Britain and the end of the first globalization: ‘financial crisis’, contagion and the British financial system authors



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Britain and the end of the first globalization: ‘financial crisis’, contagion and the British financial system
authors:-
Mark Billings (corresponding author), Lecturer in Accounting and Risk, Nottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham, NG8 1BB

tel: + 44 (0) 115 846 6362, fax: + 44 (0) 115 846 6667



e-mail: mark.billings@nottingham.ac.uk
and
Forrest Capie, Professor of Economic History at Cass Business School, London, currently seconded to the Bank of England.
The paper will be presented at the conference by Mark Billings.
Abstract
The current era is sometimes described as one of unprecedented globalization. An earlier era of globalization is variously argued to have ended with World War One or with the dislocations of the late 1920s and 1930s (James, 2001). Certainly at the beginning of the 1930s the UK economy and some British financial institutions experienced various problems. Contributing factors included: currency crisis and abandonment of the gold standard; payment difficulties of international borrowers, especially those in Germany and central European countries subject to standstill agreements; struggling domestic borrowers in traditional industries; and the background of growing international economic and political tensions.
The aim of this paper is to bring together a variety of evidence to present a coherent picture of the impact of financial stresses on the British banking sector in the 1930s. We combine new evidence on the clearing banks, which played a key role in the UK financial system, with data on a variety of other banking institutions from existing studies on the Bank of England, discount houses, merchant banks and British multinational banks. Data on liquidity, profitability, capital, risk concentrations and bad debts are examined, and we consider the links by which ‘contagion’ might have been spread and assess the impact of ‘crisis’ on Britain’s financial system.
The impact of the problems affecting the banking sector in the 1930s varied greatly across the different types of institution. Two categories of institution were particularly hard-hit: the merchant banks, whose main business was the financing of international trade, mostly Anglo-German; and the British overseas banks, many of which were heavily dependent on business in Latin America. However, the clearing banks, the largest financial institutions and the key element in the payments system, proved to be sound. The performance of these banks in the twentieth century has been subject to many criticisms, many of these unjustified or exaggerated (Collins, 1998). However, the resilience of these banks contributed greatly to the stability of Britain’s financial system at a time when severe problems were found in many other countries. We argue that the range of evidence available provides more comprehensive support for this view than has been accepted previously.
There were many routes by which ‘contagion’ was transmitted to the British banking system. But the system emerged intact, and we argue was not under serious threat. Withdrawals made by overseas depositors are accepted as having been significant in the 1931 exchange-rate crisis, although the evidence on the nature and extent of these withdrawals is unsatisfactory. But there is no evidence of a ‘domestic run’ on British banks.
The ‘Big Five’ clearing banks, the result of the amalgamation process which was complete by 1920, survived well. They were strongly capitalised, had large branch networks, strong earning power, and diversified and liquid balance sheets, in contrast, for example, to their German counterparts. Their alleged conservativeness, although exaggerated, allowed them to cope with their problems and avoid the fate of banks elsewhere. Many more specialised and smaller British institutions, the merchant banks with large exposures to German Standstill debt and discount houses, were effectively bankrupt, kept afloat by a mixture of owners’ capital, funding from the large clearing banks and the Bank of England, mergers and changes to market practice. The experiences of British banks operating internationally were mixed, but often poor, reflecting the impact of the Great Depression on many of the countries in which they operated.
Financial and monetary stability underpin macroeconomic stability and there is evidence of that in Britain. The British economy, after a recession only for the years 1929-32, rather than deep depression, then went on to experience its strongest-ever upswing in the years 1932-7. Leaving the gold standard was of crucial importance, but the robustness of the financial system, due in large part to that of the clearing banks, was certainly one factor in protecting the real economy from undue suffering.
Key words: globalization; British banks; the 1930s; contagion; crisis; stability.
References
Collins, M. (1998), ‘English Bank Development Within a European Context, 1870-1939’, Economic History Review, Vol. 51, No.1, pp. 1-24.

James, H. (2001), The End of Globalization: Lessons from the Great Depression, Cambridge, Mass.: Harvard University Press.



Authors:-
Mark Billings is Lecturer in Accounting and Risk at Nottingham University Business School and co-director of the University of Nottingham International Business History Institute. He has previously held positions in banking and business and at Sheffield Hallam University. A graduate in economics and holder of an MSc in financial management from the Universities of Sheffield and London respectively, he is also a member of the Institute of Chartered Accountants in England and Wales. His research interests are in risk, financial reporting, and banking, financial and accounting history.
Forrest Capie is Professor of Economic History at Cass Business School, London and currently seconded to the Bank of England. After a doctorate at the London School of Economics and a teaching fellowship there, he taught at the Universities of Warwick and Leeds. He has been a Visiting Professor at the University of Aix-Marseille and at the London School of Economics and a visiting scholar at the IMF. He has written widely on money, banking, trade and commercial policy, and was editor of the Economic History Review from 1993 to 1999.







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