2. The growth of banking and insurance

Question 1

How did the medieval money system develop

Answer 1

The medieval money system had developed from bartering to using bills of exchange as credit notes - involved charging interest - carried a risk to the supplier the they wouldn’t be paid
- However - they would receive more money in the long term, once the goods were delivered

Question 2

How did money-lending and services associated with banking already exist before the Stuart period?

Answer 2

• Under Elizabeth I - Sir Thomas Gresham obtained loans from the money market in Antwerp - in 1571 opened the Royal Exchange - the first commercial building in Britain

Question 3

How was the growth of lending made possible?

Answer 3

• By the lowering of interest rates, with the legal limit for interest rates as follows:

1571-1624: 10%
1624-1651: 8%
1651-1714: 6%

Made credit more attractive - banks and brokers needed to provide it

Question 4

Growth of brokers

Answer 4

• Established networks of contacts who could provide money - particularly in London - with rates being offered below the legal limit in times of surplus

Question 5

Money scrivener

Answer 5

Someone who lends money, or arranges the lending of money on behalf of others, usually to those wanting to raise money on guarantee or security.

Question 6

First money scrivening firm

Answer 6

1650 - established by Robert Abbott

Question 7

What political situation did the growth of money scriveners result from?

Answer 7

• Royalist landowners faced disaster in decade after Civil War - due to the Commonwealth’s move to confiscate their land and remove their capital
• Turned to London for loans in order to protect their assets and estates - encouraged men with wealth to offer their own capital as loans
• Abbot able to act as a successful broker in these transactions

Question 8

How much passed through Robert Abbotts accounts from 1652 to 1655?

Answer 8

He charged a fee for his services - £1,137,646
- Firm taken over by his nephew, Robert Clayton, after Abbott died - became exceptionally wealthy

• By 1672 - Clayton received £3,515 per year in interest from loans alone
• Clayton and his business partner, John Morris, also responsible for writing first English cheque in 1659
• Acted as a promise to pay the receiver a specific amount

Question 9

Timeline of events of banking and insurance

Answer 9

1571 - Royal Exchange opened
1601 - An ‘Assurance Court’ set up to deal with marine insurance matters
1636 - the first money-scrivening firm is established
1640 - Charles I seizes gold from the Tower of London, causing merchants to invest with goldsmith-bankers
1650 - the first coffee house was opened in Oxford
1659 - the first cheque is drawn
1672 - Charles Ii confiscates assets of goldsmith-bankers
1688 - Edward Lloyd opens his coffee house in London

Question 10

Goldsmith bankers

Answer 10

• Traditionally - job was to forge items out of gold and silver for sale - therefore had secure private vaults for the storage of precious metals
• Merchants who accumulated large amounts of gold usually deposited this at the Royal Mint but - after Charles I seized it in 1640 - storing values w/ goldsmiths seen as safer option

Able to lend money they held in storage with interest

Question 11

How many goldsmith bankers in 1670 and 1677?

Answer 11

1670 - 32

1677 - 44

Question 12

Because goldsmiths were seen as trustworthy, they were able to borrow at between…

Answer 12

4% and 6% - so they could offer short term loans at a rate above 6%

Question 13

What system was used by goldsmiths and money scriveners?

Answer 13

Paper-based - goldsmiths would often accept bills and notes from other banks and then attempt to raise funds to pay off the debt

Question 14

What improve the stability of banking in Britain?

Answer 14

• The guild system of apprenticeship - banks knew each other through this - familiarity and reputation
• Therefore bankers keen to take business from each other - competition

Question 15

How was banking not always able to flourish?

Answer 15

• The Commonwealth attempted to regulate finance through the Hale Commission - formed in 1652 - discussed a number of legal reforms:
• suggested the establishment of a register of property transactions - however, like the majority of the commission’s recommendations, it wasn’t acted upon

Question 16

What did Charles II do when he was heavily indebted in the early 1670s?

Answer 16

• Indebted to a group of goldsmith bankers - were borrowing money at 6% and lending it to the Crown at 10%
• Led to Charles reforming banking in 1672 - so loans to the Crown levied from the general public - so less interest paid
• Goldsmiths told the funds they had deposited in royal treasury had been confiscated - were not refunded

Question 17

What did Charles II’s banking reforms lead to?

Answer 17

• Any trust the public had in the Crown to keep investments safe completely lost - resulted in another boom for private financiers
• Confidence not regained until 1688, when William III restored the status of goldsmith bankers by repaying the original loans

Question 18

Robert Clayton

Answer 18

1629-1707:

• Career encompassed banking, politics and the military
• Was apprenticed to his uncle, Robert Abbott - was during this time he met lifelong business partner, John Morris
• They went on to found Clayton and Morris Co - one of the most successful banking companies in London

Question 19

The growth of insurance was instrumental in fostering…

Answer 19

the economic conditions required for successful trade and expanding empire.

Question 20

Marine insurance

Answer 20

Financial coverage provided against risks to shipping including loss or theft of a ship or damage to cargo.

Question 21

How was marine insurance already well established in 17th century Britain?

Answer 21

• Italian merchants had brought the practice to Britain in the 15th century
• But a developed industry didn’t appear until after 1688

Question 22

1601 marine insurance law

Answer 22

• To regulate the market and create a separate Assurance Court to deal with insurance matters

Question 23

Why, in the first half of the century, were many British merchants reluctant to part with large amounts of money to take out insurance?

Answer 23

Due to the high rates charged for premiums - it was common for as little as half of the value of goods on a ship to be covered.
- Companies such as the EIC decided they were rich enough to take the risk of losses rather than pay the insurance premiums

Question 24

Importance of the Dutch in relation to insurance

Answer 24

• Were apparently more conscious of risks associated with international trade
• By 1657 - had become normal for ships from Holland to be insured through English brokers
• London merchants began to replicate the Dutch in seeing the calculation of risk as a wise practice - and use of insurance services rose

Question 25

How did marine insurance prices change in the course of the 17th century?
Significance of London?

Answer 25

• Prices to all destinations dropped by up to 75% and London became the leading insurance market in the world - insured against piracy fire and natural disaster

Question 26

Edward Lloyd

Answer 26

1688 - opened his coffee house in London - which would eventually develop to become the world’s first insurance market, Lloyd’s of London
- Lloyd welcomed merchants and ship owners to share everything from weather conditions to the latest prices of tradable commodities

Question 27

Fire insurance

Answer 27

• Enjoyed a boom in the 17th century - not least of course after 1666
• 1627 - an office had been created within the Royal Exchange to deal w/ insurance of ships and fire
• Scheme created by Charles in 1638 - to insure London citizens and business owners against fire - was disrupted by outbreak of Civil War

Fires common in tightly packed streets of London and other large towns - Great Fire increased need for formal insurance policies

Question 28

Act passed in 1667 after Great Fire

Answer 28

• For the rebuilding of the city after the fire - reference is made to the settling of insurance claims at the Royal Exchange

Question 29

What two specialist companies were set up towards the end of the 17th century?

Answer 29

The Fire Office - 1681
The Friendly Society - 1683

Not until 1720 that a company specialising in policies for private housing was established - but there was no provision for accident or life insurance until much later

Question 30

Summary: importance of insurance

Answer 30

• Although it was in its infancy in the 17th century - it was an essential ingredient in the growth of a prosperous economy
• Made possible by the development of more formal banking