt and Hamburg (1806–12). These were followed after the war by an influx of ‘Greek’ merchants, the religious minority in the Ottoman Empire. Their trading stations had reached as far west as Amsterdam in the late eighteenth century, but it was the renewal of persecution that led a sequence of families to settle in London, Manchester and other northern textile centres. These waves of immigration brought not only mercantile experience and capital, but also specific expertise in trading to export markets hitherto lightly touched by British-based enterprise. The fusion of this experience with the financial techniques that the British adopted from the Dutch will form one of the main themes of this book.⁶

The financial needs of the British government during the French Wars proved to be a hothouse for the rapid development of a home-grown species of loan contractors. Dealing in government stocks became a major activity; according to the Bank of England ledgers, the number of people dealing in bonds rose from 430 in 1792 to 726 in 1812, but most of the business was effectively handled by as few as 10 loan contractors. The major contractors included Boyd, Benfield & Co., originally Paris bankers, J. J. Angerstein, who came of a Hanoverian merchant family, Peter de Thelusson, a typical Huguenot merchant and financier, David Ricardo, of Dutch Jewish descent, and the Goldsmid brothers, who were Ashenazi Jews. This list is intended to illustrate ethnic variety rather than cover the entire spectrum.⁷ At the end of the war the most successful contractors were Sir Francis Baring, Exeter-born son of the Dutch immigrant already mentioned, and N. M. Rothschild, a younger son of a Frankfurt Jewish dealer in coins who moved into the trade in printed cottons. Their firms became leaders and pace-setters in the postwar economy, so their story will be dealt with in greater detail in the next chapter. For the moment it is sufficient to notice that they stood in the long tradition of merchants who united their trade with sporadic ventures into ‘pure’ finance.⁸

It may seem surprising on the face of it that, considering the impressive growth of the British economy and British overseas trade in the eighteenth century, the country should remain a debtor nation to the Netherlands for so long. Actually economists are quite familiar with the concept of young and expanding economies being in deficit on balance of trade, but in this particular instance there is a more significant point. Through the eighteenth century British merchants were devoting increasing resources to providing long credits for the development of the rapidly growing American colonies and their successor, the United States. At the end of the eighteenth century the British merchant trading there seldom saw his capital back within three years, and sometimes it was four or five. Dutch acceptance credits in London were typically three or six months, and despite a drive to win American markets after 1776, Amsterdam merchants were unwilling to accede to the liberal system by which the British retained their grip on the North American market. In specific commodity terms, printed textiles are said to have been the most important article of international trade in the eighteenth century; much of the production was concerned with the Dutch financing the export of German linens to London where they were printed, while London merchants financed the export of popular lines across the Atlantic. This is only one example, but it serves to illustrate the notion that Amsterdam was used to support the growth of the British overseas trade. However, this general proposition tells us nothing of the functions of British merchants and manufacturers in relation to the finance of overseas trade, a matter which must now be given closer attention.⁹

The Finance of Trade in the Early Industrial Revolution

The financial dependence of British manufacturers on importers and other merchants can be glimpsed in the correspondence of a few leading firms of the period. Matthew Boulton, the famous Birmingham toymaker (and later partner with James Watt in marketing the separate condenser steam engine) was in partnership with a merchant called Fothergill until his death in 1782. Fothergill travelled all over the continent looking for markets, and borrowed money from various German merchants in the 1760s and 1770s. Similarly Josiah Wedgwood, the famous potter, was in partnership with a merchant called Thomas Bentley, who found the earliest foreign orders for their goods from Hamburg merchants and their inland connections. One such firm, Grammer & Wright of Munster, wrote in 1769, ‘what goods you send us the value will be accepted by an eminent house in Amsterdam at the usual credit of twelve months’. A parallel theme can be discerned in the trade of a number of the provincial textile regions. Some of the exports from Liverpool were part of a triangular system of trade and credit involving sales of American produce to the continent. Payment for these goods was usually made by such continental houses as Hope & Co. and Sylvanus Bourne & Co. of Amsterdam. The Devon serge industry, like calico printing, was evidently nurtured by the enterprise and wealth of Amsterdam, Hamburg and Frankfurt merchant houses, prominent among which were Huguenot families such as Passavant and Du Fay. Norwich and Leeds appear to have benefited from similar connections.¹⁰

However, most manufacturers who exported already drew on London rather than continental houses. Wedgwood explained to an Italian customer ‘that being a manufacturer only in an inland county, neither travelling myself nor employing any agent to do it for me, my foreign correspondents name me a good house, generally in London, to accept my draft for the amount of goods.’ In much the same way, Boulton & Watt sought London and Liverpool merchant guarantors for the overseas sales of their patent steam engines, but allowed foreign orders to be guaranteed by merchants in that country. ‘You will observe’, James Watt jun. wrote in 1795, ‘that the sums [engine prices] we have specified are to be paid upon the delivery of the materials at Hull, and that we undertake no foreign orders without having a guarantee in their country, being engineers not merchants.’ Similarly, McConnel & Kennedy, the early leaders of the fine spinning industry in Manchester, refused to meet foreign orders without the guarantee of a London merchant. The same theme can be found in the correspondence of West Riding woollen manufacturers of the period.

