Instead of a few large and powerful banking companies, there existed numerous weak private firms, which, in many instances, had advanced out of all proportion to their total working resources, thereby sacrificing security to large profits. So long as times were good all went merrily; but, unfortunately, the great impetus given to trade by the conclusion of peace with France and the United States in 1783 did not last more than five or six years.
The year 1789 brings us to the French Revolution, and in 1793 we were at war with France again. Then came the reaction. Country bankers failed in every direction; but in 1797 Mr. Pitt came to the rescue in order to relieve the Bank of England, and the directors of the Bank were allowed to issue notes at their discretion, cash payments being suspended. Between 1792 and 1820 over one thousand private bankers put up their shutters; and during the 1825 crisis sixty-five banks closed their doors, hundreds of their customers being ruined in consequence. The panic of 1825, which almost emptied the Bank's tills, thoroughly convinced the Government that the country had outgrown the monopoly of the Bank of England.
By limiting the partners in private banking companies to six in number, and prohibiting the establishment of joint stock banks in opposition to the Bank of England, the Government sanctioned a policy which could not but result in disaster. Like most monopolies, that of the Bank of England was framed to exclude powerful rivals, and to keep those in opposition small and weak; and the result was disaster and ruin in every direction. The greater the trade of the country, the more apparent became the evil, until even the Government was compelled to decide that the monopoly of the Bank of England must forthwith be curtailed.
Small tradesmen were quick to realise the possibilities attached to an unlimited issue of notes, and hundreds of them combined the business of banking with their retail trades, for, although the law placed every obstacle in the way of sound banking, it encouraged small men, who possessed little or no capital, to engage in a business which should be conducted with much capital and great caution. The country was flooded with the notes of these so-called bankers, who, directly their notes were presented for payment in large numbers, failed by the dozen.
A system which encouraged all that was bad, and excluded everything that was sound and secure, was naturally doomed to extinction; and small wonder that in 1826 the era of country joint stock banking began. Like most fresh ventures which cannot be guided by precedent, it began disastrously, for the simple reason that those who were responsible for the guidance of the new companies had to learn from experience—a very bitter school. But the new banks laboured under fewer disadvantages than the old private bankers, and the Bank Act of 1844, we shall see, clearly defined their position.
We can now understand why the private banker was never a great success in this country. He was of course sacrificed to the monopoly of the Bank of England; for although six very rich capitalists could conduct a large banking business, the resources at their command would not be sufficient to enable them to extend their branches throughout the country. Consequently, before the advent of the joint stock banks we find the private banker, broadly speaking, confining his connections to a particular district or county.
It is true that he enjoyed free trade in banking down to 1844; but the regulation as to the number of partners in his business necessarily confined his offices or branches to a limited area, and effectually prevented his expansion on a large scale; so we get influential houses in the various counties, such as the Gurneys in Norfolk and Suffolk, the Smiths in Nottingham, and so on. It is noticeable, however, that both these well-known private firms, recognising the applicability of the joint stock system to the times, have surrendered their note issues, and taken a place in the modern movement, evidently foreseeing that, in order to progress, they must adopt the methods of their more successful rivals.