banking crisis

The Banking Crisis of 1825

Banking Crisis – Lloyds was a safe bank in 1825

The recent banking crisis and the failure of the Scottish attempts to take over the banking world in the UK two years back has set me thinking about the earlier attempts at setting up regional banks and in particular the setting up of the first real retail type banks in the UK. Many years ago numerous county banks were created in different parts of Britain, including Gods Country Wales. There were a number of so called drovers’ banks set up in mid-Wales at that time. Drovers as in ‘rawhide’, the famous cowboy series took the cattle (and sheep) to market and returned the money from the sale to the farmers – which could mean they had quite a considerable sum of money on their person. They would set off with chuck wagon, outriders etc. and fighting off Indians and Brumies would travel the some 180 miles to market to sell their stock.

This growing trade with London’s Smithfield market demanded a relatively secure way of transmitting bills of exchange – i.e. bank notes. One such example was the ‘Black Ox’ drovers’ Bank set up by David Jones of Llandovery in 1799 in the tap room of the Black Ox Pub where the deposits were kept in the coal scuttle behind the bar. The notes depicted the Welsh Black breed of cattle as the motif (shown below) – definitely a better idea than some second rate prince or monarch we now have to put up with nowadays. This Bank is claimed to be the first (real) bank in Wales founded by the drovers John Jones and David Lloyd although I cannot confirm both these names – The bank originally occupied The Black Ox at Llandovery, and later on had premises at The King’s Head inn from 1799 – 1848. An interesting side note on this bank is it later became the Lloyds Bank we all know and love as a main street player in the UK and taker of vast sums of tax-payers money in bailouts. A little earlier in Aberystwyth in 1762 there was a bank formed in the same year a customs office opened in the town, a bank called Banc y Llong (the Ship Bank), followed by a bank known as the Black Sheep Bank because of the picture of a sheep on its notes being chased by a shepherd with his trousers down. There is an example of a note shown below (no shepherd in this version).

In 1825 a crisis occurred which saw the collapse of many private banks across the country. A major factor was the over-issuing of notes and the allowing of debt to spiral out of control such that the sum total of the issued notes could not be honoured if they all came in for payment together. Other contributory factors included a tighter fiscal policy by the London banks a latter day ‘credit crunch’ and bad speculation in the booming industries in the north of the country coinciding with a slump in agriculture. I think this is surprising for the parallelism with what has gone on recently. The collapse of one or two banks caused a run on the others creating a ‘domino effect’ and general panic set in – there were runs on the banks! There are numerous stories from this period about the ruses used by the banks in an attempt to allay the panic. Staff would haul large sacks of scrap metal across the bank in full view of the customers, the sacks having a handful of gold coins on the top to make it appear that the bank had large funds. Nowadays we do this by pumping huge sums of taxpayers money by the European Central Bank to make out the banks in Spain for example are stable and we have Major Merkosy telling us not to panic as they have everything under control so the similarities could not be more obvious.

This is an Article I found on the Black Ox Bank

The Bank was called Banc yr Eidion Du in Welsh, because the notes issued by it were engraved with the picture of a black ox. This bank was opened in 1799 by David Jones *in rooms at the King’s Head, Llandovery. He was a*local farmer’s son and a former drover whose wife brought with her a fortune of £10,000. The business was very profitable, it was said that its founder “knew of more ways of making money than there are public houses in Llandovery.” There were a few !*When he died David Jones left an estate of £140,000 plus landed property. He was High Sheriff of Carmarthenshire in 1825, during the financial crisis of 1825/6, when 70 private banks in England and Wales failed, the reputation of the Black Ox was so high that customers had more faith in its stability than *in the Bank of England. He was followed in the business by 3 sons who opened branches in Llandeilo and Lampeter. The firm continued under the name of David Jones & Sons until 1909 when it was amalgamated into Lloyds Bank


Nice link to a post on the Welsh Pound

A local provincial banknote from Wales
A local provincial banknote from Wales

This is an example of a Black bull from Wales

Let’s ban reckless politicians as well as reckless bankers

Some years ago I was sitting in the accountancy module B212 ‘window dressing and off balance sheet techniques‘ during my Masters course when the lecturer at the time piped up that one of the biggest fears in was the fact that mortgages were lent long whilst money was saved or acquired from the market short. In principle short money can be called for very quickly whilst paying back a mortgage on demand is impossible. A interesting discussion took place as we considered the possibilities of savers suddenly loosing confidence and withdrawing funds to stuff under the mattress or inter-bank lending suddenly drying up. And the fact that as mortgagees we would be unable to pay our green loans on demand loans so all chaos could result. We also in passing have a quaint notion that the money in the bank is actually ours to call on on demand – look to how Cyprus handled their depositors!

Obviously I am drawn to this reminiscing from a course more than 20 years ago by the thought that we have actually looked into the abyss over the last few years in the banking crisis. If this loss of confidence had gone much further there is actually no way that any government could cover all of the required finance without long term fiscal consequences. When looking at any proposed bailout of 700billion in the US this was clear – the figures are simply too huge. So how did we get here when the risk was well known. We had all began to assume that the ongoing growth period from the mid nineties would go on forever – we believed for a short while the Brown and Bush nonsense that the boom and bust and the cyclic nature of economies was a thing of the past. Actually not many economists bought this line but there seemed to be over the last ten years a creeping complacency in the market and in the economy at large that growth would continue house prices would rise and all would continue as before. So we are just past the worst of it house prices are on the rise again and we are set for another round of wish and hope. I can’t wait for the first labour politician who tells us we can take the breaks of public spending.

One of the problems faced by HBOS for example was the breaking of the linkage between grannies saving, and loans being made to the newly forming families to buy their homes. Grannies tend to keep their money safe in a Bank for a rainy day – so save relatively long. More of the money that was being lent was being acquired on the wholesale market thus very short and when money becoming in short supply and loans were called in the whole circus came to an end. Coupled with this trend the window dressing of junk debt and reselling as triple A in other areas meant in some cases these inter-bank loans were unpinned by toxic and rubbish debt that could not in any case be collected. So a prediction of an accounting professor twenty years ago came all to true in a few turbulent weeks three years ago.

What is a little depressing about the saga  is they who carried out these feats of financial engineering received the plaudits of their peers only a short while before the drop. The CEO of HBOS for example was hailed as a ‘genius’ only a year before the end. To some extend it was rather pleasing to see another rueful former CEO contemplating the handover of his company in a garage sale to one of his former rivals. A 300 year old company was sunk in that case during his short three years at the helm – a nice achievement not unique unfortunately if you look across the water.

There is an old saying that goes ‘when the going gets tough the politicians run for cover’ and politicians on both sides of the Atlantic squarely place the blame on the city or processes such as short trading and not themselves. Not minded to the fact that their policies and management of the economic context and their abject complacency has led us to where we are now. In the UK eye watering public sector borrowing to finance the client state, virtually no monetary policy, the encouragement of a reckless financial environment the surreal belief that would go on forever and the belief in the infallibility of their stewardship and lack of responsibilities are where some the explanation lies.

We even have the left in the UK claiming the debt is being caused by the current government and it was the nasty banks that let the country down. Partially true, I knew quite a few of these rather intellectually limited but supremely arrogant idiots, but the almost criminal management of the economy by the Labour government and the financing of the client welfare state was at the heart of the problem in the UK.

If we are talking about banning reckless bankers how about reckless Politicians anyone?