Towards the end of the eighteenth century, there are signs that many more manufacturers were taking the initiative in establishing their own connections abroad, particularly in the more familiar North American market, and were now less dependent on external finance. One of the most informative sources on this is the journals of Joshua Gilpin, an American paper manufacturer who toured the manufacturing districts of Britain in the middle 1790s. In the Potteries he recorded

The number of houses now engaged in the manufacture are nearly 150, each house is generally confined to some particular kind [of ware] according to the line in which their business extends, as those who supply the home demand, those for Germany, France, West Indies, and America, require such different wares to each market that no-one could engage to make them all; they therefore apply themselves separately to make for the different markets to which they extend their trade.… Many of the manufacturers export to orders on their own credit from the Continent but to America they generally require an English house to be drawn to the extent of the credit.

The usual twelve months’ credit was allowed. In Nottingham, the principal seat of the hosiery industry, Gilpin noted

A large trade is carried on from Nottingham direct to America by the manufacturers. They ship their goods chiefly by London but also by Liverpool and Hull; they prefer the last, the goods are delivered at either place at the charge of the manufacturer. Mark Huish is the most established merchant in Nottingham … he supplies most of the good houses in Philadelphia with hosiery on twelve months’ credit.

In Leicester, Gilpin called on John Pares, the partner of James Heygate, London hosier and banker, and found that his house also ‘give 12 mo. credit paid to their agent in America or 9 mos. remitted here.’

In the fastest-growing textile regions of Lancashire and the West Riding of Yorkshire, numerous fustian manufacturers in the cotton districts and clothiers in the woollen districts were encroaching on merchant functions to find their own markets abroad. This was part of an energetic extension of functions that was characteristic of the ‘new frontier’ manufacturing regions, for the organisers of the domestic system were simultaneously integrating backwards into mechanised spinning. In 1784 Bailey’ Northern Directory listed thirty-five cotton and yarn merchants, among whom only one indicated that he had manufacturing interests. The Manchester section of the Universal British Directory (1794) listed sixty firms who combined manufacturing and mercantile functions, and a recent analysis of the origins of the forty-three biggest cotton mill owners in the industry shows that numbers of ‘country manufacturers’ (that is organisers of the domestic system and calico printers in the villages around Manchester) also became merchants. A parallel process of simultaneous forward and backward integration was evident in Leeds and its region, though the growth in the woollen industry was not so spectacular as that of cotton. A few of the biggest merchant-manufacturers evidently sold in several world markets; Lingards, for instance, sold their fustians and other cottons direct to agents in Russia, Italy, the United States and Prussia, while Peels, the calico printers, had an extensive sale in North America and continental Europe, employing both resident agents and travellers working on commission. Other firms, in a more modest way of business, evidently specialised or rather pursued a limited connection abroad. Thus William & Samuel Rawlinson, also trading in partnership with an Italian called Alberti, exported ‘much to the Continent, especially Italy and Germany, some to W. Indies, not much to America’, while Samuel Greg found the main outlet for his fustians in an agent in Philadelphia (USA), and Robinsons & Heywood appear in the 1794 directory as merchants and ‘Manufacturers of African Goods’. Other merchant-manufacturers from Manchester and Leeds attempted to find their own customers at the continental fairs. William Radcliffe of Mellor (Stockport), who began his workin...

Índice

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of Tables
• Preface
• 1 The Evolution of Merchant Roles in Eighteenth-Century Finance
• 2 Market Leaders: Rothschilds and Barings
• 3 New Competitors
• 4 The Structure of Merchant Banking at its Nineteenth-Century Pinnacle
• 5 Qualification: ‘Indubitable Credit’
• 6 The Work of Issue Houses
• 7 The Work of Accepting Houses
• 8 The Decline of Merchanting
• 9 Consortiums and Syndicates
• 10 Performance
• Notes and References
• Appendices
• Index of people and places
• Index of subjects