Respectable banking: the search for stability in London’s money and credit markets since the great currency crisis of 1695

The history of London’s money and credit markets is one of intermittent crises interspersed with successive attempts to find ways and means of stabilizing the system. The currency reforms of the eighteenth century, and the banking ones of the nineteenth, culminated in a century of stability which lasted until 1971. Recent scholarship has emphasized the importance of the Bank of England’s role as lender of last resort, and its modern extension, deposit insurance. Less heed has been paid to various market practices introduced in the late nineteenth century that had the effect of restricting competition. These practices included curbs on liability management and rediscounting, prohibitions against speculative lending, liquidity requirements, and limits on maturity mismatching. In the 1930s, the building societies broke most of these rules, combining liability management with maturity mismatching, and the resultant housing boom could have led to a bust, but for the war. Cartel control of the mortgage lending rate after the Second World War helped to limit liability management, and provided a mechanism for managing liquidity in a sector that faced considerable maturity mismatching. A tendency to downplay the importance of these restrictions has encouraged a degree of complacency about their removal, and the deregulation that started in 1971 created a banking model that disregarded these principles of sound banking. The events of 2007-8 suggest a reappraisal is needed, and this study offers a revised interpretation of developments in the London market since the great currency crisis of 1695. Currency stability was achieved in the eighteenth century by keeping the price of gold aligned with the nominal value of guineas. In the late nineteenth century, banking practices likewise sought to stabilize the prices of assets used to support paper money. This culminated in the clearing bank model of the 1890s and the building societies model of the 1950s, both of which lasted until the onset of deregulation in the 1970s and 1980s.